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     June 30,
2009
 
 or
 
 o 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:  0-19276
 
 FUSHI
COPPERWELD, INC.
 (Exact
name of registrant as specified in its charter)
  Nevada
              13-3140715(State
      or other jurisdiction of incorporation or organization)
              (I.R.S.
      Employer Identification
  No.)
 
 1
Shuang Qiang Road, Jinzhou
 Dalian, People’s Republic of
China 116100
  (Address
of principal executive offices) (Zip Code)
 
 (011)-86-411-8770-3333
 (Registrant’s
telephone number, including area code)
  
 (Former
name, former address and former fiscal year, if changed since last
report)
 
 Indicate
by check whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days:   Yes x No o
 
 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 o No o
 
 Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
 
 Large
accelerated filer oAccelerated filer x  Non-accelerated
filer (Do not check if a smaller reporting company) o  Smaller
reporting company  o
 
 Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o No x
 
 As of
August 1, 2009 the registrant had 27,902,485shares of common stock
outstanding.
   
 
  TABLE
OF CONTENTS
 
 PAGEPART
      I. FINANCIAL INFORMATIONItem
      1. Financial StatementsConsolidated
      Balance Sheets as of June 30, 2009 (Unaudited) and December 31,
      2008
                2Consolidated
      Statements of Income and Other Comprehensive Income for the Three and Six
      Months Ended June 30, 2009 and 2008 (Unaudited)
                3Consolidated
      Statements of Cash Flows for the Six Months Ended June 30, 2009 and 2008
      (Unaudited)
                4Consolidated
      Statement of Stockholders’ Equity for the Six Months Ended June 30, 2009
      (Unaudited) and the Year Ended December 31, 2008
                5Notes
      to Consolidated Financial Statements
                6Item
      2. Management’s Discussion and Analysis of Financial Condition and Results
      of Operations
                48Item
      3. Quantitative and Qualitative Disclosures About Market
    Risk
                78Item
      4. Controls and Procedures
                80PART
      II. OTHER INFORMATIONItem
      1. Legal Proceedings
                82Item
      1A. Risk Factors
                84Item
      2. Unregistered Sales of Equity Securities and Use of
    Proceeds
                84Item
      3. Defaults Upon Revolving Line of Credit
                84Item
      4. Submission of Matters to a Vote of Security Holders
                85Item
      5. Other Information
                85Item
      6. Exhibits
                85Signatures
                86
  - 1
-
  PART
I. FINANCIAL INFORMATION
 
 Item 1.
Financial Statements
 FUSHI
COPPERWELD, INC.  AND SUBSIDIARIES
 
 CONSOLIDATED  BALANCE
SHEETS
 AS OF
JUNE 30, 2009 AND DECEMBER 31, 2008
 
 June 30,
                        
                        
                        December 31,2009
                        
                        
                        2008UnauditedASSETSCURRENT
      ASSETS:Cash
                        
                        $
                        49,933,562
                        
                        
                        $
                        65,611,770Restricted
      cash
                        
                        
                        -
                        
                        
                        
                        1,000,000Accounts
      receivable, trade, net of allowance of bad debt of $345,983 and $318,529
      as of June 30, 2009 and December 31, 2008, respectively
                        
                        
                        59,630,681
                        
                        
                        
                        49,782,548Inventories
                        
                        
                        17,600,577
                        
                        
                        
                        6,977,852Notes
      receivables
                        
                        
                        147,599
                        
                        
                        
                        171,300Other
      receivables and prepaid expenses
                        
                        
                        844,158
                        
                        
                        
                        869,973Advances
      to suppliers
                        
                        
                        8,002,246
                        
                        
                        
                        20,261,585Deposit
      in derivative hedge
                        
                        
                        1,000,000
                        
                        
                        
                        1,000,000Prepaid
      taxes
                        
                        
                        -
                        
                        
                        
                        670,805Total
      current assets
                        
                        
                        137,158,823
                        
                        
                        
                        146,345,833PLANT
      AND EQUIPMENT, net
                        
                        
                        117,683,413
                        
                        
                        
                        119,761,027OTHER
      ASSETS:Advances
      to suppliers, noncurrent
                        
                        
                        6,493,174
                        
                        
                        
                        4,022,879Notes
      receivables, noncurrent
                        
                        
                        759,106
                        
                        
                        
                        799,106Intangible
      assets, net of accumulated amortization
                        
                        
                        12,155,202
                        
                        
                        
                        12,406,920Deferred
      loan expense, net
                        
                        
                        2,772,825
                        
                        
                        
                        3,317,725Deferred
      tax assets
                        
                        
                        10,168,733
                        
                        
                        
                        7,804,027Total
      other assets
                        
                        
                        32,349,040
                        
                        
                        
                        28,350,657Total
      assets
                        
                        $
                        287,191,276
                        
                        
                        $
                        294,457,517LIABILITIES
      AND SHAREHOLDERS' EQUITYCURRENT
      LIABILITIES:Revolver
      line of credit
                        
                        $
                        4,489,366
                        
                        
                        $
                        4,712,075Accounts
      payable, trade
                        
                        
                        5,126,855
                        
                        
                        
                        7,204,156Notes
      payable, current
                        
                        
                        10,000,000
                        
                        
                        
                        5,000,000Short-term bank
      loans
                        
                        
                        -
                        
                        
                        
                        17,588,400Other
      payables and accrued liabilities
                        
                        
                        9,004,077
                        
                        
                        
                        4,751,460Customer
      deposits
                        
                        
                        80,652
                        
                        
                        
                        542,540Taxes
      payable
                        
                        
                        1,390,026
                        
                        
                        
                        -Cross
      currency hedge payable
                        
                        
                        372,118
                        
                        
                        
                        104,324Total
      current liabilities
                        
                        
                        30,463,094
                        
                        
                        
                        39,902,955LONG-TERM  LIABILITIES:Derivative
      liability - conversion option
                        
                        
                        6,351,413
                        
                        
                        
                        -Notes
      payable, non-current
                        
                        
                        35,729,652
                        
                        
                        
                        40,000,000Fair
      value of derivative instrument
                        
                        
                        7,890,432
                        
                        
                        
                        4,377,076Total
      long-term liabilities
                        
                        
                        49,971,497
                        
                        
                        
                        44,377,076Total
      liabilities
                        
                        
                        80,434,591
                        
                        
                        
                        84,280,031COMMITMENTS
      AND CONTINGENCIES
                        
                        
                        
                        
                        
                        
                        7,197,794SHAREHOLDERS'
      EQUITY:Preferred
      stock,$0.001 par value, 5,000,000 shares authorized, none issued or
      outstanding as of June 30, 2009 and December 31, 2008
                        
                        
                        -
                        
                        
                        
                        -Common
      stock,$0.006  par value, 100,000,000 shares authorized, June 30,
      2009: 30,100,659 shares issued and 27,900,659 outstanding December 31,
      2008: 27,499,034 shares issued and 27,399,034 outstanding
                        
                        
                        167,405
                        
                        
                        
                        164,395Restricted
      common stock in escrow
                        
                        
                        13,200
                        
                        
                        
                        600Additional
      paid in capital
                        
                        
                        101,020,802
                        
                        
                        
                        91,172,890Common
      stock subscription receivable
                        
                        
                        (5,919,597
                        )
                        
                        
                        -Statutory
      reserves
                        
                        
                        13,988,671
                        
                        
                        
                        12,316,147Retained
      earnings
                        
                        
                        80,247,101
                        
                        
                        
                        78,613,158Accumulated
      other comprehensive income
                        
                        
                        17,239,103
                        
                        
                        
                        20,712,502Total
      shareholders' equity
                        
                        
                        206,756,685
                        
                        
                        
                        202,979,692Total
      liabilities and shareholders' equity
                        
                        $
                        287,191,276
                        
                        
                        $
                        294,457,517
 
 The
accompanying notes are an integral part of these consolidated
statements.
  - 2
-
 
 FUSHI
COPPERWELD, INC.  AND SUBSIDIARIES
 
 CONSOLIDATED
STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME
 FOR THE
THREE AND SIX MONTHS ENDED JUNE 30, 2009 AND 2008
 (UNAUDITED)
 
 Three months ended June 30,
                    
                    
                    Six months ended June 30,2009
                    
                    
                    2008
                    
                    
                    2009
                    
                    
                    2008REVENUES
                    
                    $
                    48,301,545
                    
                    
                    $
                    62,536,129
                    
                    
                    $
                    83,558,081
                    
                    
                    $
                    116,545,156COST
      OF GOODS SOLD
                    
                    
                    34,848,865
                    
                    
                    
                    45,789,522
                    
                    
                    
                    61,166,026
                    
                    
                    
                    85,064,862GROSS
      PROFIT
                    
                    
                    13,452,680
                    
                    
                    
                    16,746,607
                    
                    
                    
                    22,392,055
                    
                    
                    
                    31,480,294OPERATING
      EXPENSESSelling
      expenses
                    
                    
                    1,086,414
                    
                    
                    
                    1,258,050
                    
                    
                    
                    2,288,561
                    
                    
                    
                    2,050,961General
      and administrative expenses
                    
                    
                    3,167,361
                    
                    
                    
                    3,521,466
                    
                    
                    
                    6,237,603
                    
                    
                    
                    7,917,245Total
      operating expenses
                    
                    
                    4,253,775
                    
                    
                    
                    4,779,516
                    
                    
                    
                    8,526,164
                    
                    
                    
                    9,968,206INCOME
      FROM OPERATIONS
                    
                    
                    9,198,905
                    
                    
                    
                    11,967,091
                    
                    
                    
                    13,865,891
                    
                    
                    
                    21,512,088OTHER
      INCOME (EXPENSE)Interest
      income
                    
                    
                    83,004
                    
                    
                    
                    192,458
                    
                    
                    
                    166,621
                    
                    
                    
                    352,821Interest
      expense
                    
                    
                    (1,478,203
                    )
                    
                    
                    (3,805,067
                    )
                    
                    
                    (2,949,071
                    )
                    
                    
                    (5,585,536
                    )(Loss)
      gain on derivative instrument
                    
                    
                    (215,964
                    )
                    
                    
                    186,022
                    
                    
                    
                    (382,374
                    )
                    
                    
                    355,190Change
      in fair value of derivative liability - warrants
                    
                    
                    (688,876
                    )
                    
                    
                    -
                    
                    
                    
                    (752,114
                    )
                    
                    
                    -Change
      in fair value of derivative liability - conversion option
                    
                    
                    (4,583,809
                    )
                    
                    
                    -
                    
                    
                    
                    (5,122,846
                    )
                    
                    
                    -Other
      expense
                    
                    
                    (140,133
                    )
                    
                    
                    (52,875
                    )
                    
                    
                    (246,482
                    )
                    
                    
                    (108,002
                    )Total
      other expense, net
                    
                    
                    (7,023,981
                    )
                    
                    
                    (3,479,462
                    )
                    
                    
                    (9,286,266
                    )
                    
                    
                    (4,985,527
                    )INCOME
      BEFORE INCOME TAXES
                    
                    
                    2,174,924
                    
                    
                    
                    8,487,629
                    
                    
                    
                    4,579,625
                    
                    
                    
                    16,526,561PROVISION
      (BENEFIT) FOR INCOME TAXES
                    
                    
                    612,224
                    
                    
                    
                    1,206,783
                    
                    
                    
                    (83,992
                    )
                    
                    
                    1,675,218NET
      INCOME
                    
                    
                    1,562,700
                    
                    
                    
                    7,280,846
                    
                    
                    
                    4,663,617
                    
                    
                    
                    14,851,343OTHER
      COMPREHENSIVE INCOMEUnrealized
      gain on marketable securities
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    22,301Foreign
      currency translation adjustment
                    
                    
                    433,866
                    
                    
                    
                    4,308,352
                    
                    
                    
                    39,957
                    
                    
                    
                    12,163,352Change
      in fair value of derivative instrument
                    
                    
                    (751,227
                    )
                    
                    
                    4,377,975
                    
                    
                    
                    (3,513,356
                    )
                    
                    
                    (731,505
                    )COMPREHENSIVE
      INCOME
                    
                    $
                    1,245,339
                    
                    
                    $
                    15,967,173
                    
                    
                    $
                    1,190,218
                    
                    
                    $
                    26,305,491EARNINGS
      PER SHARE:Basic
                    
                    $
                    0.06
                    
                    
                    $
                    0.27
                    
                    
                    $
                    0.17
                    
                    
                    $
                    0.55Diluted
                    
                    $
                    0.06
                    
                    
                    $
                    0.25
                    
                    
                    $
                    0.17
                    
                    
                    $
                    0.51WEIGHTED
      AVERAGE SHARES:Basic
                    
                    
                    27,827,838
                    
                    
                    
                    27,354,215
                    
                    
                    
                    27,696,388
                    
                    
                    
                    27,201,127Diluted
                    
                    
                    28,323,611
                    
                    
                    
                    28,732,109
                    
                    
                    
                    28,054,226
                    
                    
                    
                    28,690,851
 
 The
accompanying notes are an integral part of these consolidated
statements.
  - 3
-
  FUSHI
COPPERWELD, INC.  AND SUBSIDIARIES
 
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 FOR THE
SIX MONTHS ENDED JUNE 30, 2009 AND 2008
 (UNAUDITED)
 
 2009
                              
                              
                              2008CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income
                              
                              $
                              4,663,617
                              
                              
                              $
                              14,851,343Adjustments
      to reconcile net incomeprovided
      by (used in) operating activities:Bad
      debt expense
                              
                              
                              27,793
                              
                              
                              
                              379,581Inventories
      write-off
                              
                              
                              179,654
                              
                              
                              
                              -Reserve
      for inventories
                              
                              
                              23,272
                              
                              
                              
                              185,749Depreciation
                              
                              
                              4,612,405
                              
                              
                              
                              3,026,421Loss
      on sale of property and equipment
                              
                              
                              117,430
                              
                              
                              
                              -Deferred
      taxes
                              
                              
                              (2,364,707
                              )
                              
                              
                              (1,188,895
                              )Amortization
      of intangible assets
                              
                              
                              238,283
                              
                              
                              
                              158,651Amortization
      of loan commission
                              
                              
                              544,900
                              
                              
                              
                              2,253,306Interest
      penalty
                              
                              
                              -
                              
                              
                              
                              710,544Amortization
      of stock compensation expense
                              
                              
                              928,727
                              
                              
                              
                              914,083Loss
      (gain) on derivative instrument
                              
                              
                              382,374
                              
                              
                              
                              (355,189
                              )Change
      in fair value of derivative liability - conversion option
                              
                              
                              5,122,846
                              
                              
                              
                              -Change
      in fair value of derivative liability - warrants
                              
                              
                              752,114
                              
                              
                              
                              -Investment
      loss on marketable securities
                              
                              
                              -
                              
                              
                              
                              16,158Change
      in operating assets and liabilities:Accounts
      receivable
                              
                              
                              (9,906,381
                              )
                              
                              
                              (19,191,506
                              )Inventories
                              
                              
                              (10,699,400
                              )
                              
                              
                              (13,000,865
                              )Other
      receivables and prepayments
                              
                              
                              102,867
                              
                              
                              
                              549,790Advances
      to suppliers - current
                              
                              
                              12,233,042
                              
                              
                              
                              (2,697,002
                              )Notes
      receivables
                              
                              
                              63,638
                              
                              
                              
                              320,603Accounts
      payable
                              
                              
                              (2,091,085
                              )
                              
                              
                              7,347,146Other
      payables and accrued liabilities
                              
                              
                              (2,009,752
                              )
                              
                              
                              (1,260,185
                              )Customer
      deposits
                              
                              
                              (467,587
                              )
                              
                              
                              621,290Taxes
      payable
                              
                              
                              2,062,180
                              
                              
                              
                              1,779,587Net
      cash provided by (used in) operating activities
                              
                              
                              4,516,230
                              
                              
                              
                              (4,579,390
                              )CASH
      FLOWS FROM INVESTING ACTIVITIES:Proceeds
      from sale of marketable securities
                              
                              
                              -
                              
                              
                              
                              2,983,842Payments
      on derivative instrument
                              
                              
                              (114,580
                              )
                              
                              
                              -Proceeds
      from derivative instrument
                              
                              
                              -
                              
                              
                              
                              738,376Purchase
      of land use right
                              
                              
                              -
                              
                              
                              
                              (1,687,468
                              )Proceeds
      from sale of property and equipment
                              
                              
                              424,444
                              
                              
                              
                              -Purchases
      of property and equipment
                              
                              
                              (3,135,693
                              )
                              
                              
                              (13,600,999
                              )Change
      in purchases on advances for purchase of equipment
                              
                              
                              (2,473,841
                              )
                              
                              
                              (3,148,802
                              )Net
      cash used in investing activities
                              
                              
                              (5,299,670
                              )
                              
                              
                              (14,715,051
                              )CASH
      FLOWS FROM FINANCING ACTIVITIES:Release
      of restricted cash
                              
                              
                              1,000,000
                              
                              
                              
                              -Net
      (payments) borrowings on revolver line of credit
                              
                              
                              (222,709
                              )
                              
                              
                              1,763,772Proceeds
      from bank loans
                              
                              
                              -
                              
                              
                              
                              16,908,000Payments
      on bank loans
                              
                              
                              (17,553,600
                              )
                              
                              
                              (17,268,032
                              )Proceeds
      on issuance of common stock and warrants
                              
                              
                              1,920,000
                              
                              
                              
                              -Net
      cash (used in) provided by financing activities
                              
                              
                              (14,856,309
                              )
                              
                              
                              1,403,740EFFECT
      OF EXCHANGE RATE ON CASH
                              
                              
                              (38,459
                              )
                              
                              
                              4,837,022DECREASE
      IN CASH
                              
                              
                              (15,678,208
                              )
                              
                              
                              (13,053,679
                              )CASH,
      beginning of period
                              
                              
                              65,611,770
                              
                              
                              
                              79,914,758CASH,
      end of period
                              
                              $
                              49,933,562
                              
                              
                              $
                              66,861,079Supplemental
      cash flow disclosures:Interest
      paid
                              
                              $
                              1,988,420
                              
                              
                              $
                              3,438,440Income
      tax paid
                              
                              $
                              1,933,546
                              
                              
                              $
                              1,303,257
 
 The
accompanying notes are an integral part of these consolidated
statements.
  - 4
-
  FUSHI
COPPERWELD, INC AND SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF SHAREHOLDERS' EQUITY
 
 
 Common stockShares outstanding
                      
                      
                      Shares In escrow
                      
                      
                      Additional
                      
                      
                      Common stock
                      
                      
                      Retained earnings
                      
                      
                      AccumulatedNumber
                      
                      
                      Par
                      
                      
                      Number
                      
                      
                      Par
                      
                      
                      paid in
                      
                      
                      subscription
                      
                      
                      Statutory
                      
                      
                      Unrestricted
                      
                      
                      comprehensiveof shares
                      
                      
                      value
                      
                      
                      of shares
                      
                      
                      value
                      
                      
                      capital
                      
                      
                      receivable
                      
                      
                      reserves
                      
                      
                      earnings
                      
                      
                      income (loss)
                      
                      
                      TotalsBALANCE,
      December 31, 2007
                      
                      
                      25,211,304
                      
                      
                      $
                      151,268
                      
                      
                      
                      100,000
                      
                      
                      $
                      600
                      
                      
                      $
                      77,665,064
                      
                      
                      $
                      
                      
                      
                      $
                      8,321,726
                      
                      
                      $
                      54,133,070
                      
                      
                      $
                      4,015,930
                      
                      
                      $
                      144,287,658-CB
      transfer to common stock @$7.00
                      
                      
                      2,142,857
                      
                      
                      
                      12,857
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      14,987,143
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      15,000,000Adjustment
      to shares outstanding
                      
                      
                      4,851
                      
                      
                      
                      29
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      (29
                      )
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      -Stock
      compensation expense
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      914,083
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      914,083Net
      income
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      14,851,343
                      
                      
                      
                      
                      
                      
                      
                      14,851,343Allocation
      of APIC due to Kuhn's litigation
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      (3,487,250
                      )
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      (3,487,250
                      )Adjustment
      to statutory reserve
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      2,142,419
                      
                      
                      
                      (2,142,419
                      )
                      
                      
                      
                      
                      
                      
                      -Change
      in fair value of derivative instrument
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      (731,505
                      )
                      
                      
                      (731,505
                      )Foreign
      currency translation gain
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      12,163,352
                      
                      
                      
                      12,163,352Reverse
      unrealized loss on marketable securities
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      22,301
                      
                      
                      
                      22,301BALANCE,
      June 30, 2008 (unaudited)
                      
                      
                      27,359,012
                      
                      
                      
                      164,154
                      
                      
                      
                      100,000
                      
                      
                      
                      600
                      
                      
                      
                      90,079,011
                      
                      
                      
                      -
                      
                      
                      
                      10,464,145
                      
                      
                      
                      66,841,994
                      
                      
                      
                      15,470,078
                      
                      
                      
                      183,019,982Exercise
      of warrants for cash @ $3.11
                      
                      
                      44,873
                      
                      
                      
                      270
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      139,124
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      139,394Adjustment
      to shares outstanding
                      
                      
                      (4,851
                      )
                      
                      
                      (29
                      )
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      29Stock
      compensation expense
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      954,726
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      954,726Net
      income
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      13,623,166
                      
                      
                      
                      
                      
                      
                      
                      13,623,166Adjustment
      to statutory reserve
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      1,852,002
                      
                      
                      
                      (1,852,002
                      )
                      
                      
                      
                      
                      
                      
                      -Change
      in fair value of derivative instrument
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      4,869,825
                      
                      
                      
                      4,869,825Foreign
      currency translation gain
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      372,599
                      
                      
                      
                      372,599BALANCE,
      December 31, 2008, as previously reported
                      
                      
                      27,399,034
                      
                      
                      
                      164,395
                      
                      
                      
                      100,000
                      
                      
                      
                      600
                      
                      
                      
                      91,172,890
                      
                      
                      
                      -
                      
                      
                      
                      12,316,147
                      
                      
                      
                      78,613,158
                      
                      
                      
                      20,712,502
                      
                      
                      
                      202,979,692Cumulative
      effect of reclassification of conversion option
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      (1,357,150
                      )
                      
                      
                      
                      
                      
                      
                      (1,357,150
                      )BALANCE,
      January 1, 2009, as adjusted (unaudited)
                      
                      
                      27,399,034
                      
                      
                      
                      164,395
                      
                      
                      
                      100,000
                      
                      
                      
                      600
                      
                      
                      
                      91,172,890
                      
                      
                      
                      -
                      
                      
                      
                      12,316,147
                      
                      
                      
                      77,256,008
                      
                      
                      
                      20,712,502
                      
                      
                      
                      201,622,542Shares
      issued for cash @ $4.80
                      
                      
                      400,000
                      
                      
                      
                      2,400
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      1,706,157
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      1,708,557Shares
      placed in escrow (subscription receivable)
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      2,200,000
                      
                      
                      
                      13,200
                      
                      
                      
                      6,249,481
                      
                      
                      
                      (6,262,681
                      )
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      -Shares
      removed from escrow as payment
                      
                      
                      100,000
                      
                      
                      
                      600
                      
                      
                      
                      (100,000
                      )
                      
                      
                      (600
                      )
                      
                      
                      
                      
                      
                      
                      343,084
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      343,084Reclassification
      of derivative liability-warrant to equity
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      963,557
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      963,557Exercise
      of stock option
                      
                      
                      1,625
                      
                      
                      
                      10
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      (10
                      )
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      -Stock
      compensation expense
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      928,727
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      928,727Net
      income
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      4,663,617
                      
                      
                      
                      
                      
                      
                      
                      4,663,617Adjustment
      to statutory reserve
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      1,672,524
                      
                      
                      
                      (1,672,524
                      )
                      
                      
                      
                      
                      
                      
                      -Change
      in fair value of derivative instrument
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      (3,513,356
                      )
                      
                      
                      (3,513,356
                      )Foreign
      currency translation gain
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      39,957
                      
                      
                      
                      39,957BALANCE,
      June 30, 2009 (unaudited)
                      
                      
                      27,900,659
                      
                      
                      $
                      167,405
                      
                      
                      
                      2,200,000
                      
                      
                      $
                      13,200
                      
                      
                      $
                      101,020,802
                      
                      
                      $
                      (5,919,597
                      )
                      
                      $
                      13,988,671
                      
                      
                      $
                      80,247,101
                      
                      
                      $
                      17,239,103
                      
                      
                      $
                      206,756,685
  The
accompanying notes are an integral part of these consolidated
statements.
  - 5
-
 FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
30, 2009
 (Unaudited)
 
 Note
1 - Organization and Line of Business
 
 Fushi
Copperweld, Inc, a Nevada corporation (“Fushi”), is the holding company of Fushi
Holdings, Inc., (“Fushi Holdings”) incorporated in the state of Delaware, which
is a holding company for Dalian Fushi International Bimetallic Cable Co., Ltd
(“Fushi International”) organized under the laws of the People's Republic of
China (“PRC”).  Dalian Fushi Bimetallic Manufacturing Co., Ltd
(“Dalian Fushi”) is a variable interest entity through a contractual
relationship (Note 2). Dalian Fushi is a limited liability company organized
under the laws of the PRC, which is engaged in the manufacturing and sale of
bimetallic wire products.
 
 Fushi
acquired Copperweld Bimetallics Holdings, LLC, a North Carolina limited
liability company and the holder of the partnership interest in Copperweld
Bimetallics, LLC, (“Copperweld”) a limited liability company registered in the
state of Delaware and the parent of Copperweld Bimetallics UK, Ltd. ("Copperweld
UK"), a private company registered in the United Kingdom and Copperweld
International Holdings, LLC a North Carolina limited liability
company.  Copperweld is a bimetallic sales and manufacturing operation
headquartered in Fayetteville, Tennessee. Copperweld UK is a manufacturing,
distribution and customer service facility located in Telford, England.
Copperweld International Holdings, LLC was a non-operating company that held
partnership interests in a company located in Tongling, PRC at December 31,
2007.  Those interests were liquidated in an agreement entered into by
Copperweld and its subsidiaries, affiliates and International Manufacturing
Equipment Sales, Inc. on January 16, 2008. Additionally, Fushi acquired
International Manufacturing Equipment Sales, LLC, a shell company that was, at
the time of purchase, a non-affiliated but commonly owned limited liability
company.
 
 Three of
the companies acquired on October 29, 2007 were dissolved in 2008:
 
 1.
Copperweld Holdings, LLC, a North Carolina limited liability company. This
company had no liabilities and its only asset was the ownership of Copperweld
Bimetallics, LLC, which the ownership rights were transferred to Fushi
Copperweld, Inc. on October 29, 2007.
 
 2.
Copperweld Bimetallics International Holdings, LLC, a Delaware limited liability
company was established to hold the partnership interest in the Tongling joint
venture which has been dissolved.  This company was a shell company with no
assets or liabilities at the time the joint venture was dissolved.
 
 3.
International Manufacturing Equipment Suppliers, LLC, a North Carolina limited
liability company.  This company was not an affiliate of the Copperweld
companies. This company was formed by the prior owner of Copperweld
Bimetallics to facilitate the transfer of equipment to the Tongling joint
venture.  As noted above, the Tongling joint venture has been
dissolved.  This company had no assets or liabilities at the time of the
dissolution.
 
 Fushi,
Fushi Holdings, Fushi International, Dalian Fushi, Copperweld and Copperweld UK
are hereinafter referred to as “the Company”.
  - 6
-
  FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
30, 2009
 (Unaudited)
 
 The
Company is in the business of developing, designing, manufacturing, marketing
and distributing bimetallic wire products, principally copper-clad aluminum and
copper-clad steel. The Company's products are primarily focused on serving
end-user applications in the telecommunication, electrical utility, and
transportation markets. The Company’s products are sold in North America,
Europe, North Africa, the Middle East, and the PRC.
 
 Note
2 - Summary of Significant Accounting Policies
 
 Management
has included all adjustments, consisting only of normal recurring adjustments,
considered necessary to give a fair presentation of operating results for the
periods presented. Interim results are not necessarily indicative of results for
a full year. The information included in this Form 10-Q should be read in
conjunction with information included in the 2008 annual report filed on Form
10-K.
 
 Principles of
consolidation
 
 The
accompanying consolidated financial statements include the financial statements
of Fushi and its wholly owned subsidiaries, Fushi Holdings, Fushi International,
Copperweld, Copperweld UK and its 100% variable interest entity Dalian Fushi.
All significant inter-company transactions and balances have been eliminated in
consolidation.
 
 In
accordance with FASB Interpretation No. 46R, "Consolidation of Variable Interest
Entities" ("FIN 46R"), variable interest entities (VIEs) are generally entities
that lack sufficient equity to finance their activities without additional
financial support from other parties or whose equity holders lack adequate
decision making ability.  All VIEs with which the Company is
involved must be evaluated to determine the primary beneficiary of the risks and
rewards of the VIE. The primary beneficiary is required to consolidate the VIE
for financial reporting purposes.
 
 The
Company has concluded that Dalian Fushi is a VIE and that the Company is the
primary beneficiary.  Under the requirements of FIN 46R, the Company
consolidated the financial statements of Dalian Fushi.
 
 Use of
estimates
  The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period. For
example, the Company estimates the fair value of its derivative instrument.
Actual results could differ from those estimates.
  - 7
-
  FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
30, 2009
 (Unaudited)
 
 Revenue
recognition
  The
Company's revenue recognition policies are in accordance with Staff Accounting
Bulletin (“SAB”) 104. Sales revenue is recognized at the date of shipment to
customers when a formal arrangement exists, the price is fixed or determinable,
the delivery is completed, no other significant obligations of the Company exist
and collectability is reasonably assured. Payments received before all of the
relevant criteria for revenue recognition are recorded as customer
deposits.
 
 Shipping and handling
costs
 
 Shipping
and handling costs related to costs of goods sold are included in selling costs
which totaled $985,222 and $1,054,515 for the six months ended June 30, 2009 and
2008, respectively, and $431,577 and $600,664 for the three months ended June
30, 2009 and 2008, respectively.
 
 Foreign currency translation
and other comprehensive income
 
 The
reporting and functional currency of the Company is the US dollar. The
subsidiaries Fushi International, VIE Dalian Fushi and Beijing Office use the
local currency Renminbi (RMB) to conduct business. Copperweld UK conducts
business in British Pounds.
 
 For the
subsidiaries whose functional currencies are other than the US dollar, all
assets and liabilities accounts were translated at the exchange rate on the
balance sheet date; stockholder's equity is translated at the historical rates
and items in the consolidated statements of operations and consolidated cash
flow statements are translated at the average rate in each applicable period.
Translation adjustments resulting from this process are included in accumulated
other comprehensive income in the consolidated statement of shareholders’
equity. The resulting translation gains and losses that arise from exchange rate
fluctuations on transactions denominated in a currency other than the functional
currency are included in the results of operations as incurred.
 
 The
balance sheet amounts with the exception of equity at June 30, 2009 were
translated at 6.830 RMB and £0.608 to $1.00, respectively. The balance sheet
amounts with the exception of equity at December 31, 2008 were translated at
6.823 RMB and £0.684 to$1.00. The average translation rates applied to the
income and cash flow statement amounts for six months ended June 30, 2009 were
6.833 RMB and £0.669 to $1.00, respectively. The average translation rates
applied to income and cash flow statement amounts for the six months ended June
30, 2008 were 6.958 RMB and £0.507 to $1.00, respectively.
  In
accordance with FAS 95, "Statement of Cash Flows," cash flows from the Company's
operations is calculated based upon the local currencies. As a result, amounts
related to assets and liabilities reported on the consolidated statements of
cash flows will not necessarily agree with changes in the corresponding balances
on the consolidated balance sheets.
 
 Cash and concentration of
risk
 
 The
Company considers all highly liquid investments with original maturities of
three months or less at the time of purchase to be cash equivalents, for cash
flow statement purposes. Cash includes cash on hand and demand deposits in
accounts maintained with state owned banks within the PRC and with banks in the
United Kingdom (“UK”) and the USA.
  - 8
-
  FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
30, 2009
 (Unaudited)
 
 Certain
financial instruments, which subject the Company to concentration of credit
risk, consist of cash. The Company maintains balances at financial institutions
which, from time to time, may exceed deposit insurance limits for the banks
located in the United States and UK. Balances at financial institutions or state
owned banks within the PRC are not covered by insurance. As of June 30, 2009,
the Company had deposits in excess of federally insured limits totaling
$49,457,235. The Company has not experienced any losses in such accounts and
believes it is not exposed to any significant risks on its cash in bank
accounts.
 
 Parts of
the Company’s operations are carried out in the PRC and UK. Accordingly, the
Company's business, financial condition and results of operations may be
influenced by the political, economic and legal environments in the two
countries, and by the general state of the two countries' economy. The Company's
operations in the two countries are subject to specific considerations and
significant risks not typically associated with companies in North America.
These include risks associated with, among others, the political, economic and
legal environments and foreign currency exchange. The Company's results may be
adversely affected by changes in governmental policies with respect to laws and
regulations, anti-inflationary measures, currency conversion and remittance
abroad, and rates and methods of taxation, among other things.
 
 Restricted
cash
 
 Restricted
cash consists of monies placed in escrow for Kuhns lawsuit settlement. On May
21, 2009, the company delivered $1,000,000 plus accrued interest (the “Escrow
Payment”) as partial payment to reduce the settlement liability owed to Kuhns
pursuant to the Settlement Agreement signed on May 19, 2009. See Note 18 for
details.
 
 Additional product sales
information
  The
Company has expanded its geographic sales area from the Chinese domestic market
to the international market. The following chart shows that the PRC market
remains the largest single market for the Company while approximately 23% and
31% of sales were spread across international markets during the first two
quarters of 2009 and 2008, respectively.
 
 June 30, 2009
                      
                      
                      June 30, 2008(Unaudited)
                      
                      
                      (Unaudited)China
                      
                      $
                      64,210,887
                      
                      
                      $
                      79,859,350USA
                      
                      
                      14,933,674
                      
                      
                      
                      25,944,828Europe
                      
                      
                      1,943,156
                      
                      
                      
                      5,871,508Other
      countries
                      
                      
                      2,470,364
                      
                      
                      
                      4,869,470Total
      sales
                      
                      $
                      83,558,081
                      
                      
                      $
                      116,545,156
  - 9
-
  FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
30, 2009
 (Unaudited)
 
 Major customers and
suppliers
 
 Ten major
customers accounted for 27% and 21% of the sales for the six months ended June
30, 2009 and 2008, respectively. Total receivable balance due from the top ten
customers at June 30, 2009 and December 31, 2008 amounted to $18,972,679 and
$11,838,214, respectively.
 
 Five
major suppliers provided approximately 82% of the Company’s raw materials for
the six months ended June 30, 2009 and five major suppliers provided 64% of the
Company’s raw materials for the six months ended June 30, 2008. At June 30,
2009,  advances to the Company’s major five suppliers were $7,630,038,
all of which was current. At December 31, 2008, advances to the Company’s major
five suppliers were $20,111,644, all of which was current.
 
 Accounts
receivables
 
 During
the normal course of business, the Company extends unsecured credit to its
customers. Management regularly reviews aging of receivables and changes in
payment trends by its customers, and records a reserve when they believe
collection of amounts due are at risk. Accounts considered uncollectible are
written off through a charge to the valuation allowance. As of June 30, 2009 and
December 31, 2008, management concluded its allowance for bad debts was
sufficient.
 
 Inventories
  Inventories
are stated at the lower of cost or market using a weighted average method.
Inventories consist of raw materials, work in process, finished goods and
packing materials. Raw materials consist of copper, aluminum and steel used in
production. The cost of finished goods included direct costs of raw materials as
well as direct labor used in production. Indirect production costs such as
utilities and indirect labor related to production such as assembling, shipping
and handling for raw material costs are also included in the cost of
inventories.
 
 The
Company reviews its inventories regularly for possible obsolete goods and
establishes reserves when determined necessary.
 
 Derivative
instrument
 
 Effective
January 1, 2009, the Company adopted FAS 161, “Disclosures about Derivative
Instruments and Hedging Activities, an amendment of FAS 133, which amends and
expands the disclosure requirements of FAS 133.” SFAS 161 requires qualitative
disclosures about objectives and strategies for using derivatives and
quantitative disclosures about the fair value of and gains and losses on
derivative instruments. The Company uses a cross currency hedge, a derivative
financial instrument, to hedge the risk of rising interest rates on its variable
interest rate debt. This type of derivative financial instrument is known as a
cash flow hedge. The Company accounts for this interest rate swap in accordance
with FAS 133, “Accounting for Derivatives Instruments and Hedging Activity,”
which requires the derivative to be carried on the consolidated balance sheet at
fair value and to meet certain documentary and analytical requirements to
qualify for hedge accounting treatment. The above derivative qualifies for hedge
accounting under FAS 133 and, accordingly, changes in the fair value effective
portion is reported in accumulated other comprehensive income, net of related
income tax effects. Amounts included in accumulated other comprehensive income
are reclassified into earnings when the hedged transaction affects
earnings.
  - 10
-
  FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
30, 2009
 (Unaudited)
 
 At the
inception of the transaction, the Company documented the relationship between
hedging instruments and hedged items, as well as its risk management objective
and the strategy for undertaking various hedge transactions. This process
includes linking all derivatives designated to specific firm commitments of
forecast transactions. The Company also documents its assessment, both at
inception and on an ongoing basis, of whether the derivative financial
instruments that are used in hedging transactions are highly effective in
offsetting changes in fair values or cash flows of hedged items. Any portion
deemed ineffective is recorded in earnings with the effective portion reflected
in accumulated other comprehensive. Changes in the fair values of derivative
financial instruments accounted for as cash flow hedges to the extent they
qualify for hedge accounting, are recorded in accumulated other comprehensive
income.
 
 Financial
instruments
 
 The
Company analyzes all financial instruments with features of both liabilities and
equity under FAS 150, “Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity,” FAS 133 and EITF 00-19,
“Accounting for Derivative Financial Instruments Indexed to, and Potentially
Settled in, a Company’s Own Stock.” Before the adoption of EITF 07-5
"Determining Whether an Instrument (or Embedded Feature) is Indexed to an
Entity's Own Stock,” the convertible note issued in 2007 did not require
bifurcation or result in liability accounting. However, with the recent adoption
of EITF 07-5, the embedded conversion feature must be bifurcated from its host
instrument and accounted for separately as a derivative liability. Additionally,
the Company analyzes registration rights agreements associated with any equity
instruments issued to determine if penalties triggered for late filing should be
accrued under FSP EITF 00-19-2, “Accounting for Registration Payment
Arrangements.”
 
 FAS 107,
“Disclosures About the Fair Value of Financial Instruments” defines financial
instruments and requires fair value disclosure about those instruments. FAS 157,
“Fair Value Measurements,” was adopted by the Company on January 1, 2008,
defines fair value, establishes a three-level valuation hierarchy for
disclosures of fair value measurement and enhances disclosures requirements for
fair value measures. Receivables, payables, notes, loans, and derivatives all
meet the definition of financial instruments. The carrying amounts reported in
the balance sheets for accounts receivable, notes receivable, accounts payable,
other payables, and short term bank loans qualify as financial instruments are a
reasonable estimate of fair value because of the short period of time between
the origination and their expected realization and, if applicable, the stated
interest rate is equivalent to interest rates currently
available.  The three levels are defined as follows:
 
 ·
                  Level
      1 inputs to the valuation methodology are quoted prices (unadjusted) for
      identical assets or liabilities in active
  markets.
  - 11
-
  FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
30, 2009
 (Unaudited)
 
 ·
                  Level
      2 inputs to the valuation methodology include quoted prices for similar
      assets and liabilities in active markets, and inputs that are observable
      for the assets or liability, either directly or indirectly, for
      substantially the full term of the financial
  instruments.
 ·
                  Level
      3 inputs to the valuation methodology are unobservable and significant to
      the fair value.
 
 Other
than as listed below, the Company did not identify any assets or liabilities
that are required to be presented on the balance sheet at fair value in
accordance with FAS 157.
 
 During
2007, the Company issued 3% secured convertible debentures in a face amount of
$20,000,000 which are due in 2012.  The conversion option embedded in
the convertible notes requires liability accounting at fair value and
periodically marked-to-market.  The Company used level 3 inputs for
its valuation methodology for the embedded feature as the fair value was
determined by using Cox-Ross-Rubinstein binomial pricing model based on various
assumptions as follows: volatility of 60%, risk free interest rate of 1.42%, and
a conversion price of $3.97.
 
 Also
during 2007, the Company borrowed $40,000,000 in the form of a high yield
debenture note with a floating rate. As of June 30, 2009, the outstanding
principal of high yield debenture note amounted to $40,000,000 and the
outstanding principal of convertible debenture note amounted to
$5,000,000.  The Company used Level 3 inputs for its valuation
methodology for the notes payable, and their fair values are determined using
cash flows discounted at relevant market interest rates in effect at the period
close since there is no observable market price.
 
 The
Company’s warrant liability is carried at fair value.  The Company
used Level 3 inputs for its valuation methodology for the warrant liability as
their fair values were determined by using the Cox-Ross-Rubinstein binomial
pricing model based on various assumptions as follows: volatility of 60%, risk
free interest rate ranging from 0.42% to 0.83%, and exercise prices ranging from
$5.25 to $6.00.  As of June 30, 2009, the Company has re-classified
its warrant liability to equity as explained in further detail at Note
13.
 
 As of
June 30, 2009, the Company had a derivative instrument with a carrying value of
$7.9 million. The Management calculated the fair value of the derivative
instrument using Level 3 inputs since there is no observable market
price.
 
 Carrying Value
                                June 30, 2009
                                (Unaudited)
                              
                              Fair Value Measurements
                                June 30, 2009
                                Using Fair Value Hierarchy
                                (Unaudited)Level 1
                              
                              Level 2
                              
                              Level 3Derivative
      liability – conversion option
                              
                              $
                              6,351,413
                              
                              
                              
                              
                              
                              $
                              6,351,413Convertible
      note
                              
                              $
                              5,729,652
                              
                              
                              
                              
                              
                              $
                              5,729,652Derivative
      instrument
                              
                              $
                              7,890,432
                              
                              
                              
                              
                              
                              $
                              7,890,432
  - 12
-
  FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
30, 2009
 (Unaudited)
 
 For the
six months ended June 30, 2009 and 2008 the Company recognized a loss in the
change in fair value of derivative liability – conversion option in the amounts
of $5,122,846 and $0, respectively. For the three months ended June 30, 2009 and
2008 the Company recognized a loss in the change in fair value of derivative
liability – conversion option in the amounts of $4,583,809 and $0,
respectively.
 
 For the
six months ended June 30, 2009 and 2008 the Company recognized a loss in the
change in fair value of derivative liability – warrants in the amounts of
$752,114 and $0, respectively. For the three months ended June 30, 2009 and 2008
the Company recognized a loss in the change in fair value of derivative
liability – warrants in the amounts of $688,876 and $0,
respectively.
 
 Derivative
liability
 
 Emerging
Issues Task Force (“EITF”) 00-19 “Accounting for Derivative Financial
Instruments Indexed to and Potentially Settled in, a Company’s Own Stock”,
provides a criteria for determining whether freestanding contracts that are
settled in a company’s own stock, including common stock warrants, should be
designated as either an equity instrument, an asset or as a liability under
FAS 133 “Accounting for Derivative Instruments and Hedging Activities.”
Under the provisions of EITF 00-19, a contract designated as an asset or a
liability must be carried at fair value on a company’s balance sheet, with any
changes in fair value recorded in a company’s results of
operations.  Using the criteria in EITF 00-19, the Company determines
which options, warrants and embedded features require liability accounting and
records the fair value as a derivative liability. The changes in the values of
these instruments are shown in the accompanying consolidated statements of
income and other comprehensive income as “change in fair value of derivative
liability – warrants or conversion option and change in fair value of derivative
instrument.”
 
 Stock-based
compensation
 
 The
Company records and reports stock-based compensation under FAS 123R,
“Share-Based Payments." This Statement requires a public entity to measure the
cost of services received in exchange for an award of equity instruments based
on the grant-date fair value of the award. That cost is recognized over the
period during which services are received. Stock compensation for stock granted
to non-employees is determined in accordance with FAS 123R and the EITF 96-18,
"Accounting for Equity Instruments that are issued to Other than Employees for
Acquiring, or in Conjunction with Selling Goods or Services," as the fair value
of the consideration received or the fair value of equity instruments issued,
whichever is more reliably measured.
 
 Plant and equipment,
net
  Plant and
equipment are stated at cost. When the asset property and equipment is retired
or otherwise disposed of, the related cost and accumulated depreciation are
removed from the respective accounts, and any gain or loss is included in
operations. Depreciation of property and equipment is provided using the
straight-line method for substantially all assets with estimated lives as
follows:
  - 13
-
  FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
30, 2009
 (Unaudited)
 
 EstimatedUsefulLifeBuildings
                        20-39.5
      yearsMachinery
      and equipment
                        7-15
      yearsOther
      equipment
                        3-5
      yearsTransportation
      equipment
                        3-5
      years
 
 Construction
in progress represents the costs incurred in connection with the construction of
buildings or new additions to the Company’s plant facilities. Costs classified
to construction in progress include all cost of obtaining the asset and bringing
it to the location and condition necessary for its intended use. No depreciation
is provided for construction in progress until such time as the assets are
completed and are placed into service. Interest incurred during construction is
capitalized into construction in progress. All other interest is expensed as
incurred.  Total interest capitalized for the six months ended June
30, 2009 and 2008 amounted to $1,350 and $62,812, respectively. Total interest
capitalized for the three months ended June 30, 2009 and 2008 was $0 and
$17,364, respectively.
 
 If a cost
does not extend an assets useful life, increase its productivity, improve its
operating efficiency or add additional production capacity, the cost is regarded
as repairs and maintenance and recognized as an expense as incurred; if it does,
the cost is regarded as major renewals and betterments and
capitalized.  For the three and six months ended June 30, 2009 and
2008, there were no amounts expended for major renewals and betterments that
were capitalized.
 
 The
repairs and maintenance expense for the six months ended June 30, 2009 and 2008
amounted to $324,416 and $514,772, respectively, and the three months ended June
30, 2009 and 2008 amounted to $193,998 and $223,709, respectively.
 
 Long-lived
assets
 
 The
Company evaluates the carrying value of long-lived assets each reporting period
in accordance with FAS 144 "Accounting for the Impairment of Disposal of
Long-Lived Assets.” When estimated cash flows generated by those assets are less
than the carrying amounts of the asset, the Company recognizes an impairment
loss. Based on its review, the Company believes that, as of June 30, 2009, there
were no impairments of its long-lived assets.
 
 Intangible
assets
 
 Land use
rights – land in the People’s Republic of China is government owned. However,
the government grants “land use rights." The Company amortizes land use rights
on a straight line basis over the 50 year life.
 
 Patents –
Patents are stated at cost, less accumulated amortization. The Company amortizes
patents on a straight line basis over 7-15 years.
  - 14
-
  FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
30, 2009
 (Unaudited)
 
 The
Company evaluates intangible assets for impairment, at least annually and more
often whenever events or changes in circumstances indicate that the carrying
value may not be recoverable from its estimated future cash flows.
Recoverability of intangible assets, other long-lived assets, and goodwill is
measured by comparing their net book value to the related projected undiscounted
cash flows from these assets, considering a number of factors including past
operating results, budgets, economic projections, market trends and product
development cycles. If the net book value of the asset exceeds the related
undiscounted cash flows, the asset is considered impaired, and a second test is
performed to measure the amount of impairment loss. Based on its review, the
Company believes that, as of June 30, 2009, there was no impairment of
intangible assets.
 
 Research and
development
 
 Research
and development expenses include salaries, consultant fees, supplies and
materials, as well as costs related to other overhead such as facilities,
utilities and other departmental expenses. The costs the Company incurs with
respect to internally developed technology and engineering services are included
in research and development expenses as incurred as they do not directly relate
to any particular licensee, license agreement or license fees.
 
 Research
and development costs are recorded in general and administrative expenses.
Research and development costs were $107,701 and $155,040 for the six months
ended June 30, 2009 and June 30, 2008, respectively and $31,149 and $73,707 for
the three months ended June 30, 2009 and 2008, respectively.
 
 Earnings per
share
 
 The
Company reports earnings per share in accordance with the provisions of FAS 128,
"Earnings Per Share.” FAS 128 requires presentation of basic and diluted
earnings per share in conjunction with the disclosure of the methodology used in
computing such earnings per share. Basic earnings per share excludes dilution
and is computed by dividing income available to common stockholders by the
weighted average common shares outstanding during the period. Diluted earnings
per share takes into account the potential dilution that could occur if
securities or other contracts to issue common stock were exercised and converted
into common stock using the treasury method. For the six and three months ended
June 30, 2009 and 2008, the Company properly excluded options, warrants and
convertible notes with anti-dilutive effects from the diluted earnings per share
calculation.
  - 15
-
  FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
30, 2009
 (Unaudited)
 
 Income
taxes
 
 The
Company records and reports income taxes pursuant to FAS 109, “Accounting for
Income Taxes," and FIN 48, “Accounting for Uncertainty in Income Taxes.” The
provision for income taxes consists of taxes currently due plus deferred taxes.
FAS 109 requires the recognition of deferred income tax liabilities and assets
for the estimated future tax effects attributable to temporary differences and
operating loss and tax credit carryforwards. Deferred tax liability or asset
attributable to temporary differences is accounted for using the balance sheet
liability method in respect of temporary differences between income tax basis
and financial reporting basis of assets and liabilities. Deferred tax expense or
benefit is the change during the year in deferred tax liabilities and
assets.  Deferred taxes are determined separately for each tax-paying
component (an individual entity or group of entities that is consolidated for
tax purposes) in each tax jurisdiction. Deferred tax liability or asset is
calculated at the tax rates that are expected to apply to the period when the
asset is realized or the liability is settled. Deferred tax is charged or
credited in the income statement, except when it is related to items credited or
charged directly to equity, in which case the deferred tax is also dealt with in
equity. Deferred tax assets and liabilities are offset when they relate to
income taxes levied by the same taxation authority and the Company intends to
settle its current tax assets and liabilities on a net basis. Deferred tax
assets are reduced by a valuation allowanceif, based on the weight
of available evidence, it is more likely than not (a likelihood of more than 50
percent) that some portion or all of the deferred tax assets will not be
realized.
 
 Under FIN
48, the evaluation of a tax position is a two-step process. The first step is to
determine whether it is more-likely-than-not that a tax position will be
sustained upon examination, including the resolution of any related appeals or
litigation based on the technical merits of that position. The second step is to
measure a tax position that meets the more-likely-than-not threshold to
determine the amount of benefit to be recognized in the financial statements. A
tax position is measured at the largest amount of benefit that is greater than
50 percent likely of being realized upon ultimate settlement. Tax positions that
previously failed to meet the more-likely-than-not recognition threshold should
be recognized in the first subsequent period in which the threshold is met.
Previously recognized tax positions that no longer meet the more-likely-than-not
criteria should be de-recognized in the first subsequent financial reporting
period in which the threshold is no longer met. FIN 48 also provides guidance on
de-recognition, classification, interest and penalties, accounting in interim
periods, disclosures and transition.
 
 Value-added
tax
 
 Sales
revenue represents the invoiced value of goods, net of a value-added tax
(“VAT”). All of the Company’s products that are produced and sold in the PRC are
subject to a Chinese VAT at a rate of 17% of the gross sales price. All of the
Company’s products that are manufactured and sold in the UK are subject to a UK
VAT at a rate of 15% of the gross sales price. This VAT may be offset by VAT
paid by the Company on raw materials and other materials included in the cost of
producing their finished product. The Company recorded VAT payable and VAT
receivable net of payments in the consolidated financial statements. The VAT tax
return is filed offsetting the payables against the
receivables.
  - 16
-
  FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
30, 2009
 (Unaudited)
 
 Adoption of EITF
07-5
 
 Effective
January 1, 2009, the Company adopted the provisions of EITF 07-5,
"Determining Whether an Instrument (or Embedded Feature) is Indexed to an
Entity’s Own Stock,” which is effective with respect to financial statements for
fiscal years beginning after December 15, 2008 and replaced the previous
guidance on this topic in EITF 01-6.  Paragraph 11a of FAS 133
specifies that a contract that would otherwise meet the definition of a
derivative but is both (a) indexed to the Company’s own stock and (b) classified
in stockholders’ equity in the statement of financial position would not be
considered a derivative financial instrument.  EITF 07-5 provides a
new two-step model to be applied in determining whether a financial instrument
or an embedded feature is indexed to an issuer’s own stock and thus able to
qualify for the FAS 133 paragraph 11(a) scope exception.
 
 The
conversion option embedded in the Company’s convertible notes previously met the
criteria in EITF 01-6, as well as the other criteria of FAS 133, paragraph 11(a)
and, accordingly, it was not separately accounted for as a derivative instrument
liability.  However, the conversion option does not meet the criteria
of EITF 07-5 because it requires that the conversion price be adjusted in
certain circumstances that do not meet the “fixed-for-fixed’ criteria in that
issue.  As a result, the Company is now required to separately account
for the embedded conversion option as a derivative instrument liability, carried
at fair value and marked-to-market each period, with changes in the fair value
each period charged or credited to income.
 
 In
accordance with the transition provisions of EITF 07-5, the new guidance has
been applied to the $5,000,000 of the Company’s convertible notes that were
outstanding as of January 1, 2009.  The cumulative effect of this
change in accounting principle of $1,357,150 has been recognized as a reduction
of the opening balance of Retained Earnings as January 1, 2009.  That
cumulative effect adjustment is the difference between the amounts previously
recognized in the Company’s consolidated balance sheet as of December 31, 2008
and the amounts that would have been recognized if the guidance in EITF 07-5 had
been applied from the issuance date of the outstanding Convertible
Notes.
 
 Segment
Reporting
 
 SFAS No.
131 (“SFAS 131”), “Disclosure about Segments of an Enterprise and Related
Information,” requires use of the “management approach” model for segment
reporting. The management approach model is based on the way a company’s
management organizes segments within the company for making operating decisions
and assessing performance. The Company has determined that it has two reportable
segments, China and U.S. (See Note 17).
 
 Recently issued accounting
pronouncements
 
 In
December 2007, FAS 141(R), “Business Combinations," was issued. FAS 141R
replaces FAS 141.FAS
141R retains the fundamental requirements in FAS 141 that the acquisition method
of accounting, which FAS 141 called the purchase method, be used for all
business combinations and for an acquirer to be identified for each business
combination. FAS 141R requires an acquirer to recognize the assets acquired, the
liabilities assumed, and any noncontrolling interest in the acquiree at the
acquisition date, measured at their fair values as of that date, with limited
exceptions. This replaces FAS 141’s cost-allocation process, which required the
cost of an acquisition to be allocated to the individual assets acquired and
liabilities assumed based on their estimated fair values. FAS 141R also requires
the acquirer in a business combination achieved in stages, sometimes referred to
as a step acquisition, to recognize the identifiable assets and liabilities, as
well as the noncontrolling interest in the acquiree, at the full amounts of
their fair values, or other amounts determined in accordance with FAS 141R. FAS
141R applies prospectively to business combinations for which the acquisition
date is on or after the beginning of the first annual reporting period beginning
on or after December 15, 2008. An entity may not apply it before that date. The
Company has adopted FAS 141R and believes that if the Company consummated a
business combination transaction, the Company’s adoption of FAS 141R would have
a material impact on the consolidated financial statements.
  - 17
-
  FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
30, 2009
 (Unaudited)
 
 On
October 10, 2008, the FASB issued FSP 157-3, “Determining the Fair Value of a
Financial Asset When the Market for That Asset Is Not Active,” which clarifies
the application of FAS 157 in a market that is not active and provides an
example to illustrate key considerations in determining the fair value of a
financial asset when the market for that financial asset is not active. FSP
157-3 became effective on October 10, 2008, and its adoption did not have a
material impact on the Company’s financial position or results for the year
ended December 31, 2008.
 
 In
December 2008, the FASB issued FSP FAS 140-4 and FIN 46(R)-8, “Disclosures by
Public Entities (Enterprises) about Transfers of Financial Assets and Interests
in Variable Interest Entities.” FSP FAS 140-4 and FIN 46(R)-8 amends FAS 140 and
FIN 46(R) to require additional disclosures regarding transfers of financial
assets and interest in variable interest entities. FSP FAS 140-4 and FIN 46(R)-8
is effective for interim or annual reporting periods ending after December 15,
2008. The adoption of FSP FAS 140-4 and FIN 46(R)-8 did not have a material
impact on the Company’s consolidated financial statements.
 
 In
January 2009, the FASB issued FSP EITF 99-20-1, “Amendments to the Impairment
Guidance of EITF Issue No. 99-20, and EITF Issue No. 99-20, Recognition of
Interest Income and Impairment on Purchased and Retained Beneficial Interests in
Securitized Financial Assets.” FSP EITF 99-20-1 changes the impairment model
included within EITF 99-20 to be more consistent with the impairment model of
FAS 115. FSP EITF 99-20-1 achieves this by amending the impairment model in EITF
99-20 to remove its exclusive reliance on “market participant” estimates of
future cash flows used in determining fair value. Changing the cash flows used
to analyze other-than-temporary impairment from the “market participant” view to
a holder’s estimate of whether there has been a “probable” adverse change in
estimated cash flows allows companies to apply reasonable judgment in assessing
whether an other-than-temporary impairment has occurred. The adoption of FSP
EITF 99-20-1 did not have a material impact on the Company’s consolidated
financial statements because all of the Company’s investments in debt
securities are classified as trading securities.
  - 18
-
  FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
30, 2009
 (Unaudited)
 
 In April
2009, the FASB issued FSP FAS 157-4, “Determining Fair Value When the Volume and
Level of Activity for the Asset or Liability Have Significantly Decreased and
Identifying Transactions That Are Not Orderly”. FSP FAS 157-4 amends FAS 157 and
provides additional guidance for estimating fair value in accordance with FAS
157 when the volume and level of activity for the asset or liability have
significantly decreased and also includes guidance on identifying circumstances
that indicate a transaction is not orderly for fair value measurements. This FSP
shall be applied prospectively with retrospective application not permitted.
This FSP shall be effective for interim and annual periods ending after
June 15, 2009, with early adoption permitted for periods ending after
March 15, 2009. An entity early adopting this FSP must also early adopt FSP
FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary
Impairments”. Additionally, if an entity elects to early adopt either FSP FAS
107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial
Instruments” or FSP FAS 115-2 and FAS 124-2, it must also elect to early adopt
this FSP. The adoption of FSP FAS 157-4 did not have a material impact on the
Company’s consolidated financial statements.
 
 In April
2009, the FASB issued FSP FAS 115-2 and FAS 124-2. This FSP amends SFAS 115,
“Accounting for Certain Investments in Debt and Equity Securities,” SFAS 124,
“Accounting for Certain Investments Held by Not-for-Profit Organizations,” and
EITF Issue No. 99-20, “Recognition of Interest Income and Impairment on
Purchased Beneficial Interests and Beneficial Interests That Continue to Be Held
by a Transferor in Securitized Financial Assets,” to make the
other-than-temporary impairments guidance more operational and to improve the
presentation of other-than-temporary impairments in the financial statements.
This FSP will replace the existing requirement that the entity’s management
assert it has both the intent and ability to hold an impaired debt security
until recovery with a requirement that management assert it does not have the
intent to sell the security, and it is more likely than not it will not have to
sell the security before recovery of its cost basis. This FSP provides increased
disclosure about the credit and noncredit components of impaired debt securities
that are not expected to be sold and also requires increased and more frequent
disclosures regarding expected cash flows, credit losses, and an aging of
securities with unrealized losses. Although this FSP does not result in a change
in the carrying amount of debt securities, it does require that the portion of
an other-than-temporary impairment not related to a credit loss for a
held-to-maturity security be recognized in a new category of other comprehensive
income and be amortized over the remaining life of the debt security as an
increase in the carrying value of the security. This FSP became effective for
interim and annual periods ending after June 15, 2009, with early adoption
permitted for periods ending after March 15, 2009. The adoption of FSP FAS
115-2 and FAS 124-2 did not have a material impact on the Company’s consolidated
financial statements.
 
 In April
2009, the FASB issued FSP FAS 107-1 and APB 28-1. This FSP amends FAS 107,
“Disclosures about Fair Value of Financial Instruments,” to require disclosures
about fair value of financial instruments not measured on the balance sheet at
fair value in interim financial statements as well as in annual financial
statements. Prior to this FSP, fair values for these assets and liabilities were
only disclosed annually. This FSP applies to all financial instruments within
the scope of FAS 107 and requires all entities to disclose the method(s) and
significant assumptions used to estimate the fair value of financial
instruments. This FSP shall be effective for interim periods ending after
June 15, 2009, with early adoption permitted for periods ending after
March 15, 2009. An entity may early adopt this FSP only if it also elects
to early adopt FSP FAS 157-4 and FSP FAS 115-2 and FAS 124-2. This FSP does not
require disclosures for earlier periods presented for comparative purposes at
initial adoption. In periods after initial adoption, this FSP requires
comparative disclosures only for periods ending after initial adoption. The
adoption of FSP FAS 107-1 and APB 28-1 did not have a material impact on the
Company’s consolidated financial statements.
  - 19
-
  FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
30, 2009
 (Unaudited)
 
 In May
2009, the FASB issued FAS 165, Subsequent Events [ASC 855-10-05],
which provides guidance to establish general standards of accounting for
and disclosures of events that occur after the balance sheet date but
before financial statements are issued or are available to be issued. FAS
165 also requires entities to disclose the date through which subsequent
events were evaluated as well as the rationale for why that date was
selected. FAS 165 is effective for interim and annual periods ending after June
15, 2009, and accordingly, the Company adopted this Standard during the
second quarter of 2009. FAS 165 requires that public entities evaluate
subsequent events through the date that the financial statements are
issued. The Company has evaluated subsequent events through the time of filing
these consolidated financial statements with the SEC on August 10,
2009.
 
 In June
2009, the FASB issued Statement of Financial Accounting Standards No. 166,
Accounting for Transfers of Financial Assets — an amendment of FASB
Statement No. 140 (“FAS 166”) [ASC 860], which requires entities to provide more
information regarding sales of securitized financial assets and similar
transactions, particularly if the entity has continuing exposure to the risks
related to transferred financial assets. FAS 166 eliminates the concept of
a “qualifying special-purpose entity,” changes the requirements for
derecognizing financial assets and requires additional disclosures. FAS 166
is effective for fiscal years beginning after November 15, 2009. The Company has
not completed the assessment of the impact FAS 166 will have on the
Company’s financial condition, results of operations or cash flows.
 
 In June
2009, the FASB issued Statement of Financial Accounting Standards No. 167,
Amendments to FASB Interpretation No. 46(R) (“FAS 167”) [ASC 810-10], which
modifies how a company determines when an entity that is insufficiently
capitalized or is not controlled through voting (or similar rights) should
be consolidated. FAS 167 clarifies that the determination of whether a company
is required to consolidate an entity is based on, among other things, an
entity’s purpose and design and a company’s ability to direct the activities of
the entity that most significantly impact the entity’s economic
performance. FAS 167 requires an ongoing reassessment of whether a company is
the primary beneficiary of a variable interest entity. FAS 167 also
requires additional disclosures about a company’s involvement in variable
interest entities and any significant changes in risk exposure due to that
involvement. FAS 167 is effective for fiscal years beginning after November 15,
2009. The Company has not completed the assessment of the impact FAS 167
will have on the Company’s financial condition, results of operations or cash
flows.
  - 20
-
  FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
30, 2009
 (Unaudited)
 
 In June
2009, the FASB issued Statement of Financial Accounting Standards No. 168, The
FASB Accounting Standards CodificationTM and the Hierarchy of Generally
Accepted Accounting Principles a Replacement of FASB Statement No. 162 (“FAS
168”). This Standard establishes the FASB Accounting Standards
CodificationTM (the “Codification”) as the source of authoritative accounting
principles recognized by the FASB to be applied by nongovernmental entities
in the preparation of financial statements in conformity with U.S. GAAP. The
Codification does not change current U.S. GAAP, but is intended to simplify
user access to all authoritative U.S. GAAP by providing all the authoritative
literature related to a particular topic in one place. The Codification is
effective for interim and annual periods ending after September 15, 2009, and as
of the effective date, all existing accounting standard documents will be
superseded. The Codification is effective for the Company in the third quarter
of 2009, and accordingly, the Company’s Quarterly Report on Form 10-Q for
the quarter ending September 30, 2009 and all subsequent public filings will
reference the Codification as the sole source of authoritative
literature.
 
 Reclassification
 
 Certain
reclassifications have been made to the 2008 consolidated financial statements
to conform to the 2009 consolidated financial statement presentation. These
reclassifications had no effect on net income or cash flows as previously
reported.
 
 Note
3 - Accounts receivable
 
 Accounts
receivable consisted of the following:
 
 June
      30, 2009
                    
                    
                    December
      31, 2008(Unaudited)Trade
      accounts receivable
                    
                    $
                    59,976,664
                    
                    
                    $
                    50,101,077Allowance
      for bad debts
                    
                    
                    (345,983
                    )
                    
                    
                    (318,529
                    )Trade
      accounts receivable, net
                    
                    $
                    59,630,681
                    
                    
                    $
                    49,782,548
 
 The
following table consists of allowance for doubtful accounts.
 
 Allowance
      for doubtful accounts at December 31, 2007
                    
                    $
                    135,418Reserve
      adjustment
                    
                    
                    379,581Accounts
      receivable write off
                    
                    
                    (9,426
                    )Effect
      of foreign currency translation
                    
                    
                    11,880Allowance
      for doubtful accounts at June 30, 2008 (Unaudited)
                    
                    
                    517,453Reserve
      adjustment
                    
                    
                    (201,115
                    )Accounts
      receivable write off
                    
                    
                    -Effect
      of foreign currency translation
                    
                    
                    2,191Allowance
      for doubtful accounts at December 31, 2008
                    
                    
                    318,529Reserve
      adjustment
                    
                    
                    27,793Accounts
      receivable write off
                    
                    
                    -Effect
      of foreign currency translation
                    
                    
                    (339
                    )Allowance
      for doubtful accounts at June 30, 2009 (Unaudited)
                    
                    $
                    345,983
 
 Note
4 - Inventories
 
 Inventories
consisted of the following:
  - 21
-
  FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
30, 2009
 (Unaudited)
 
 June
      30, 2009
                          
                          
                          December 31, 2008(Unaudited)Raw
      materials
                          
                          $
                          14,328,523
                          
                          
                          $
                          3,929,585Work
      in process
                          
                          
                          1,547,648
                          
                          
                          
                          1,337,703Finished
      goods
                          
                          
                          1,908,165
                          
                          
                          
                          1,832,511Scrap
                          
                          
                          -
                          
                          
                          
                          38,540Totals
                          
                          
                          17,784,336
                          
                          
                          
                          7,138,339Less
      allowance for obsolete inventory
                          
                          
                          (183,759
                          )
                          
                          
                          (160,487
                          )Totals
                          
                          $
                          17,600,577
                          
                          
                          $
                          6,977,852
 
 The
Company’s principal raw materials consist of aluminum and steel rods and copper
strips. Changes in the price of copper, which has an established history of
volatility, directly affect the prices of the Company’s products and influence
the demand for products. The Company’s decision to make advanced purchases of
raw materials is mainly based upon (1) the current and projected future market
price of raw materials, (2) the demand and supply situation in the raw materials
market, and (3) the forecasted demand of products.
 
 The
following table consists of allowance for obsolete inventory:
 
 Allowance
      for obsolete inventory at December 31, 2007
                              
                              $
                              63,594Reserve
      adjustment
                              
                              
                              185,749Allowance
      for obsolete inventory at June 30, 2008 (Unaudited)
                              
                              
                              249,343Reserve
      adjustment
                              
                              
                              (88,856
                              )Allowance
      for obsolete inventory at December 31, 2008
                              
                              
                              160,487Reserve
      adjustment
                              
                              
                              23,272Allowance
      for obsolete inventory at June 30, 2009 (Unaudited)
                              
                              $
                              183,759
  Note
5 - Plant and equipment
 
 Plant and
equipment consisted of the following:
 
 June
      30, 2009
                        
                        
                        December
      31, 2008(Unaudited)Land
                        
                        $
                        100,726
                        
                        
                        $
                        100,726Buildings
      and improvements
                        
                        
                        43,373,862
                        
                        
                        
                        43,418,544Transportation
      equipment
                        
                        
                        4,134,392
                        
                        
                        
                        4,138,892Machinery
      and equipment
                        
                        
                        73,095,975
                        
                        
                        
                        55,147,707Office
      furniture
                        
                        
                        1,169,354
                        
                        
                        
                        1,166,477Construction
      in progress
                        
                        
                        16,752,253
                        
                        
                        
                        33,163,330Totals
                        
                        
                        138,626,562
                        
                        
                        
                        137,135,676Less
      accumulated depreciation
                        
                        
                        (20,943,149
                        )
                        
                        
                        (17,374,649
                        )Totals
                        
                        $
                        117,683,413
                        
                        
                        $
                        119,761,027
  - 22
-
 
 FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
30, 2009
 (Unaudited)
 
 Construction
in progress at June 30, 2009 consisted of the following:
 
 June
      30,
                                                      
                                                      
                                                      
                                                      ExpectedNo.
                                                      
                                                      Project
      Description
                                                      
                                                      2009(Unaudited)
                                                      
                                                      CommencementDate
                                                      
                                                      completion
                                                        date1
                                                      
                                                      Manufacturing
      machinery and equipment for CCA/CCS
                                                      
                                                      $
                                                      3,033,509
                                                      
                                                      Dec-07
                                                      
                                                      Dec-092
                                                      
                                                      Corporation
      administration office building
                                                      
                                                      
                                                      13,052,689
                                                      
                                                      May-03
                                                      
                                                      Dec-103
                                                      
                                                      Manufacture
      building (Dalian)
                                                      
                                                      
                                                      630,001
                                                      
                                                      Jan-08
                                                      
                                                      Dec-094
                                                      
                                                      Manufacturing
      machinery and equipment for CCA (Multiple)
                                                      
                                                      
                                                      29,972
                                                      
                                                      Oct-07
      thru July-09
                                                      
                                                      Sep-095
                                                      
                                                      Building
      attachment (Fayetteville)
                                                      
                                                      
                                                      6,082
                                                      
                                                      Apr-09
                                                      
                                                      Sep-09Total
                                                      
                                                      $
                                                      16,752,253
 
 Construction
in progress as of December 31, 2008 consisted of the following:
 
 ExpectedNo.
                                                
                                                Project
      description
                                                
                                                December31,
      2008
                                                
                                                Commencementdate
                                                
                                                completion
                                                  date1
                                                
                                                Manufacturing
      machinery and equipment for CCA/CCS
                                                
                                                $
                                                14,507,534
                                                
                                                Dec-07
                                                
                                                Dec-092
                                                
                                                Corporation
      administration office building
                                                
                                                
                                                12,964,718
                                                
                                                May-03
                                                
                                                Dec-103
                                                
                                                Manufacturing
      machinery and equipment for CCA (Multiple)
                                                
                                                
                                                3,298,681
                                                
                                                Oct-07
      thru Jan-08
                                                
                                                Mar-09
      thru Dec-094
                                                
                                                Manufacturing
      machinery and equipment for CCS (Multiple)
                                                
                                                
                                                1,775,300
                                                
                                                Mar-07
      thru Sep-08
                                                
                                                Mar-09
      thru Dec-095
                                                
                                                Manufacture
      building
                                                
                                                
                                                617,097
                                                
                                                Jan-08
                                                
                                                Dec-09Total
                                                
                                                $
                                                33,163,330
 
 The
decrease in the construction in progress balance for the six months period ended
June 30, 2009 is primarily related to $12.5 million of machinery and equipment
(Project No. 1) that was deemed completed through its installation and testing
process during the first quarter.  As a result, the machinery and
equipment was then transferred from construction in progress to depreciable
fixed assets. The estimated costs to complete Project No. 1 (Manufacturing
Machinery and Equipment) as of June 30, 2009, and December 31, 2008 was $1.98
million and $2.34 million, respectively.  The estimated costs to
complete Project No. 2 (Tower B) as of June 30, 2009, and December 31, 2008 was
$2.99 million and $3.09 million, respectively.
 
 The
change in plant and equipment is as follows:
  - 23
-
  FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
30, 2009
 (Unaudited)
 
 Plant
      and equipmentBalance
      as of December 31, 2008
                          
                          $
                          137,135,676Acquired
      through cash payment
                          
                          
                          373,333Acquired
      from advanced payments
                          
                          
                          2,762,360Fixed
      assets transferred from CIP
                          
                          
                          19,316,033CIP
      transferred to fixed assets
                          
                          
                          (19,316,033
                          )Disposal
                          
                          
                          (1,697,776
                          )FX
      rate effect
                          
                          
                          52,969Balance
      as of June 30, 2009 (Unaudited)
                          
                          $
                          138,626,562
 
 Depreciation
expense for the six months ended June 30, 2009 and 2008 amounted to $4,612,405
and $3,026,421, respectively, and the three months ended June 30, 2009 and 2008
amounted to $2,515,197 and $1,622,379, respectively.
 
 Note
6 – Advances to suppliers
 
 Advances
on purchases are monies deposited or advanced to outside vendors for future
inventory and equipment purchases. Most of the Company’s vendors require a
certain amount of money to be deposited with them as a guarantee that the
Company will receive their purchase on a timely basis.
 
 Advances
to suppliers consisted of the following:
 
 June
      30, 2009
                    
                    
                    December
      31, 2008(Unaudited)Advances
      for inventories – current
                    
                    $
                    8,002,246
                    
                    
                    $
                    20,261,585Advances
      for equipment – non current
                    
                    
                    6,493,174
                    
                    
                    
                    4,022,879Total
      advances to suppliers
                    
                    $
                    14,495,420
                    
                    
                    $
                    24,284,464
 
 Due to
globally depressed commodity prices, the Company believed there was an
opportunity to secure lower purchase prices through increased investments in
deposit (advance) to suppliers which in turn lowered the average purchase price
of raw materials and minimized the loss resulting from the significant decline
in spot prices in the fourth quarter of 2008.
 
 Note
7 – Intangible assets
 
 Intangible
assets consist of land use rights and patents. Intangible assets consisted of
the following:
 
 June
      30, 2009
                    
                    
                    December
      31, 2008(Unaudited)Patents
                    
                    $
                    1,753,300
                    
                    
                    $
                    1,755,025Land
      use rights
                    
                    
                    12,464,469
                    
                    
                    
                    12,478,090Total:
                    
                    
                    14,217,769
                    
                    
                    
                    14,233,115Less:
      accumulated amortization
                    
                    
                    (2,062,567
                    )
                    
                    
                    (1,826,195
                    )Intangible
      assets, net
                    
                    $
                    12,155,202
                    
                    
                    $
                    12,406,920
  - 24
-
 
 FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
30, 2009
 (Unaudited)
 
 Amortization
expense for the six months ended June 30, 2009 and 2008 amounted to $238,283 and
$158,651, and for the three months ended June 30, 2009 and 2008 amounted to
$119,207 and $96,374, respectively.
 
 Estimated
amortization expense for each of the years ended is as follows:
 
 June
      30,
                          
                          Amount2010
                          
                          $
                          476,5662011
                          
                          
                          476,5662012
                          
                          
                          476,5662013
                          
                          
                          391,2942014
                          
                          
                          332,972
 
 Note
8 - Prepaid taxes, taxes payable and deferred tax asset
 
 Prepaid
taxes and taxes payable consisted of the following:
 
 June
      30, 2009
                    
                    
                    December
      31, 2008(Unaudited)Income
      tax
                    
                    $
                    1,342,946
                    
                    
                    $
                    997,581VAT
      benefit
                    
                    
                    (59,634
                    )
                    
                    
                    (1,779,973
                    )Others
                    
                    
                    106,714
                    
                    
                    
                    111,587Total
      taxes payable (prepayment)
                    
                    $
                    1,390,026
                    
                    
                    $
                    (670,805
                    )
 
 Incometax
 
 Under the
former Income Tax Laws of PRC, the Company is generally subject to an income tax
at an effective rate of 33% (30% state income taxes plus 3% local income taxes)
on income reported in the statutory financial statements after appropriate tax
adjustments. For an enterprise that qualifies as a new or high-technology
enterprise or a Foreign Invested Enterprise (“FIE”) located in the old town of
an inshore open city, it is subject to an income tax rate of 24%. In addition,
if the enterprise is located in a specially designated region that allows
foreign enterprises, the enterprise is entitled to a two-year income tax
exemption and a 50% income tax reduction for the following three
years.
 
 Beginning
January 1, 2008, the new Chinese Enterprise Income Tax (“EIT”) law replaced the
former income tax laws for Domestic Enterprises (“DEs”) and FIEs. The new
standard EIT rate of 25% replaced the 33% rate previously applicable to both DEs
and FIEs. The two years tax exemption, three years 50% tax reduction tax holiday
for production-oriented FIEs, was eliminated. However, the new EIT Law permits
companies to continue to enjoy their former preferential tax treatments until
such treatments expire in accordance with their current terms.
  - 25
-
  FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
30, 2009
 (Unaudited)
 
 The
Company’s wholly owned subsidiary, Fushi International, is a foreign limited
liability company and is located in the old town of an inshore open city. Under
the former Income Tax Laws of PRC, the Company qualified to use 24% income tax
rate and has a full income tax exemption for the years ended December 31, 2006
and 2007 and a 50% income tax reduction for the years ending December 31, 2008,
2009 and 2010. Under the new EIT law effected in 2008, the company continues to
enjoy the former preferential tax rate until it expires in December 2010. So,
the applicable corporate income tax rate in 2009 is 12%. The provision for
income tax for the six months ended June 30, 2009 and 2008 was $2,280,715 and
$2,844,180, respectively.
 
 Dalian
Fushi was incorporated in the PRC and is subject to PRC income tax. Dalian Fushi
located its factory in a special economic region in Dalian, PRC and qualified as
a "new or high-technology enterprise" that is allowed a two year income tax
exemption beginning in 2002, the first year after it became profitable, and a
50% income tax reduction for the following three years, 2004 through 2006.
Dalian Fushi had a loss from operations in the first six months of 2009, so no
provision for income taxes was made during this period.
 
 The
Company is subject to the United States federal income tax at a tax rate of 34%.
No provision for income taxes in the U.S. has been made as the Company had no
U.S. taxable income for the six months ended June 30, 2009 and 2008,
respectively.
 
 Fushi,
Fushi Holdings, Copperweld Bimetallics Holdings, LLC and Copperweld Bimetallics,
LLC were incorporated in the United States and have incurred net operating
losses for income tax purposes since inception. The net operating loss carry
forwards for United States income taxes may be available to reduce future years’
taxable income. These carryforwards will expire, if not utilized, through 2025
and 2029.
 
 Copperweld
UK is organized as a United Kingdom private company and subject to 20% to 28%
statutory taxes on its taxable income. Copperweld UK had a loss from
operations in the first six months in year 2009, so no provision for income
taxes was made during this period.
 
 The
(Benefit) Provision for income taxes consisted of the following for the six
months ended June 30:
 
 2009
                      
                      
                      2008(Unaudited)
                      
                      
                      (Unaudited)Provision
      for China income taxes
                      
                      $
                      2,280,715
                      
                      
                      $
                      2,844,180Deferred
      income taxes
                      
                      
                      (2,364,707
                      )
                      
                      
                      (1,168,962
                      )(Benefit)
      Provision for income taxes
                      
                      $
                      (83,992
                      )
                      
                      $
                      1,675,218
 
 The
(Benefit) Provision for income taxes consisted of the following for the three
months ended June 30:
  - 26
-
  FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
30, 2009
 (Unaudited)
 
 2009
                      
                      
                      2008(Unaudited)
                      
                      
                      (Unaudited)Provision
      for China income taxes
                      
                      $
                      1,350,404
                      
                      
                      $
                      1,576,742Deferred
      income taxes
                      
                      
                      (738,180
                      )
                      
                      
                      (369,959
                      )(Benefit)
      Provision for income taxes
                      
                      $
                      612,224
                      
                      
                      $
                      1,206,783
 
 The
following table reconciles the U.S. statutory rates to the Company’s effective
tax rate for the six months ended June 30, 2009 and 2008:
 
 June
      30, 2009
                    
                    
                    June
      30, 2008(Unaudited)
                    
                    
                    (Unaudited)U.S.
      Statutory rates on foreign income
                    
                    
                    34.0
                    %
                    
                    
                    34.0
                    %Foreign
      income not recognized in U.S.
                    
                    
                    (34.0
                    )
                    
                    
                    (34.0
                    )China
      income taxes
                    
                    
                    25.0
                    
                    
                    
                    25.0China
      income tax exemption
                    
                    
                    (13.0
                    )
                    
                    
                    (13.0
                    )Deferred
      tax recognized from NOL
                    
                    
                    (34.0
                    )
                    
                    
                    (34.0
                    )Other
      item (a)
                    
                    
                    20.2
                    
                    
                    
                    32.1Effective
      income tax rate
                    
                    
                    (1.8
                    )%
                    
                    
                    10.1
                    %
 
 a)
                The
      20.2% and 32.1%  represents the $5,874,960 and $914,083 of
      expenses incurred by the Company that are not subject to income tax for
      the six months ended June 30, 2009 and 2008,
  respectively.
 
 The
estimated tax savings from the tax exemptions for the six months ended June 30,
2009, amounted to $2,470,774. The net effect on earnings per share had the
income tax been applied would decrease basic earnings per share from $0.17 to
$0.08 and diluted earnings per share from $0.17 to $0.08.
 
 The
estimated tax savings from the tax exemptions for the three months ended June
30, 2009, amounted to $1,462,937. The net effect on earnings per share had the
income tax been applied would decrease basic earnings per share from $0.06 to
$0.004 and diluted earnings per share from $0.06 to $0.004.
 
 The
estimated tax savings from the tax exemptions for the six months ended June 30,
2008, amounted to $3,081,195. The net effect on earnings per share had the
income tax been applied would decrease basic earnings per share from $0.55 to
$0.43 and diluted earnings per share from $0.51 to $0.41.
 
 The
estimated tax savings from the tax exemptions for the three months ended June
30, 2008, amounted to $1,708,138. The net effect on earnings per share had the
income tax been applied would decrease basic earnings per share from $0.27 to
$0.20 and diluted earnings per share from $0.25 to $0.19.
  - 27
-
  FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
30, 2009
 (Unaudited)
 
 The
Company has cumulative undistributed earnings from foreign subsidiaries of
approximately $115 million as of June 30, 2009, included in the consolidated
retained earnings and will continue to be indefinitely reinvested in
international operations.  Accordingly, no provision has been made for U.S.
deferred taxes related to future repatriation of these earnings, nor is it
practicable to estimate the amount of income taxes that would have to be
provided if we concluded that such earnings will be remitted in the
future.
 
 Deferredtaxasset
 
 The
Company accounts for income taxes in accordance with SFAS No. 109,
Accounting for Income Taxes (“SFAS No. 109”).FAS
109 requires the recognition of deferred income tax liabilities and assets for
the estimated future tax effects attributable to temporary differences,
operating loss carryforwards and tax credit carryforwards. Deferred tax
liability or asset attributable to temporary differences is accounted for using
the balance sheet liability method in respect of temporary differences between
income tax basis and financial reporting basis of assets and
liabilities.
 
 Fushi was
incorporated in the United States and has incurred net operating losses for
income tax purposes since inception. The pre-tax operating loss including time
differences as of June 30, 2009 and December 31, 2008 amounted to $29,908,038
and $23,266,152, respectively. The estimated loss carryforwards for United
States income taxes as of June 30, 2009 and December 31, 2008 may be available
to reduce future years’ taxable income. These carry forwards will expire in
varying amounts in the years 2025 to 2029 if not utilized.
 
 The
deferred tax asset consisted of the following:
 
 June
      30, 2009
                    
                    
                    December
      31,(Unaudited)
                    
                    
                    2008Accruals
      not yet deductible
                    
                    $
                    743,336
                    
                    
                    $
                    696,120Stock
      based compensation
                    
                    
                    1,610,107
                    
                    
                    
                    1,294,340Bad
      debt allowance
                    
                    
                    (69,951
                    )
                    
                    
                    (70,822
                    )Loss
      carryforward
                    
                    
                    7,885,241
                    
                    
                    
                    5,884,389Total
      deferred tax assets
                    
                    $
                    10,168,733
                    
                    
                    $
                    7,804,027
  The
deferred tax activity consisted of the following:
 
 Deferred
      tax asset at December 31, 2008
                      
                      $
                      7,804,027Additions
      to deferred tax asset
                      
                      
                      2,364,706Deferred
      tax asset at June 30, 2009 (Unaudited)
                      
                      $
                      10,168,733
  - 28
-
  FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
30, 2009
 (Unaudited)
  A
valuation allowance is required against deferred tax assets if, based on the
weight of available evidence, it is more-likely-than-not that some or all of the
deferred tax assets will not be realized. Management believes that the
realization of the benefits can be used by their US operating subsidiary in
future periods because expectations are that Copperweld U.S. will have taxable
income in future periods. US companies must generate a total of $29,908,038 of
taxable net income (including the recovery of time difference) by years
2025 to 2029 (the recovery of time difference is not subject to those years) in
order to recover the deferred tax asset balance. Profits of Fayetteville in each
of the first three quarters of 2008 were $1,036,996, $244,546 and $102,198
respectively. Through cost savings initiatives implemented beginning in the
fourth quarter of 2008; the Company has lowered total labor overhead by
approximately $100,000 per month. The Company is also in the process of refining
and improving their manufacturing processes that may further realize cost
savings of approximately $300,000 per month. With these cost saving measures in
place, the Company believes that it is possible to realize profit at current
sales levels at the Fayetteville facility and that Fayetteville will be well
positioned to experience increased profitability when the global economic crisis
subsides and sales begin to rebound to historical levels. The Company projects
the Fayetteville facility to start generating positive annual pre-tax income in
fiscal year 2010. Based on its review, the Company believes that, as of June 30,
2009, it was not necessary to provide a valuation allowance for deferred tax
assets.
 
 Value added
tax
 
 VAT on
sales and VAT on purchases in Dalian China amounted to $11,187,919 and
$9,072,688 for the six months ended June 30, 2009, and $14,005,473 and
$10,434,463 for the six months ended June 30, 2008, respectively.
 
 VAT on
sales and VAT on purchases in Copperweld UK amounted to $50,567 and $111,827 for
the six months ended June 30, 2009 and $133,722 and $225,936 for the six months
ended June 30, 2008, respectively.
 
 Sales and
purchases are recorded net of VAT collected and paid as the Company acts as an
agent for the government. VAT taxes are not impacted by the income tax
holiday.
 
 Note
9 - Short term bank loans and revolving credit lines
 
 Short
term bank loans represent amounts due to various banks and are due on demand or
normally within one year. These loans generally can be renewed with the banks.
Short term bank loans consisted of the following:
 
 Name
      of lender
                                  
                                  June
      30, 2009
                                  
                                  
                                  December
      31, 2008(Unaudited)Guangdong
      Development bank, Dalian Stadium branch, due February 25, 2009, annual
      interest at 8.96%,secured by the Company’s land use rightand
      building.
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  8,794,200Guangdong
      Development bank, Dalian Stadium branch, due March 9, 2009, annual
      interest at 8.96%, secured by the Company’s land use right and
      building
                                  
                                  
                                  -
                                  
                                  
                                  
                                  2,931,400Guangdong
      Development bank, Dalian Stadium branch, due March 19, 2009, annual
      interest at 8.96%, secured by the Company’s land use right and
      building
                                  
                                  
                                  -
                                  
                                  
                                  
                                  1,465,700Guangdong
      Development bank, Dalian Stadium branch, due March 26, 2009, annual
      interest at 8.96%, secured by the Company’s land use right and
      building
                                  
                                  
                                  -
                                  
                                  
                                  
                                  4,397,100Total
      Short-Term Bank Loans
                                  
                                  
                                  -
                                  
                                  
                                  
                                  17,588,400Wells
      Fargo Bank revolving credit line, annual interest rate at 0.25% plus Chase
      Bank rate, the line of credit has three years life from closing date and
      shall automatically continue every year thereafter, secured by all present
      and future account receivables, equipment, inventory and other goods,
      documents of title, general intangibles, investment property, real estate
      and other collateral of Copperweld defined in the financing
      agreement.
                                  
                                  
                                  4,489,366
                                  
                                  
                                  
                                  4,712,075Total
                                  
                                  $
                                  4,489,366
                                  
                                  
                                  $
                                  22,300,475
  - 29
-
  FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
30, 2009
 (Unaudited)
 
 The
Company paid off its four short-term loans with total balances of $17,588,400 on
January 5, 2009.
 
 Revolving line of credit –
Copperweld U.S.
 
 Copperweld
maintains a revolving line of credit with Wells Fargo Bank. Availability of the
credit line is the lower of $12.8 million or the borrowing base, which is
calculated by reference to, among other things, eligible accounts receivable,
eligible inventory and eligible other collateral less availability reserve. The
borrowing base will be calculated and reported to Wells Fargo Bank each
week. For the week ended on June 27, 2009, the availability under the
Revolving Credit Facility was $4,772,966. The outstanding balance was $4,489,366
and $4,712,075 as of June 30, 2009 and December 31, 2008, respectively. The
Company deposits the cash collections from its customers against the outstanding
account balance of the line of credit on a daily basis. The line of credit has
three years life from closing date and shall automatically continue every year
thereafter.
 
 The
annual interest rate is equal to the applicable margin of 0.25% plus the Chase
Bank reference rate. Copperweld also has to pay a monthly administration
management fee and a monthly unused line fee of 0.2% (annual rate) on the unused
balance of its revolving credit line.
  - 30
-
  FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
30, 2009
 (Unaudited)
 
 The
asset-based revolving line of credit with Wells Fargo contains various covenants
that may limit
Copperweld’s discretion in operating its business.These covenants
include limitations on Coppwerweld’s ability to declare or pay dividends or
distribute equity interest, make acquisitions, dispose of assets, incur
additional indebtedness, incur guarantee obligations, create liens, pledge or
encumbrances, make investments, engage in mergers, change the nature of its
business or engage in certain transactions with a related party, enter into
operating leases or incur obligations on capital expenditures.In addition,
Copperweld is required to comply with certain
financial covenantsthat are reported on a quarterly basis, including maintenance of
a fixed charge coverage ratio of at least 1.0 to 1.0 and maintenance of a
tangible net worth of 4.4 million starting from January 31,
2009.
 
 For both
quarters ended on June 30, 2009 and March 31, 2009, Copperweld reported a
negative fixed charge ratio due to the loss incurred on a rolling 12 months
basis, thus Copperweld was in violation of maintaining a fixed charge ratio of
at least 1.0 to 1.0. This was the sole violation of the covenant under the terms
of the revolving line of credit agreement with Wells Fargo.  On May 6,
2009, Wells Fargo exercised its right to implement the 2% additional default
rate of interest effective April 1, 2009 for the covenant violation as of March
31, 2009.
 Copperweld
is currently in discussions with Wells Fargo Bank regarding the existing
defaults, and a possible modification of certain of the borrowing terms and
existing covenants under the line of credit.
 
 Revolving line of credit –
Copperweld UK
 
 Copperweld
UK maintains an invoice discounting credit facility with a limit of
approximately $1,073,000 (or ₤750,000). The facility provides cash advances of
85% of approved sales ledger and is secured by trade accounts receivable of
Copperweld UK. The facility has a life minimum of 36 month periods and shall be
automatically renewed every year thereafter based on an annual review conducted
by the financing institute. Copperweld UK is required to maintain a projected
turnover each 12 month period and a minimum net worth of ₤750,000 at all times
if the credit facility has an outstanding balance. The facility had no balance
outstanding as of June 30, 2009 and December 31, 2008.
 
 Total
interest expense on the revolving credit line and short term loans for the six
months ended June 30, 2009 and 2008 amounted to $136,938 and $1,059,628,
respectively. Interest for the three months ended June 30, 2009 and 2008 was
$46,163 and $565,295, respectively.
  - 31
-
  FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
30, 2009
 (Unaudited)
 
 Note
10 – Notes payable
 
 Notes
payable consisted of the following:
 
 June
      30, 2009
                              
                              
                              December
      31, 2008(Unaudited)Senior
      secured convertible notes (“Convertible Notes”), bearing interest at 3%
      per annum, maturing on January 24, 2012, convertible to common stock at an
      initial conversion price of $7.00 per share (ii)
                              
                              $
                              5,729,652
                              
                              
                              $
                              5,000,000Guaranteed
      senior secured floating rate notes (“HY Notes”) maturing between July 24,
      2010 to January 24, 2012 (i)
                              
                              
                              40,000,000
                              
                              
                              
                              40,000,000Subtotal
                              
                              
                              45,729,652
                              
                              
                              
                              45,000,000Less
      current portion
                              
                              
                              10,000,000
                              
                              
                              
                              5,000,000Total
      notes payable, noncurrent
                              
                              $
                              35,729,652
                              
                              
                              $
                              40,000,000
 
 On
January 24, 2007, the Company and Citadel Equity Fund Ltd. ("Citadel") entered a
Notes Purchase Agreement.  In this transaction, Citadel
purchased:
 
 (i)           $40
million principal amount (less 3% Notes discount and 4% commission for proceeds
of $37,200,000) of guaranteed senior secured floating rate notes (“HY Notes”)
due between July 2009 to January 2012; and
 
 (ii)           $20
million principal amount (less 4% commission for proceeds of $19,200,000) of the
Company’s 3% senior secured convertible notes (“Convertible Notes”) due January
2012, which are convertible into shares of the Company's common stock at an
initial conversion price of $7.00 per share. $15 million of the convertible
notes was converted in 2008.
 
 The HY
notes bear interest at LIBOR (approximately 1.60% at June 30, 2009) + 7% and
changes to LIBOR + 5.6% permanently upon successful completion of Qualifying IPO
within eighteen months from January 24, 2007.  See below for
discussion of swap agreement changing variable interest to 8.3% fixed.The
Convertible Notes bear interest at a fixed rate of 3.00%, payable semi-annually
in arrears, and mature in 2012.  The HY Notes and the Convertible
Notes are guaranteed, jointly and severally, on a senior secured basis, by all
of the Company’s wholly-owned existing and future domestic
subsidiaries.   Subsequently on November 15, 2007, the Company
filed Form S-3 with the Securities and Exchange Commission (SEC) with a proposed
prospectus to register up to 5,743,143 shares including 2,857,143 shares
underlying the 3% Senior Convertible Notes. On November 21, 2007, the
registration statement was declared effective by the SEC. Upon the S-3
registration statement being declared effective, management concluded that the
Company had met all the requirements for a Qualifying IPO and therefore notified
the HY Notes holders of the 140 basis points step-down and subsequently paid
interest per the stepped down rate in January 2008.
 
 Management
determined that the conversion option in Convertible Notes qualified as an
embedded derivative under FAS 133 through the adoption of EITF 07-5, as
discussed in Note 2.
  - 32
-
 
 FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
30, 2009
 (Unaudited)
 
 In
connection with the transaction, Citadel was also granted certain rights over
the Company and its subsidiaries. On January 25, 2007, Fushi, Fushi Holdings,
Fushi International, Dalian Fushi, (the “Group Companies”), Li Fu, Chairman and
Chief Executive Officer, Mathus Yue Yang, the Company’s then President, Chris
Wenbing Wang, President and Chief Financial Officer and Citadel entered into an
Investor Rights Agreement. Subsequently on June 4, 2008, the Group Companies, Li
Fu, Chris Wenbing Wang and Citadel entered in an Amended and Restated Investor
Rights Agreement.  Pursuant to the Investor Rights Agreement and the
Amended and Restated Investor Rights Agreement, Citadel was granted, among other
things and subject to certain conditions, a right of first refusal with respect
to any debt or equity financing sought by the Company. In addition, Messrs. Fu,
Yang and Wang agreed to a non-competition covenant relating to their employment
and ability to engage in a business that is competitive with the Company's
business for five years.
 
 The HY
Notes and the Convertible Notes were issued pursuant to indentures, each dated
January 25, 2007 (the “HY Indenture” and “CB Indenture”, respectively, and
together, the "Indentures") among the Company, Fushi Holdings, as guarantor, and
the Bank of New York, as trustee for the Notes.  The indenture, notes
purchase agreement and investor rights agreement related to the HY Notes and
Convertible Notes contain various covenants that may limit the Company’s
discretion in operating its business. In particular, the Company is limited in
its ability to merge, consolidate or transfer substantially all of its assets,
issue stock of its subsidiaries, incur additional debt and create liens on
assets to secure debt. In addition, the Company is required to comply with
certain financial covenants, including maintenance of a fixed charge coverage
ratio of at least 2.0 and maintenance of a leverage ratio not exceeding 5.5. In
addition, upon occurrence of events defined as “Asset Sale,” “Change of Control”
or “Designated Event (means any Fundamental Change or Termination of Trading)”
under the Indentures, holders of the HY Notes and Convertible Notes may require
the Company to make an offer to repurchase the principal amounts.
 
 The
Company also agrees that on the dates indicated in the following table, the
Company will prepay the corresponding principal amount (or such lesser principal
amount as shall then be outstanding) in respect of the aggregate principal
amounts.
  Date
                      
                      Principal AmountJuly
      24, 2009
                      
                      $
                      5,000,000January
      24, 2010
                      
                      $
                      5,000,000July
      24, 2010
                      
                      $
                      5,000,000January 24, 2011
                      
                      $
                      5,000,000July
      24, 2011
                      
                      $
                      10,000,000January 24, 2012
                      
                      $
                      10,000,000
 
 The
entire remaining principal amount of the Notes shall become due and payable on
January 24, 2012.
  - 33
-
  FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
30, 2009
 (Unaudited)
 
 Unless
previously redeemed, converted, purchased or cancelled, the Company must repay
the Convertible Notes on January 24, 2012. The Convertible Notes may not be
prepaid at any time prior to maturity. At maturity, the Company must repay all
of the outstanding Convertible Notes plus a premium of 15.00% per annum on the
principal amount calculated on a semi-annual basis, plus accrued and unpaid
interest on the late payment, if any, to reflect an additional 5% per annum
interest in excess of the rate of interest then in effect. It’s estimated that the
Company will have to repay the principal of $5 million and an additional
redemption cost of $5,305,158.
 
 The
Convertible Notes are convertible at the option of the holder into the Company’s
common stock at an initial conversion price of $7 per share (approximating
14,286 shares per $100,000 principal amount of the Convertible Notes), subject
to downward adjustments of conversion price on March 1 and September 1 of each
year, beginning with March 1, 2008, to equal the simple arithmetic average of
VWAP for the fifteen trading days preceding such March 1 or September 1, with a
floor of $4.5.  On March 2, 2009, the conversion price was adjusted to
$5.11 (approximating 19,569 shares per $100,000 principal amount of the
Convertible Notes) to reflect the simple arithmetic average of VWAP for the
fifteen trading days preceding the reset date.
 
 In
addition, adjustment of the Conversion Rate will be made if and at each time,
upon completion of the quarter reviews (for each Fiscal Quarter ended March 31,
June 30 and September 30) or annual audit (for each Fiscal Quarter ended
December 31) of the Company’s consolidated financial statements an event defined
as Financial and Operational
Trigger under the CB indenture shall have occurred in the immediately
preceding Fiscal Quarter, then within five (5) Business Days following issuance
of the review or audit report, as the case may be, for such Fiscal Quarter, the
Conversion Rate shall be adjusted pursuant to a formula provided in the CB
Indenture and not subjective to the floor of $4.50.  The Financial
and Operational Triggermeans, for the Company
and its subsidiaries on a consolidated basis, that net income fora Fiscal Quarter shall be
less than the US dollar amount indicated in the table below opposite such Fiscal
Quarter:
 
 Fiscal Quarter Ending
                            
                            Net IncomeJune
      30, 2007
                            
                            $5.0
      millionSeptember
      30, 2007
                            
                            $5.0
      millionDecember
      31, 2007
                            
                            $5.0
      millionMarch
      31, 2008
                            
                            $6.0
      millionJune
      30, 2008
                            
                            $6.0
      millionSeptember
      30, 2008
                            
                            $6.0
      millionDecember
      31, 2008
                            
                            $6.0
      millionMarch
      31, 2009
                            
                            $7.2
      millionJune
      30, 2009
                            
                            $7.2
      millionSeptember
      30, 2009
                            
                            $7.2
      millionDecember
      31, 2009
                            
                            $7.2
      million
  - 34
-
  FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
30, 2009
 (Unaudited)
 
 Upon
review of the consolidated financial statements, the Company determined that
a Financial and Operational
Trigger as defined under the CB indenture occurred during the quarters
ended June 30, 2009,
March 31, 2009 andDecember 31, 2008. To the extent a conversion occurs,
the Company shall be required to deliver approximately
421,000 additional shares of the Company’s common stock to the holder of
the Convertible Notes by decreasing the Conversion Rate with respect to such
notes.  Further, the Company cannot provide assurance that the Financial and Operational
Trigger may not occur again in future fiscal quarters especially under
challenging macro-economic conditions and difficult operating environments like
the current one.  As of June 30, 2009, the Conversion Rate was
adjusted to $3.97.  As a result of the adjusted conversion price used by the Company to
fair value the embedded conversion option feature of the convertible notes, as
of June 30, 2009, the Company recognized an increase to derivative liability –
conversion option and an increase to change in fair value derivative liability –
conversion option in the amount of $2,023,663.
 
 On
January 8, 2008, Citadel Equity Fund Ltd. exercised its rights under the CB
indenture and received 2,142,857 shares in exchange for $15.0 million in debt
with an exchange factor of $7.00 in debt for each share of stock.
 
 As of
June 30, 2009, the Company had a carrying value of $5,729,652 of Convertible
Notes, of which, $5 million is principal and $729,652 is accrued interest and
redemption accretion.
 
 As
mentioned in Note 2, due to the recent adoption of EITF 07-5, the Company has
re-evaluated the Convertible Notes’ conversion option and has since then
determined that it would require liability accounting.  The Company
has since then recorded the fair value of the conversion option as “derivative
liability – conversion option” in the accompanying consolidated financial
statements. The change in the values of the conversion option is shown in the
accompanying consolidated statements of income and other comprehensive
income.
 
 Deferred
commissions on long term notes amounted to $2,663,349 (of which $1,125,000 was
due to Kuhns’ verdict as explained in Note 18) as of June 30, 2009 and
$3,188,344 as of December 31, 2008.  Amortized commission for the six
months ended June 30, 2009 and 2008 amounted to $524,995 (of which $225,000 was
due to Kuhns’ verdict as explained in Note 18) and $ 2,233,401, respectively.
Amortized commission for the three months ended June 30, 2009 and 2008 amounted
to $262,497 and $1,574,997, respectively.
 
 Interest
on long term notes for the six months ended June 30, 2009 and 2008 amounted to
$2,185,542 and $1,509,588, respectively. Interest for the three months ended
June 30, 2009 and 2008 was $1,073,352 and $917,541, respectively. Both amortized
commission and interest on long term notes are recorded as interest
expense.
 
 Note
11 – Derivative instrument
 
 The
Company's operations are exposed to a variety of global market risks, including
the effect of changing interest rates. This exposure is managed, in part, with
the use of financial derivatives. The Company uses financial derivatives only to
hedge exposures in the ordinary course of business and does not invest in
derivative instruments for speculative purposes.
  - 35
-
  FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
30, 2009
 (Unaudited)
 
 On April
10, 2007, effective January 24, 2007, the Company entered into a cross currency
swap transaction (the Swap) with Merrill Lynch Capital Services, Inc. (“MLCS”)
on the $40 million HY notes which converts the LIBOR + 7% per annum USD
variable interest rate to an 8.3% per annum RMB fixed interest rate. The
agreement was deemed effective January 24, 2007. The Swap requires semi-annual
payment in arrears on July 24 and January 24 and matures on the earlier of (1)
cash settlement defined as early termination; or (2) January 24, 2012, at which
point the Swap requires an exchange of RMB and USD based principals. Under the
terms of the cross currency swap, the Company receives variable interest rate
payments in USD and makes fixed interest rate payments in RMB with settlement
netted in USD, thereby creating the equivalent of fixed-rate debt. MLCS requires
the Company to deposit $1,000,000 with them to secure the agreement. The deposit
may be increased to $3,000,000 if the exchange rate for RMB to USD falls below
6.5 and to $5,000,000 if the exchange rate falls below 5.5. This swap is
designated and qualified as a cash flow hedge. In July, 2008, the Company placed
the $1,000,000 deposit with MLCS to secure the agreement. As of June 30, 2009,
the deposit has remained the same.
 
 Since its
effective date, the fair value of this Swap Agreement changed to a payable of
$7,890,432 and $4,377,076 as of June 30, 2009, and December 31, 2008,
respectively. For the six months ended June 30, 2009 and 2008, changes in fair
value of the Swap resulted in an increase in the liability and a loss to other
comprehensive income of $3,513,356 and $731,505, respectively, net of taxes. For
the three months ended June 30, 2009 and 2008, changes in fair value of the Swap
resulted in an increase in the liability and a loss to other comprehensive
income of $751,227, and a decrease in the liability and a gain to other
comprehensive income of $4,377,975, respectively, net of taxes.
 
 The
Company had cross currency hedge payable amounting to $372,118 and $104,324 as
of June 30, 2009 and December 31, 2008, respectively. The total loss from
derivative transactions for the six months ended June 30, 2009 was $382,374 and
the total gain from derivative transactions for the six months ended at June 30,
2008 was $355,190, respectively.  The total loss from derivative
transactions for the three months ended June 30, 2009 was $215,964 and the total
gain from derivative transactions for the three months ended at June 30, 2008
was $186,022, respectively. For the three and six months ended June 30, 2009,
there were no amounts recorded in the consolidated statements of income in
relation to this interest rate swap related to ineffectiveness of the swap
transaction.
 
 Note
12 - Earnings per share
 
 The
following is information of net income per share:
 Three
      months ended June 30,
                      
                      
                      Six
      months ended June 30,2009
                      
                      
                      2008
                      
                      
                      2009
                      
                      
                      2008(Unaudited)
                      
                      
                      (Unaudited)
                      
                      
                      (Unaudited)
                      
                      
                      (Unaudited)Net
      income for basic earnings per share
                      
                      $
                      1,562,700
                      
                      
                      $
                      7,280,846
                      
                      
                      $
                      4,663,617
                      
                      
                      $
                      14,851,343Add:
      Interest expense for convertible note
                      
                      
                      -
                      
                      
                      
                      24,887
                      
                      
                      
                      -
                      
                      
                      
                      52,649Deduct:
      Loan issuance cost
                      
                      
                      -
                      
                      
                      
                      (209,590
                      )
                      
                      
                      -
                      
                      
                      
                      (209,590
                      )Net
      income for diluted earnings per share
                      
                      $
                      1,562,700
                      
                      
                      $
                      7,096,143
                      
                      
                      $
                      4,663,617
                      
                      
                      $
                      14,694,402Weighted
      average shares used in basic computation
                      
                      
                      27,827,838
                      
                      
                      
                      27,354,215
                      
                      
                      
                      27,696,388
                      
                      
                      
                      27,201,127Diluted
      shares
                      
                      
                      495,773
                      
                      
                      
                      1,377,894
                      
                      
                      
                      357,838
                      
                      
                      
                      1,489,724Weighted
      average shares used in diluted  computation
                      
                      
                      28,323,611
                      
                      
                      
                      28,732,109
                      
                      
                      
                      28,054,226
                      
                      
                      
                      28,690,851Earnings
      per shareBasic
                      
                      $
                      0.06
                      
                      
                      $
                      0.27
                      
                      
                      $
                      0.17
                      
                      
                      $
                      0.55Diluted
                      
                      $
                      0.06
                      
                      
                      $
                      0.25
                      
                      
                      $
                      0.17
                      
                      
                      $
                      0.51
  - 36
-
  FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
30, 2009
 (Unaudited)
 
 Shares
excluded from the calculation of diluted earnings per share:
 
 Date
                                        issued/
                                        granted
                                      
                                      Nature
                                      
                                      Excise
      price
                                      
                                      
                                      Shares
      excluded
                                        for
      year diluted
                                        EPS
      calculation
                                      
                                      Reason
      for
                                        exclusion11/31/2007
                                      
                                      Warrants
                                      
                                      $
                                      16.80
                                      
                                      
                                      
                                      100,000
                                      
                                      Anti-dilutive02/23/2009
                                      
                                      Warrants
                                      
                                      $
                                      5.25-6.00
                                      
                                      
                                      
                                      300,000
                                      
                                      Anti-dilutive05/21/2007
      to 11/13/2007
                                      
                                      Options
                                      
                                      $
                                      11.75-20.94
                                      
                                      
                                      
                                      923,333
                                      
                                      Anti-dilutive04/10/2008
      to 6/25/2008
                                      
                                      Options
                                      
                                      $
                                      15.04-23.25
                                      
                                      
                                      
                                      144,000
                                      
                                      Anti-dilutive
 
 Convertible
notes were anti-dilutive and excluded from the calculation of diluted earnings
per share as well.
 
 Note
13 - Stockholders' Equity
 
 During
the first two quarters of 2009, the following activities were
recorded:
 
 On
February 23, 2009, the Company sold in a private placement 400,000 shares of its
common stock, par value $0.006 per share (the “Common Stock”) for an average
price of $4.80 per share, and warrants to purchase 300,000 shares of Common
Stock, for a total purchase price of $1,920,000.
  - 37
-
  FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
30, 2009
 (Unaudited)
 
 The
warrants consisted of Series A Warrants to purchase 100,000 shares of Common
Stock at an exercise price of $5.25 per share, Series B Warrants to purchase
100,000 shares of Common Stock at an exercise price of $5.50 per share, and
Series C Warrants to purchase 100,000 shares of Common Stock at an exercise
price of $6.00 per share.
 
 The
Series A and B Warrants are exercisable starting from the date of issuance
through the later of (i) February 22, 2010 and (ii) the date which is six (6)
months following the effective date of a registration statement filed by the
Company under which the resale of all of the shares of Common Stock underlying
the warrants have been registered under the Securities Act of 1933, as amended
(the “Securities Act”). The Series C Warrants are exercisable starting from the
date of issuance through the later of (i) August 22, 2010 and (ii) the date
which is twelve (12) months following the effective date of a registration
statement filed by the Company under which the resale of all of the shares of
Common Stock underlying the warrant have been registered under the Securities
Act.
  Because
of certain cash redemption clauses related to these warrants, the Company at
issuance followed the criteria in EITF 00-19 and recorded the fair value of
these warrants as “derivative liability – warrants” in the accompanying
consolidated financial statements.  On June 30, 2009, the Company
amended and the holders amended the original warrant agreements to remove the
certain cash redemption clauses as mentioned above.  As of June 30,
2009, the Company has re-classified the derivative liability – warrants to
additional paid in capital.  The changes in the values of these
warrants are shown in the accompanying consolidated statements of income and
other comprehensive income.  On June 30, 2009, the value of the
warrants were calculated using the Cox-Ross-Rubinstein binomial model with the
following assumptions: exercise price of $5.25 for Series A, $5.50 for Series B
and $6.00 for Series C Warrants; share price of $8.27 for all warrants; risk
free interest rate of 0.42% for Series A and B Warrants, and 0.83% for Series C
Warrants; expected remaining life of 0.65 year for Series A and B Warrants, and
1.15 years for Series C Warrants; and volatility of 60% for all
warrants.
 
 The value
of the warrants at issuance were calculated using the Cox-Ross-Rubinstein
binomial model with the following assumptions: exercise price of $5.25 for
Series A, $5.50 for Series B and $6.00 for Series C Warrants; share price of
$4.27 for all warrants; risk free interest rate of 0.57% for Series A and B
Warrants, and 0.69% for Series C Warrants; expected life of 1 year for Series A
and B Warrants, and 1.5 years for Series C Warrants; and volatility of 60% for
all warrants.
 
 On June
5, 2009, as partial payment to reduce the judgment pursuant to the Settlement
Agreement signed with Kuhns on May 19, 2009, the Company issued and deposited a
stock certificate for 2.2 million shares of Common Stock in escrow (the “Escrow
Shares”) with the Escrow Agent along with an executed stock power in blank, to
be held pursuant to the Escrow Agreement. The Company agreed to deposit a total
of 2.2 million shares of Common Stock; however, Kuhns will only receive proceeds
from the sale of such number of Escrow Shares necessary to satisfy the Judgment,
after reducing the Judgment by the Escrow Assets. Once the Judgment has been
satisfied Kuhns shall instruct the Escrow Agent to return any remaining Escrow
Shares to the Company and such Escrow Shares shall be cancelled. See Note 18 for
more detail.
  - 38
-
  FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
30, 2009
 (Unaudited)
 
 Also, as
detailed in Note 18, as part of the settlement liability to Kuhns, the Company
during May 2009, delivered to Kuhns 100,000 shares of Escrow Shares of common
stock as partial payment to Kuhns, which reduced the judgment by $343,084 per
the valuation determined by the Settlement Agreement .
 
 The
company issued 1,625 shares of common stock during the second quarter of 2009
per exercise of stock options.
 
 The
following is a summary of the outstanding and exercisable warrant
balance:
 
 Exercise
                            Price
                          
                          Number
                          
                          
                          Average
                            Remaining
      Life
                            (years)$
                          3.11
                          
                          
                          332,124
                          
                          
                          
                          2.50$
                          16.80
                          
                          
                          100,000
                          
                          
                          
                          2.40$
                          5.25
                          
                          
                          100,000
                          
                          
                          
                          0.65$
                          5.50
                          
                          
                          100,000
                          
                          
                          
                          0.65$
                          6.00
                          
                          
                          100,000
                          
                          
                          
                          1.15732,124
                          
                          
                          
                          1.80
 
 The
following is a summary of the warrant activity:
 
 Number
      of
                            Warrants
                            Outstanding
                          
                          
                          Weighted
                            -Average
                            Exercise
                            Price
                          
                          Average
                            Remaining
                            Contractual
                            LifeBalance,
      at December 31, 2007
                          
                          
                          477,052
                          
                          
                          $
                          5.98
                          
                          4.00
      yearsGranted
                          
                          
                          (55
                          )Forfeited
                          
                          
                          -Exercised
                          
                          
                          -Balance,
      at June 30, 2008 (Unaudited)
                          
                          
                          476,997
                          
                          
                          $
                          5.98
                          
                          3.50
      yearsGranted
                          
                          
                          -Forfeited
                          
                          
                          -Exercised
                          
                          
                          (44,873
                          )
                          
                          $
                          3.11Balance,
      at December 31, 2008
                          
                          
                          432,124
                          
                          
                          $
                          6.28
                          
                          2.92
      yearsGranted
                          
                          
                          300,000
                          
                          
                          $
                          5.58Forfeited
                          
                          
                          -Exercised
                          
                          
                          -Balance,
      at June 30, 2009 (Unaudited)
                          
                          
                          732,124
                          
                          
                          $
                          5.99
                          
                          1.80
      years
  - 39
-
 
 FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
30, 2009
 (Unaudited)
 
 Note
14 – Stock based compensation
  2007 Incentive
Plan
  On
October 24, 2007, the Board of Directors approved the adoption of the Fushi
Copperweld, Inc. 2007 Stock Incentive Plan (the “2007 Plan”).  The
aggregate number of shares of Common Stock that may be issued under this Plan
shall not exceed 800,000 shares, provided, however, that such number shall be
increased at the end of each fiscal year of the Company in the same proportion
as the issued and outstanding stock of such fiscal year; subject to a maximum of
10%of the issued
and outstanding stock of the Company. Share options must be granted with an
exercise price of at least 100% of the closing market price on the date of
grant. The Compensation Committee (or Chief Executive Officer) had authority to
set all the terms of each grant. Under the 2007 Plan, forfeited shares will
become available for grant again.
  The
majority of the options awarded under the 2007 Plan vest in two years from the
grant date. The majority of the options granted under the 2007 Plan expire in
3 years.
  Under the
2007 Plan, the Company granted share options to all executives, directors and
employees as summarized below:
  Grant
      Year
                      
                      Number
      of Shares
                      
                      
                      Exercise
      Price Range2007
                      
                      
                      335,000
                      
                      
                      $
                      16.36-$20.942008
                      
                      
                      151,000
                      
                      
                      $
                      15.04-$23.252009
                      
                      
                      388,000
                      
                      
                      $
                      4.95Total
                      
                      
                      874,000
 
 The fair
value of each option award is estimated on the date of grant using the
Black-Scholes model using the following weighted-average
assumptions:
 
 Q1
                          
                          
                          Year
      ended December 312009
                          
                          
                          2008
                          
                          
                          2007Risk-free
      interest rate(1)
                          
                          
                          0.78
                          %
                          
                          
                          1.84%-2.82
                          %
                          
                          
                          3.54%-4.57
                          %Expected
      dividend yield(2)
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -Expected
      option life(3)
                          
                          2
      Year
                          
                          
                          0.5-2
      Years
                          
                          
                          2
      YearsExpected
      stock price volatility(4)
                          
                          
                          60
                          %
                          
                          
                          50
                          %
                          
                          
                          50
                          %Weighted
      average fair value of options granted
                          
                          $
                          1.85
                          
                          
                          $
                          4.57
                          
                          
                          $
                          4.06
 
 (1)
                      
                      Risk-free interest rate– Risk-free interest
      rate is based on US Treasury zero-coupon issues with maturity terms
      similar to the expected term on theexpected life of the option. An
      increase in the risk-free interest rate will increase compensation
      expense.(2)
                      
                      Expected dividend yield– The dividend yield was estimated by the Company based on its
      expected dividend policy over the expected term of the options. The
      Company has no plans to pay any dividend in the foreseeable future.
      Therefore, the Company considers the dividend yield to be
      zero.
  - 40
-
  FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
30, 2009
 (Unaudited)
 
 (3)
                      
                      Expected option life–
      Because the Company has no historical share option exercise experience to
      estimate future exercise patterns, the expected life was determined using
      the simplified method as these awards meet the definition of
      “plain-vanilla” options under the rules prescribed by Staff Accounting
      Bulletin No. 107. An increase in expected life will increase compensation
      expense.(4)
                      
                      Expected stock price
      volatility– This is a measure of the amount by which a price has
      fluctuated or is expected to fluctuate. As a forward-looking measure, the
      Company uses implied volatility of Company’s 225 days call options with
      strike price of $5.00 on March 7, 2009 (source: Morningstar.com), adjusted
      by the 2-year historical volatility of the Company’s stock as well as
      2-year historical volatilities of the Company’s comparable public
      companies, to calculate the expected stock price volatility. An increase
      in the expected volatility will increase compensation
    expense.
  Stock
compensation expense is recognized based on awards expected to
vest.  FAS 123R requires forfeitures to be estimated at the time of
grant and revised in subsequent periods, if necessary, if actual forfeitures
differ from those estimates. To the extent the actual forfeiture rate is
different from the original estimate, actual share based compensation related to
these awards may be different from the expectation. There is no material
difference between actual and estimated forfeitures during the six months ended
June 30, 2009.
  The
Company recognized $928,727 and $914,083 share-based compensation expense in
general and administrative expenses for the six months ended June 30, 2009 and
2008, respectively. For the three months ended June 30, 2009 and 2008, the
Company recognized share-based compensation expense of $337,859 and $500,988,
respectively. As of June 30, 2009, the total compensation cost related to stock
options not yet recognized was $419,591 and will be recognized over the weighted
average life of 0.16 years.
 
 As of
June 30, 2009, the 892,333 executive options, 240,000 director options and
283,750 employee options outstanding had fair values of approximately
$3,473,081, $912,761 and $750,908, respectively.
  - 41
-
  FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
30, 2009
 (Unaudited)
 
 The
following is a summary of the stock option activity:
 
 Number
      of
                        Options
                        Outstanding
                      
                      
                      Weighted
                        -Average
                        Exercise
                        Price
                      
                      
                      Aggregate
                        Intrinsic
                        ValueBalance,
      December 31, 2007
                      
                      
                      1,110,000
                      
                      
                      $
                      14.30
                      
                      
                      $
                      12,075,850Granted
                      
                      
                      151,000
                      
                      
                      $
                      21.20
                      
                      
                      
                      -Forfeited
                      
                      
                      (186,667
                      )
                      
                      $
                      16.30
                      
                      
                      
                      -Exercised
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Balance,
      June 30, 2008 (Unaudited)
                      
                      
                      1,074,333
                      
                      
                      $
                      15.10
                      
                      
                      $
                      9,271,494Granted
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Forfeited
                      
                      
                      (7,000
                      )
                      
                      $
                      23.25
                      
                      
                      
                      -Exercised
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Balance,
      December 31, 2008
                      
                      
                      1,067,333
                      
                      
                      $
                      14.90
                      
                      
                      $
                      -Granted
                      
                      
                      388,000
                      
                      
                      $
                      4.95
                      
                      
                      
                      -Forfeited
                      
                      
                      (35,250
                      )
                      
                      $
                      4.95
                      
                      
                      
                      -Exercised
                      
                      
                      (4,000
                      )
                      
                      $
                      4.95
                      
                      
                      
                      -Balance,
      June 30, 2009 (Unaudited)
                      
                      
                      1,416,083
                      
                      
                      $
                      12.42
                      
                      
                      $
                      -
 
 Following
is a summary of the status of options outstanding at June 30, 2009:
 
 Outstanding
      Option
                      
                      Exercisable
      OptionsExercise
      Price
                      
                      Number
                      
                      Average
                        Remaining
                        Contractual
                        Life
                      
                      Average
                        Exercise
                        Price
                      
                      
                      Number
                      
                      
                      Weighted
                        Average
                        Exercise
                        Price$12.30
                      
                      
                      408,333
                      
                      2.89years
                      
                      $
                      12.30
                      
                      
                      
                      408,333
                      
                      
                      $
                      12.30$11.75
                      
                      
                      150,000
                      
                      3.01years
                      
                      $
                      11.75
                      
                      
                      
                      150,000
                      
                      
                      $
                      11.75$13.70
                      
                      
                      125,000
                      
                      2.24years
                      
                      $
                      13.70
                      
                      
                      
                      125,000
                      
                      
                      $
                      13.70$16.44
      - $20.94
                      
                      
                      230,000
                      
                      0.57
      to 2.62 years
                      
                      $
                      18.69
                      
                      
                      
                      230,000
                      
                      
                      $
                      18.69$16.36
                      
                      
                      10,000
                      
                      2.37
      years
                      
                      $
                      16.36
                      
                      
                      
                      10,000
                      
                      
                      $
                      16.36$23.25
                      
                      
                      77,000
                      
                      2.50
      years
                      
                      $
                      23.25
                      
                      
                      
                      77,000
                      
                      
                      $
                      23.25$15.04
                      
                      
                      17,000
                      
                      2.78
      years
                      
                      $
                      15.04
                      
                      
                      
                      17,000
                      
                      
                      $
                      15.04$20.04
                      
                      
                      50,000
                      
                      3.89
      years
                      
                      $
                      20.04
                      
                      
                      
                      33,308
                      
                      
                      $
                      20.04$4.95
                      
                      
                      348,750
                      
                      3.50
      years
                      
                      $
                      4.95
                      
                      
                      
                      174,750
                      
                      
                      $
                      4.95Total
                      
                      
                      1,416,083
                      
                      
                      
                      
                      
                      
                      
                      
                      1,225,391
 
 Note
15 - Statutory reserves
 
 The laws
and regulations of the People’s Republic of China require that before a
Sino-foreign cooperative joint venture enterprise distributes profits to its
partners, it must first satisfy all tax liabilities, provide for losses in
previous years, and make allocations in proportions determined at the discretion
of the board of directors, after the statutory reserve.
 
 Surplus reserve
fund
 
 The
Company is required to transfer 10% of its net income, as determined in
accordance with the PRC accounting rules and regulations to a statutory surplus
reserve fund until such reserve balance reaches 50% of the Company’s registered
capital. As of June 30, 2009, the Company has total registered capital of
approximately $120,248,923 (RMB 821.3 million). The Company is required to
contribute an additional $44,804,308 from future earnings if the company’s China
facility has net income for future years. The transfer to this reserve must be
made before distribution of any dividend to shareholders. The Company will
transfer at year end 10% of the year’s net income determined in accordance with
PRC accounting rules and regulations.
  - 42
-
 
 FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
30, 2009
 (Unaudited)
 
 The
surplus reserve fund is non-distributable other than during liquidation and can
be used to fund previous years’ losses, if any, and may be utilized for business
expansion or converted into share capital by issuing new shares to existing
shareholders in proportion to their shareholding or by increasing the par value
of the shares currently held by them, provided that the remaining reserve
balance after such issue is not less than 50% of the registered
capital.
 
 Note
16 – Employee pension
 
 The
Company’s employee pension for China employees generally includes two parts: the
first to be paid by the Company is 20% of the employee’s actual salary in the
prior year. The other part, paid by the employee, is 8% of the actual salary.
The Company made $77,602 and $66,706 in contributions of employment benefits for
China employees in the six months ended June 30, 2009 and 2008, respectively.
For the three months ended June 30, 2009 and 2008, the Company made
contributions of employee benefits for China employees of $45,611 and $36,244,
respectively.
 
 US
employees are provided a 401(k) plan.  US employees are eligible for the
defined contribution plan after three-months of full-time
employment.  Employee deferrals and company matching are 100% vested
immediately upon eligibility. The Company made $47,729 and $70,568 in
contributions of employment benefits for US employees in the six months ended
June 30, 2009 and 2008, respectively. For the three months ended June 30, 2009
and 2008, the Company made contributions of employment benefits for US employees
of $17,189 and $37,233, respectively.
 
 Copperweld
UK operates a defined contribution pension scheme for employees. All UK
employees are eligible to join the pension on satisfactory completion of their
trial period, which is typically three months. UK employees can contribute as
much as they like subject to current UK laws, but the company will match only
the first 2.5% of gross pay in the current year. The assets of the scheme are
held separately from those of the company. The annual contributions payable are
charged to expense. The Company made $5,400 and $19,656 in contributions of
employment benefits for UK employees in the six months ended June 30, 2009 and
2008. For the three months ended June 30, 2009 and 2008, the Company made
contributions of employment benefits for UK employees of $2,622 and $5,980,
respectively.
 
 Note
17 - Segment Information
 
 The
Company follows the provisions of SFAS No. 131, “Disclosures about Segments of
an Enterprise and Related Information”, which establishes standards for
reporting information about operating segments. Operating segments are defined
as components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision maker in
deciding how to allocate resources and assess performance. The Company’s chief
operating decision makers have been identified as the Chief Executive Officer
and Chief Financial Officer. The accounting policies of the reportable segments
are the same as those described in the summary of significant accounting
policies.
  - 43
-
 
 FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
30, 2009
 (Unaudited)
 
 As of
June 30, 2009, the Company has two reportable segments: China and US. We analyze
our worldwide operations based on two geographic reportable segments: 1)
“P.R.C.” which consists of our facility Located in Dalian, Liaoning, the
People’s Republic of China (PRC) and 2) ”US” which consists of our Fayetteville,
Tennessee, (USA), and Telford, England, (UK) facilities. The China segment,
through theDalian
manufacturing facility, is engaged in developing, designing, manufacturing,
marketing and distributing copper cladded bi-metallicengineered
conductor products, principally copper-clad aluminum (CCA) and primarily
services the Asia-Pacific region, and specifically thePRC
market.
 
 The US
segment, consisting of two manufacturing facilities, one in Fayetteville,
Tennessee, USA and a second in Telford,England, are
engaged in developing, designing, manufacturing, marketing and distributing
copper-cladded bimetallic engineered conductorproducts,
principally CCA and copper-clad steel (CCS) and primarily services the North and
South American, European, Middle Eastern andNorth African
markets.
 
 The
Company evaluates segment performance and allocates resources based on segment
gross profit and segment operating income. Segment operating income represents
income from continuing operations before interest income, interest expense,
other income (expense), other financial costs and income tax.
 
 Corporate
operating expenses are primarily stock-based compensation, professional fees and
outside service expenses.
  - 44
-
  FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
30, 2009
 (Unaudited)
  Analysis
of reportable segments (management information):
 
 For
      the Three Months Ended June 30, 2009China
                                            
                                            
                                            US
                                            
                                            
                                            Corporate
                                            
                                            
                                            Eliminations
                                            
                                            
                                            TotalRevenues
                                            
                                            
                                            39,480,037
                                            
                                            
                                            
                                            8,879,618
                                            
                                            
                                            
                                            
                                            
                                            
                                            (58,110
                                            )
                                            
                                            
                                            48,301,545Gross
      Profit
                                            
                                            
                                            12,229,639
                                            
                                            
                                            
                                            1,223,041
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            13,452,680Selling,
      general and administrative expenses
                                            
                                            
                                            1,829,642
                                            
                                            
                                            
                                            1,335,836
                                            
                                            
                                            
                                            1,088,297
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            4,253,775Operating
      income (loss)
                                            
                                            
                                            10,399,997
                                            
                                            
                                            
                                            (112,795
                                            )
                                            
                                            
                                            (1,088,297
                                            )
                                            
                                            
                                            
                                            
                                            
                                            
                                            9,198,905Capital
      expenditures
                                            
                                            
                                            100,857
                                            
                                            
                                            
                                            78,280
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            179,137For
      the Six Months Ended June 30, 2009China
                                            
                                            
                                            US
                                            
                                            
                                            Corporate
                                            
                                            
                                            Eliminations
                                            
                                            
                                            TotalRevenues
                                            
                                            
                                            65,817,481
                                            
                                            
                                            
                                            17,649,847
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            90,753
                                            
                                            
                                            
                                            83,558,081Gross
      Profit
                                            
                                            
                                            20,888,875
                                            
                                            
                                            
                                            1,503,180
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            22,392,055Selling,
      general and administrative expenses
                                            
                                            
                                            3,493,460
                                            
                                            
                                            
                                            2,931,883
                                            
                                            
                                            
                                            2,100,821
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            8,526,164Operating
      income (loss)
                                            
                                            
                                            17,395,415
                                            
                                            
                                            
                                            (1,428,703
                                            )
                                            
                                            
                                            (2,100,821
                                            )
                                            
                                            
                                            
                                            
                                            
                                            
                                            13,865,891Capital
      expenditures
                                            
                                            
                                            5,353,890
                                            
                                            
                                            
                                            255,645
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            5,609,535For
      the Three Months Ended June 30, 2008China
                                            
                                            
                                            US
                                            
                                            
                                            Corporate
                                            
                                            
                                            Eliminations
                                            
                                            
                                            TotalRevenues
                                            
                                            
                                            46,364,995
                                            
                                            
                                            
                                            16,207,248
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            (36,114
                                            )
                                            
                                            
                                            62,536,129Gross
      Profit
                                            
                                            
                                            14,677,325
                                            
                                            
                                            
                                            2,069,282
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            16,746,607Selling,
      general and administrative expenses
                                            
                                            
                                            1,984,039
                                            
                                            
                                            
                                            1,709,381
                                            
                                            
                                            
                                            1,086,096
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            4,779,516Operating
      income (loss)
                                            
                                            
                                            12,693,286
                                            
                                            
                                            
                                            359,901
                                            
                                            
                                            
                                            (1,086,096
                                            )
                                            
                                            
                                            
                                            
                                            
                                            
                                            11,967,091Capital
      expenditures
                                            
                                            
                                            14,386,560
                                            
                                            
                                            
                                            797,607
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            15,184,167
  
 For
      the Six Months Ended June 30, 2008China
                        
                        
                        US
                        
                        
                        Corporate
                        
                        
                        Eliminations
                        
                        
                        TotalRevenues
                        
                        
                        82,344,315
                        
                        
                        
                        35,028,979
                        
                        
                        
                        
                        
                        
                        (828,138
                        )
                        
                        
                        116,545,156Gross
      Profit
                        
                        
                        26,842,941
                        
                        
                        
                        4,637,353
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        31,480,294Selling,
      general and administrative expenses
                        
                        
                        4,358,071
                        
                        
                        
                        2,946,039
                        
                        
                        
                        2,664,096
                        
                        
                        
                        
                        
                        
                        
                        9,968,206Operating
      income (loss)
                        
                        
                        22,484,458
                        
                        
                        
                        1,691,726
                        
                        
                        
                        (2,664,096
                        )
                        
                        
                        
                        
                        
                        
                        21,512,088Capital
      expenditures
                        
                        
                        15,743,250
                        
                        
                        
                        1,726,660
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        17,469,910
 
 As
      of December 31, 2008
                          
                          China
                          
                          
                          US
                          
                          
                          Corporate
                          
                          
                          TotalProperty,
      plant and equipment, net
                          
                          
                          103,473,792
                          
                          
                          
                          16,287,235
                          
                          
                          
                          
                          
                          
                          119,761,027Total
      assets
                          
                          
                          252,707,535
                          
                          
                          
                          28,727,197
                          
                          
                          
                          13,022,785
                          
                          
                          
                          294,457,517As
      of June 30, 2009
                          
                          China
                          
                          
                          US
                          
                          
                          Corporate
                          
                          
                          TotalProperty,
      plant and equipment, net
                          
                          
                          103,057,104
                          
                          
                          
                          14,626,309
                          
                          
                          
                          
                          
                          
                          
                          117,683,413Total
      assets
                          
                          
                          245,733,007
                          
                          
                          
                          27,482,540
                          
                          
                          
                          13,975,729
                          
                          
                          
                          287,191,276
  - 45
-
  FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
30, 2009
 (Unaudited)
 
 Note
18 - Commitments and contingencies
 
 Swap
agreement
 
 As
discussed in Note 11, the Company entered into a swap agreement that required a
$1,000,000 deposit to secure the transaction. If the exchange rate for RMB to US
Dollars drops below certain levels, the Company will be required to deposit up
to $5,000,000. In
July 2008, the Company deposited the $1,000,000 with MLCS to secure the
agreement.
 
 Kuhns Brothers litigation
settlement
 
 On
December 11, 2007, the Company received service of an action filed by Kuhns
Brothers, Inc., Kuhns Brothers Securities Corp., and Kuhns Brothers & Co.,
Inc. against the Company in the United States District Court, District of
Connecticut on November 27, 2006.  On August 5, 2008, the Company received
verdict from the United States District Court that Kuhns is entitled to recover
a total of $7,197,794. During the fourth quarter of 2008, the Company appealed
to the court on the verdict and settlement.
 
 On May
19, 2009, the Company entered into a Settlement and Forbearance Agreement and
Release with Kuhns Brothers, Inc., Kuhns Brothers Securities Corp., and Kuhns
Bros. & Co. Inc. (collectively “Kuhns”), in which Kuhns agreed to reduce the
judgment to $7,000,000 (the “Judgment”) and the Company then agreed to withdraw
the appeal. The Company had initially accrued $7.2 million for this litigation
settlement as a contingent liability in the second quarter of 2008 and allocated
the amount into deferred commissions, additional paid in capital and current
expenses based on the nature of each charge due to Kuhns as below:
 
 Description
                          
                          Amount
                          
                          Accounting
      TreatmentPlacement
      agent fees associated to the Copperweld acquisition and Common stock
      issuance and to be deducted from the proceeds and debited to additional
      paid-in capital
                          
                          $
                          3,487,250
                          
                          Allocated
      to additional paid-in capital in 2008 under SAB Topic
  5A.Deferred
      placement agent fee related to $60 million Citadel Notes
      issuance
                          
                          
                          3,000,000
                          
                          Being
      amortized over the Notes' life and $1,875,000 has been amortized as at
      June 30, 2009 under FAS 91.Interests
      of all due placement agent fees
                          
                          
                          710,544
                          
                          Expensed
      in 2008Total
                          
                          $
                          7,197,794
  - 46
-
 
 FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
30, 2009
 (Unaudited)
 
 Pursuant
to the Settlement Agreement, the Judgment shall be satisfied in full no later
than January 15, 2010 through a combination of cash and shares. As partial
payment to reduce the Judgment, the Company delivered to Kuhns on May 21, 2009,
$1,000,000 plus accrued interest (the “Escrow Payment”), which was held in an
escrow account (the “Escrow Assets”) in the U.S. which is outside of the PRC ,
that was governed by an Escrow Agreement between the Company and Kuhns, dated
October 3, 2007. At the closing date on June 5, 2009, the Company also delivered
to Kuhns a stock certificate for 100,000 shares of Common Stock (the “Initial
Shares”), which had been part of the Escrow Assets, and (ii) deposited a stock
certificate for 2,200,000 shares of Common Stock in escrow (the “Escrow Shares”)
with the Escrow Agent along with an executed stock power in blank, to be held
pursuant to the Escrow Agreement. The Company then agreed to deposit a total of
2,200,000 shares of Common Stock. However, as stated in the settlement
agreement, Kuhns will only receive proceeds from the sale of such number of
Escrow Shares necessary to satisfy the Judgment, after reducing the Judgment by
the Escrow Assets. Once the Judgment has been satisfied Kuhns shall instruct the
Escrow Agent to return any remaining Escrow Shares to the Company and such
Escrow Shares shall be cancelled.  The Company may pay the balance of
the Judgment to Kuhns at any time without any pre-payment penalty.
 
 On or
prior to the thirtieth day after the Closing Date, the Company shall file a
registration statement on Form S-3 (the “Registration Statement”) with the U.S.
Securities and Exchange Commission (“SEC”) under the Securities Act of 1933, as
amended (the “Securities Act”) to register the Initial Shares and Escrow Shares
for resale. The Company shall use its best efforts to have the Registration
Statement declared effective under the Securities Act as promptly as possible
after the filing thereof, but in any event no later than 120 days from Closing
(the “Registration Deadline”). In the event the Registration Statement is
declared effective, then, upon written notice to the Escrow Agent, the Escrow
Agent will deposit the Escrow Shares into a brokerage account and will
thereafter sell shares in such amounts and at such times as Kuhns directs until
such time as the Judgment including any accrued interest has been paid in full.
Kuhns shall use its reasonable efforts to direct sale of the Escrow Shares
resulting in full payment of the Current Judgment Amount by January 15,
2010.
 
 In the
event the Company meets the Registration Deadline and for so long as the
Registration Statement remains effective, the Judgment shall be reduced by an
amount equal to the cash proceeds distributed by the Escrow Agent to Kuhns in
connection with sales of the Escrow Shares. If the Company fails to meet the
Registration Deadline, but causes a Registration Statement to be declared
effective by October 31, 2009, the Judgment shall instead be further reduced by
an amount equal to ninety percent (90%) of the cash proceeds distributed by the
Escrow Agent to Kuhns in connection with sales of the Escrow
Shares.
 
 In the
event that (i) the Company’s Registration Statement is not declared effective by
the Registration Deadline and (ii) for so long as the Registration Statement is
not effective subsequent to the Registration Deadline, the Current Judgment
Amount as defined in the Settlement Agreement shall accrue interest at the rate
of 18% per annum. In addition, upon such events, Kuhns shall be entitled to
receive Escrow Shares from the Escrow Agent (the “Restricted Shares”) in such
amounts, and at such times, as it determines until the Judgment is satisfied.
The Current Judgment Amount shall thereupon be reduced by the Restricted Share
Value, which shall mean an amount equal to fifty percent (50%) of the daily
volume weighted average price of the Common Stock on the NASDAQ Global Select
Market as reported by Bloomberg (“VWAP”) for the ten trading days before the
date of delivery of the Restricted Shares to Kuhns.
  - 47
-
  Item 2. Management’s Discussion and Analysis
of Financial Condition and Results of Operations
 
 The
following discussion of our financial condition and results of operations should
be read in conjunction with our consolidated financial statements and the notes
to those financial statements appearing elsewhere in this Form
10-Q.
 
 Certain
statements in this Report, and the documents incorporated by reference herein,
constitute "forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933, Section 21E of the Securities Exchange Act of 1934 and
the Private Securities Litigation Reform Act of 1995. Such forward-looking
statements include statements, which involve risks and uncertainties, regarding,
among other things, (a) our projected sales, profitability, and cash flows, (b)
our growth strategies, (c) anticipated trends in our industries, (d) our future
financing plans, and (e) our anticipated needs for, and use of, working capital.
They are generally identifiable by use of the words “may,” “will,” “should,”
“anticipate,” “estimate,” “plan,” “potential,” “project,” “continuing,”
“ongoing,” “expects,” “management believes,” “we believe,” “we intend,” or the
negative of these words or other variations on these words or comparable
terminology. Actual events or results may differ materially from those discussed
in forward-looking statements as a result of various factors, including, without
limitation, the risks outlined under “Risk Factors” in our Annual Report on Form
10-K and matters described in this report generally. In light of these risks and
uncertainties, there can be no assurance that the forward-looking statements
contained in this filing will in fact occur. You should not place undue reliance
on these forward-looking statements.
 
 The
forward-looking statements speak only as of the date on which they are made,
and, except to the extent required by federal securities laws, we undertake no
obligation to update any forward-looking statement to reflect events or
circumstances after the date on which the statement is made or to reflect the
occurrence of unanticipated events.
  The
"Company", "we," "us," "our," and the "Registrant" refer to (i) Fushi
Copperweld, Inc. (formerly Fushi International, Inc.), (ii) Fushi Holdings,
Inc.(formerly Diversified Product Inspections, Inc.) (“Fushi Holdings”), (iii)
Fushi International (Dalian) Bimetallic Cable Co., Ltd. (formerly Dalian
Diversified Product Inspections Bimetallic Cable, Co., Ltd.) (“Fushi
International (Dalian)”), (iv) Dalian Fushi Bimetallic Wire Manufacturing, Co.,
Ltd. (“Dalian Fushi”), (v) Copperweld Holdings, LLC, (vi) Copperweld Bimetallic,
LLC (“Copperweld”) and (vii) Copperweld Bimetallics UK, LLC. Unless the context
otherwise requires, all references to (i)  “PRC” and “China” are
to the People’s Republic of China; (ii) “U.S. dollar,” “$” and “US$” are to
United States dollars; (iii) “RMB” are to Yuan Renminbi of China; (iv)
“Securities Act” are to the Securities Act of 1933, as amended; and (v)
“Exchange Act” are to the Securities Exchange Act of 1934, as
amended.
  - 48
-
 
 Overview
 
 We
believe we are the world’s largest producer, based on manufacturing capacity,
and a leading innovator of bimetallic wire products, principally copper-clad
aluminum (CCA) and copper-clad steel (CCS) products. Our products are primarily
used within the telecommunications, electrical utility, and transportation
industries, and are sold as conductor components within the broadband wire and
cable market, and finished products in the electrical utility and transportation
markets.  Our products significantly reduce the amount of copper
required to manufacture a conductor, and since copper is expensive, we
significantly reduce conductor cost through the addition of an aluminum or steel
core.  CCA and CCS conductors are generally used in substitution of
solid copper conductors where either cost savings or specific electrical and/or
physical attributes are either required or desired.  In the second
fiscal quarter of 2009, our products were sold to over 300 customers in 38
countries, are marketed under the trademarked names of “Copperweld®” and
“FushiTM,” and are sold directly to cable manufacturers or through either
distributors or sales agents to end-users.
 
 Although
we are engaged in one line of business, as a result of the differing markets
primarily served by each of our manufacturing facilities and significant
differences in the operating results among each of our facilities, starting with
the second fiscal quarter of 2009, we began to analyze our worldwide operations
based on two geographic reportable segments: 1) “P.R.C.” which consists of our
facility located in Dalian, Liaoning, the People’s Republic of China (PRC) and
2) ”US” which consists of our Fayetteville, Tennessee, (USA), and Telford,
England, (UK) facilities. We have combined our U.S. and U.K. operations as one
segment, since the UK is a subsidiary of the US operating company and is under
the direction of our U.S. segment manager.  Further, the nature of our
products, services and production processes at our U.S. and U.K. facilities,
along with the customer base, methods to distribute products and services are
nearly identical.
 
 We have a
strong market position in all markets in which we compete due to the quality of
our products, geographic and customer diversity and our ability to deliver
superior products while operating as a low cost provider.  As a
result, we believe we are now the leading producer of bimetallic wire products
in the world and are the market leaders in North America, Europe, North Africa,
the Middle East and the People’s Republic of China.  We continue to
expand within current and developing markets, and to create shareholder value
by:
 
 ·
              Investing
      in organic and inorganic growth in both infrastructure-based and
      fast-growing markets;
 ·
              Focusing
      on new, higher-margin products, applications and markets through
      investment into new machinery and research and
  development;
 ·
              Improving
      business processes throughout the Company by focusing on key performance
      indicators and operational
excellence;
 ·
              Strategically
      hiring and developing  talent, to improve the effectiveness of
      our performance management processes;
and
 ·
              Protecting
      and enhancing the Fushi Copperweld
brand.
 
 To
accomplish these goals, we are focused on continuously improving operational
efficiency in areas we view to be vital: quality, delivery, cost and innovation.
We also take an opportunistic approach to achieving our goals, and thus, we seek
acquisitions of businesses which facilitate overall growth and cash flows of the
Company.
  - 49
-
  We
manufacture, market and distribute bimetallic conductors (two-metal
conductors).  These bimetallic conductors are primarily CCA and
CCS.  Both CCA and CCS are either aluminum or steel cores, surrounded
by an outer layer of pure copper, resulting in a composite bimetallic conductor.
The copper sheath, through our processing methods, is metallurgically “bonded”
to the core metal.  The amount of copper-metal used in cladding the
core-metal varies widely, and is based on customers’ needs.  However,
bimetallic conductors, compared to solid copper conductors, can reduce the
amount of copper used by as much as 90% by volume, or 73% by
weight.  This is a considerable cost savings.  For many
applications, bimetallic conductors offer significant advantages over copper
wire.  End-user manufacturers in the industry have increasingly
pursued and considered alternative technologies such as bimetallics due to
performance and economic considerations.  Relative to traditional copper
conductors, bimetallic conductors offer greater value to a variety of customers.
 Because of the benefits of bimetallic conductors, we believe there are
substantial opportunities to capture increased market share in applications that
have historically been dominated by solid copper wire.
 
 Our
engineered bimetallic conductor products offer end-users greater
value-performance than “solid” copper conductors.  Our bimetallic
conductors combine the efficiency of copper with the lightweight qualities of
aluminum (CCA), or the ruggedness and strength of steel
(CCS).   Bimetallic conductors offer favorable cost
characteristics, weight savings (CCA), increased flexibility and end-product
ease-of-handling (CCA), increased tensile strength (CCS), improved corrosion
characteristics and decreased theft risk.  Conductivity can be
customized, by changing the percentage of copper, to fit many applications. The
physical and electrical attributes of our bimetallic products provide our
customers cost savings beyond their intrinsic pricing advantages.
 
 Our
proprietary manufacturing technology allows us to produce superior products
compared to other manufacturers and creates a significant barrier to
entry.  Manufacturing copper-clad products involves bonding copper tape to
an aluminum or steel core rod, drawing the cladded product to a finished
diameter and heat treating (annealing) as necessary depending on customer
specifications. Our proprietary cladding process differentiates us in terms of
manufacturing capabilities, offering superior product quality.  Our
developmental capabilities support the ongoing evolution of our current
products.  We are continuously working toward new technologies and
products that we expect will improve the performance and capabilities of our
bimetallic products thereby allowing us to enter new markets.
 
 While the
pricing volatility of our raw materials, especially copper, is a primary cause
of cost variations in our products, changes in raw material costs do not
materially affect our dollar earnings on a per pound basis. Although an increase
in the price of raw materials may serve to reduce our gross margins as a
percentage of net sales, likewise, a decline in raw material prices may increase
our gross margin as a percentage of net sales. We generally pass the cost of
price changes in our raw materials to our customers rather than the percentage
changes. We establish prices for our products based on market factors and our
cost to produce our products. Typically, we set a base price for our products
for our customers with an understanding that as prices of raw materials change,
primarily for copper but also for aluminum and steel, we will pass the change
through to our customers. Therefore, when prices of raw material increase, our
prices to our customers increase and the amount of our total net sales increases
while the dollar amount of our gross margin remains relatively
stable.  As a result, the impact on earnings per share from volatile
raw material prices is minimal, although there are timing delays of varying
lengths depending upon volatility of metals prices, the type of product,
competitive conditions and particular customer arrangements.
  - 50
-
 
 Factors
driving and affecting operating results include raw material prices, product and
price competition, economic conditions in various geographic regions, foreign
currency exchange rates, interest rates, changes in technology, fluctuations in
customer demand, variations in the mix of products, production capacity and
utilization, working capital sufficiency, availability of credit and general
market liquidity, patent and intellectual property issues, litigation results
and legal and regulatory developments, and our ability to accurately forecast
sales demand and calibrate manufacturing to such demand, manage volatile raw
material costs, develop, manufacture and successfully market new and enhanced
products and product lines, control operating costs, and attract, motivate and
retain key personnel to manage our operational, financial and management
information systems.
 
 Highlights for the Quarter
include:
 
 -
              EPS
      of $0.06 for the three months ended June 30,
  2009;
 -
              Metric
      tons of volume shipped increased 9.5% compared to the second quarter
      2008;
 -
              Significantly
      improved performance at Fayetteville facility; generated approximately
      $0.5 million of net income during the month of June
  2009;
 -
              Expects
      to benefit from increased demand in coming quarters due to strength in the
      utility and telecommunications markets as well as the Chinese government's
      stimulus package;
 -
              Successfully
      increased annual CCA capacity by 6,000 metric tons at Dalian facility;
      and
 -
              Improved
      cash flows from operating activities by $9.1 million compared to the
      second quarter 2008
 
 Current
Business Environment and Outlook for the remainder of 2009
 
 With
respect to the overall business trends for the remainder of 2009 and forward,
management is increasingly encouraged by recent trends that show positive
metrics in the economy and our markets around the world. Statistics released by
the PRC’s National Bureau of Statistics indicate that the $586 billion stimulus
package implemented by the Chinese government in November 2008 began to gain
further traction during the first half of 2009, as total fixed asset investment
grew 33.5%, a growth of 7.2% compared to the same period in 2008. We believe the
following macro-level trends will positively impact our business and offer us
opportunities to capture new business despite global economic conditions and
preserved profitability:
 
 ·
              Strong
      incremental demand for CCA-based telecommunication products in China,
      primarily due to 3G related capital
investment;
 ·
              Chinese
      government stimulus packages focused on infrastructure, high-speed
      railways, Transmission and Distribution and power grid build
      out;
 ·
              Continued
      strength of the grounding wire
market;
 ·
              Worldwide
      long-term growth trends in electric utility and infrastructure markets;
      and
 ·
              Continued
      demand for cost effective and energy saving
  alternatives.
 
 Furthermore,
we have focused on driving profitability by streamlining our organizational
structure and business procedures, increasing operational efficiency and
optimizing operating processes, while managing production costs and operating
expenses.
  - 51
-
 
 In order
to enhance our productivity and expand our sales of higher margin products, we
are continuing to develop applications in high-potential utility and electrical
appliance markets. Meanwhile, we are also working to strengthen sales management
and customer relations.  We will seek to consolidate our relationships with
our best customers, stop or suspend selling to customers that pose significant
credit risk, and develop new customers cautiously.  In addition, as part of
our ongoing efforts to reduce total operating costs, we will continuously
improve our ability to efficiently utilize existing and new manufacturing
capacity to manage expansion and growth. We believe that investment to increase
capacity will pay off by increased product sales in the future. We believe that
effectively utilizing manufacturing assets, and generating economies of scale,
will help offset high raw material prices and dilute overhead over time. Moving
forward, as we are optimistic about the demand growth for our various products,
we expect our combined utilization rates to improve.
 
 We
actively seek to identify and promptly respond to key economic and industry
trends in order to capitalize on expanding niche markets for our products, and
to potentially enter new markets both vertically and horizontally, in order to
achieve better returns.  We believe that we have the resources, technology,
working capital and capacity to meet growing market demands.  Over the
long-term, we believe that we are well positioned to benefit from the growth
opportunities in China and throughout the world.
 
 Results
of Operations
 
 The following table sets forth, for the
periods indicated, statement of operations data in millions of dollars and as
percentage of net sales. Percentages may not add due to
rounding:
 
 Three Months Ended
                                  
                                  
                                  %
                                  
                                  
                                  Six Months Ended
                                  
                                  
                                  %June 30, 2009
                                  
                                  
                                  June 30, 2008
                                  
                                  
                                  Change
                                  
                                  
                                  June 30, 2009
                                  
                                  
                                  June 30, 2008
                                  
                                  
                                  Change(in millions, except percentages)Revenues
                                  
                                  
                                  48.3
                                  
                                  
                                  
                                  62.5
                                  
                                  
                                  
                                  -22.8
                                  %
                                  
                                  
                                  83.6
                                  
                                  
                                  
                                  116.5
                                  
                                  
                                  
                                  -28.3
                                  %Gross
      Profit
                                  
                                  
                                  13.5
                                  
                                  
                                  
                                  16.7
                                  
                                  
                                  
                                  -19.4
                                  %
                                  
                                  
                                  22.4
                                  
                                  
                                  
                                  31.5
                                  
                                  
                                  
                                  -28.8
                                  %Selling,
      general and administrative expenses
                                  
                                  
                                  4.3
                                  
                                  
                                  
                                  4.8
                                  
                                  
                                  
                                  -10.0
                                  %
                                  
                                  
                                  8.5
                                  
                                  
                                  
                                  10.0
                                  
                                  
                                  
                                  -14.7
                                  %Operating
      Income
                                  
                                  
                                  9.2
                                  
                                  
                                  
                                  12.0
                                  
                                  
                                  
                                  -23.1
                                  %
                                  
                                  
                                  13.9
                                  
                                  
                                  
                                  21.5
                                  
                                  
                                  
                                  -35.4
                                  %Income
      Before Taxes
                                  
                                  
                                  2.2
                                  
                                  
                                  
                                  8.5
                                  
                                  
                                  
                                  -74.1
                                  %
                                  
                                  
                                  4.6
                                  
                                  
                                  
                                  16.5
                                  
                                  
                                  
                                  -72.2
                                  %Net
      Income Provision
                                  
                                  
                                  0.6
                                  
                                  
                                  
                                  1.2
                                  
                                  
                                  
                                  -50.3
                                  %
                                  
                                  
                                  -0.1
                                  
                                  
                                  
                                  1.7
                                  
                                  
                                  
                                  -106.0
                                  %Net
      Income
                                  
                                  
                                  1.6
                                  
                                  
                                  
                                  7.3
                                  
                                  
                                  
                                  -78.1
                                  %
                                  
                                  
                                  4.7
                                  
                                  
                                  
                                  14.9
                                  
                                  
                                  
                                  -68.4
                                  %
 
 Comparison
of the Three Fiscal Months Ended June 30, 2009 and June 30, 2008:
 
 Net
Sales
 
 The
following tables set forth net sales in millions by each of our reporting
segments and metric tons sold on a combined basis:
  - 52
-
 
 Net SalesThree Fiscal Months Ended June 30,2009
                    
                    
                    2008Amount
                    
                    
                    % of Net
                      Sales
                    
                    
                    Amount
                    
                    
                    % of Net
                      Sales
                    
                    
                    Dollar
                      Change
                    
                    
                    % ChangeP.R.C.
                    
                    $
                    39.4
                    
                    
                    
                    81.6
                    %
                    
                    $
                    46.3
                    
                    
                    
                    74.1
                    %
                    
                    $
                    (6.9
                    )
                    
                    
                    -14.9
                    %US
                    
                    $
                    8.9
                    
                    
                    
                    18.4
                    %
                    
                    $
                    16.2
                    
                    
                    
                    25.9
                    %
                    
                    $
                    (7.3
                    )
                    
                    
                    -45.1
                    %Total
      net sales
                    
                    $
                    48.3
                    
                    
                    
                    100.0
                    %
                    
                    $
                    62.5
                    
                    
                    
                    100.0
                    %
                    
                    $
                    (14.2
                    )
                    
                    
                    -22.8
                    %
 
 
 Metric Tons SoldThree Fiscal Months Ended June 30,2009
                      
                      
                      2008MT
                      
                      
                      % of MT
                        Sales
                      
                      
                      MT
                      
                      
                      % of MT
                        Sales
                      
                      
                      Tonnage
                        Change
                      
                      
                      % ChangeP.R.C.
                      
                      
                      9,060
                      
                      
                      
                      82
                      %
                      
                      
                      7,247
                      
                      
                      
                      72
                      %
                      
                      
                      1,813
                      
                      
                      
                      25.0
                      %US
                      
                      
                      1,960
                      
                      
                      
                      18
                      %
                      
                      
                      2,814
                      
                      
                      
                      28
                      %
                      
                      
                      -854
                      
                      
                      
                      -30.3
                      %Total
      sales volume
                      
                      
                      11,020
                      
                      
                      
                      100
                      %
                      
                      
                      10,061
                      
                      
                      
                      100
                      %
                      
                      
                      959
                      
                      
                      
                      9.5
                      %
 
 Net sales
decreased 22.8% over the same quarter one year earlier primarily due to a 29.3%
decline in average selling prices resulting from a decline in the costs of
our raw materials, which we pass on to our customer.  This
was partially offset by a 9.5% growth in metric tons sold over the same
period.
 
 The
P.R.C. segment experienced a decline of 14.9% in net sales for the three months
ended June 30, 2009 relative to the comparable 2008 period. The majority of the
decrease in P.R.C. net sales is due to a 31.9% decline in the average selling
price as a result of lower metal prices relative to the comparable 2008 periods.
We generally pass the cost of price changes in raw materials to customers and
set the base price for our products.  As raw material prices change we
pass that change through, whether it results in an increase or decrease in the
base price for our products. This decline was partially offset by a 25.0%
increase in metric tons sold.  We expect long-term demand for our
P.R.C. products to be positively affected by the build-out of the homegrown 3G
network in the P.R.C. and continued traction of the government stimulus package
announced in November 2008.
 
 The US
segment experienced a significant decline in net sales in all major geographic
regions with particular weakness in Europe and North America, resulting
in a decline of 45.1% for the three months ended June 30, 2009 relative to
the comparable 2008 period. The decline in the US segment net sales is primarily
the result of a 30.4% decline in metric tons shipped and a 21.8% decline in the
average selling price. We continue to remain optimistic that the electrical
utility industries provide strong growth opportunities for our CCS products
within the markets served by our US segment operations.  However, delays in
disbursement of government stimulus packages and uncertainty in the global
economy may continue to depress capital spending by telecommunication and
electrical utility providers, and negatively impact markets and
consequently our net sales within in the markets of the US segment.
 
 Net
Sales by Industry
 
 The
following table presents the breakdown of combined net sales in
millions by industry:
  - 53
-
 
 Net SalesThree Fiscal Months Ended June 30,2009
                    
                    
                    2008Amount
                    
                    
                    % of Net
                      Sales
                    
                    
                    Amount
                    
                    
                    % of Net
                      Sales
                    
                    
                    Dollar
                      Change
                    
                    
                    % ChangeTelecommunication
                    
                    
                    23.1
                    
                    
                    
                    47.8
                    %
                    
                    
                    32.7
                    
                    
                    
                    52.3
                    %
                    
                    
                    -9.6
                    
                    
                    
                    -29.4
                    %Utility
                    
                    
                    22.1
                    
                    
                    
                    45.8
                    %
                    
                    
                    26.7
                    
                    
                    
                    42.7
                    %
                    
                    
                    -4.6
                    
                    
                    
                    -17.2
                    %Transportation
                    
                    
                    0.4
                    
                    
                    
                    0.8
                    %
                    
                    
                    1.1
                    
                    
                    
                    1.8
                    %
                    
                    
                    -0.7
                    
                    
                    
                    -63.5
                    %Other
                    
                    
                    2.7
                    
                    
                    
                    5.6
                    %
                    
                    
                    2.0
                    
                    
                    
                    3.2
                    %
                    
                    
                    0.7
                    
                    
                    
                    35.0
                    %Total
      net sales
                    
                    
                    48.3
                    
                    
                    
                    100.0
                    %
                    
                    
                    62.5
                    
                    
                    
                    100.0
                    %
 
 The
following table presents the breakdown of metric tons shipped to customers by
industry:
 
 Three Fiscal Months Ended June 30,2009
                                  
                                  
                                  2008Tons
                                  
                                  
                                  % of Tons
                                    Sold
                                  
                                  
                                  Tones
                                  
                                  
                                  % of Tons
                                    Sold
                                  
                                  
                                  Tonnage
                                    Change
                                  
                                  
                                  % ChangeTelecommunication
                                  
                                  
                                  5,294
                                  
                                  
                                  
                                  48.0
                                  %
                                  
                                  
                                  4,909
                                  
                                  
                                  
                                  48.8
                                  %
                                  
                                  
                                  385
                                  
                                  
                                  
                                  8
                                  %Utility
                                  
                                  
                                  4,887
                                  
                                  
                                  
                                  44.4
                                  %
                                  
                                  
                                  4,514
                                  
                                  
                                  
                                  44.9
                                  %
                                  
                                  
                                  373
                                  
                                  
                                  
                                  8
                                  %Transportation
                                  
                                  
                                  64
                                  
                                  
                                  
                                  0.6
                                  %
                                  
                                  
                                  155
                                  
                                  
                                  
                                  1.5
                                  %
                                  
                                  
                                  -91
                                  
                                  
                                  
                                  -59
                                  %Other
                                  
                                  
                                  775
                                  
                                  
                                  
                                  7.0
                                  %
                                  
                                  
                                  483
                                  
                                  
                                  
                                  4.8
                                  %
                                  
                                  
                                  292
                                  
                                  
                                  
                                  60
                                  %Total
      sales volume
                                  
                                  
                                  11,020
                                  
                                  
                                  
                                  100
                                  %
                                  
                                  
                                  10,061
                                  
                                  
                                  
                                  100
                                  %
 
 In China,
we are increasing sales volume in the telecommunication market, which has been
our largest market, and we are focused on increasing market share in
the underdeveloped utility market.  During the three month period
ended June 30, 2009, our sales to the telecommunication and utility markets
increased by 385 and 373 metric tons, respectively, primarily due to strong
demand for CCA products in the P.R.C. and partially offset by decreased demand
from the North American and European markets.
 
 Capacity
and Output
 
 The
following table summarizes installed cladding capacities and output by for the
three month period ended June 30, 2009:
 
 Three Fiscal Months Ended June 30, 2009P.R.C.
                        
                        
                        USCapacity
                        
                        
                        Output
                        
                        
                        Capacity
                        
                        
                        OutputCCA
                        
                        
                        10,000
                        
                        
                        
                        8,828
                        
                        
                        
                        3,100
                        
                        
                        
                        480CCS
                        
                        
                        200
                        
                        
                        
                        15
                        
                        
                        
                        4,075
                        
                        
                        
                        1,465Other
                        
                        
                        -
                        
                        
                        
                        217
                        
                        
                        
                        35
                        
                        
                        
                        15Total
                        
                        
                        10,200
                        
                        
                        
                        9,060
                        
                        
                        
                        7,210
                        
                        
                        
                        1,960
  - 54
-
  As
of June 30, 2009, we had combined CCA annual production capacity of 49,400,
metric tons and CCS cladding capacity of 17,100 metric tons on an annualized
basis based on our product mix. Installed capacity can increase or decrease
based on the size of the rod used in the cladding operation for CCA and on the
conductivity engineered into the CCS production. The above capacity figures
reflect a further 6,000 metric tons of annualized CCA capacity which was
successfully installed and commissioned at our Dalian facility during the second
quarter of 2009.  We also have plans to install a further
8,200 metric tons of annualized CCS cladding capacity online at our Dalian
facility by the end of the first quarter of 2010.  We expect the
first 4,100 metric tons of annualized CCS cladding capacity to be fully
operational at our Dalian facility by the end of the third quarter of 2009 and
an additional 4,100 metric to be operational during the course of first quarter
of 2010.
 
 Product
Mix
 
 Metric
      Tons SoldThree Fiscal Months Ended June
      30,2009
                    
                    
                    2008Tonnage
                    
                    
                    % of Net
                      Sales
                    
                    
                    Tonnage
                    
                    
                    % of Net
                      Sales
                    
                    
                    Tonnage
                      Change
                    
                    
                    % ChangeCCA
                    
                    
                    9,309
                    
                    
                    
                    84
                    %
                    
                    
                    7,775
                    
                    
                    
                    77
                    %
                    
                    
                    1,534
                    
                    
                    
                    20
                    %CCS
                    
                    
                    1,479
                    
                    
                    
                    13
                    %
                    
                    
                    2,065
                    
                    
                    
                    21
                    %
                    
                    
                    -586
                    
                    
                    
                    -28
                    %Others
                    
                    
                    232
                    
                    
                    
                    2
                    %
                    
                    
                    221
                    
                    
                    
                    2
                    %
                    
                    
                    11
                    
                    
                    
                    5
                    %Total
      net sales
                    
                    
                    11,020
                    
                    
                    
                    100
                    %
                    
                    
                    10,061
                    
                    
                    
                    100
                    %
 
 The chart
above illustrates the growth of CCA as a percentage of tons sold comparing the
three month period ended June 30, 2009, to June 30, 2008, for the combined
reporting segments.  The demand for our CCA products in the PRC
strengthened during the second quarter 2009 compared to the same period in 2008
due to increased traction of domestic infrastructure projects related to the
stimulus package and 3G network build-out. However, we experienced a significant
tapering of demand of 29.5% for CCA and CCS products served by facilities in our
US reporting segment, which primarily serve the North American and European
markets.
 
 Gross
Margin
 
 Three Months Ended June 30,
                          
                          
                          Change(in millions)
                          
                          2009
                          
                          
                          2008
                          
                          
                          Dollar
                          
                          
                          %Gross
      Margin
                          
                          $
                          13.5
                          
                          
                          $
                          16.7
                          
                          
                          $
                          (3.2
                          )
                          
                          
                          -19.4
                          %as
      a percentage of net sales
                          
                          
                          27.9
                          %
                          
                          
                          26.8
                          %
                          
                          
                          
                          
                          
                          
                          1.1
                          %
 
 Gross
margin decreased $3.2 million or 19.4% quarter over quarter. The decline in
gross margin was primarily due to lower average selling prices, which resulted
in lower revenues. Despite the decline in absolute gross margin, the gross
margin for the three months ended June 30, 2009, as a percentage of net sales
increased from 26.8% to 27.9% when compared to the same period in 2008 due
primarily to higher margins contributed by our Fayetteville
facility.  Higher margins in Fayetteville for the three months ended
June 30, 2009 was primarily a result of cost savings initiatives implemented in
the first quarter of 2009.  Gross margins at our Dalian facility
remained relatively stable for the three fiscal month period ended June 30,
2009, slightly decreasing from 31.7% to 31.0% compared to the same period in
2008.
  - 55
-
  Selling
Expenses
 
 Three Months Ended June 30,
                    
                    
                    Change(in millions)
                    
                    2009
                    
                    
                    2008
                    
                    
                    Dollar
                    
                    
                    %Selling
      Expenses
                    
                    $
                    1.1
                    
                    
                    $
                    1.3
                    
                    
                    $
                    (0.2
                    )
                    
                    
                    -15.4
                    %as
      a percentage of net sales
                    
                    
                    2.2
                    %
                    
                    
                    2.0
                    %
                    
                    
                    
                    
                    
                    
                    0.2
                    %
 
 Selling
expense decreased by $0.2 million or 15.4% for the three months ended June 30,
2009, compared to the same quarter of 2008.  Selling expenses
decreased primarily because of the cost saving initiatives implemented by
management and decreased sales volume from our Fayetteville and Telford
facility.  As a percentage of net sales, selling expenses experienced
a slight increase from 2.0% of net sales for the 2008 quarter to 2.2% of net
sales due to decreased revenue.
 
 General
and Administrative Expenses
 
 Three Months Ended June 30,
                    
                    
                    Change(in millions)
                    
                    2009
                    
                    
                    2008
                    
                    
                    Dollar
                    
                    
                    %General
      and Administrative Costs
                    
                    $
                    3.2
                    
                    
                    $
                    3.5
                    
                    
                    $
                    (0.3
                    )
                    
                    
                    -8.6
                    %as
      a percentage of net sales
                    
                    
                    6.6
                    %
                    
                    
                    5.6
                    %
                    
                    
                    
                    
                    
                    
                    1.0
                    %
 
 General
and administrative expenses decreased by $0.3 million or 8.6% to $3.2 million
during the three month period ended June 30, 2009, compared to the same period
in 2008. This decrease is primarily a result of cost saving initiatives
implemented by management in response to the economic downturn. As a
percentage of net sales, general and administrative expenses increased slightly
by 1.0% to 6.6% from 5.6% for the second quarter of 2008 as a result of
decreased revenue in the second quarter of 2009. During
the second quarter of 2009, included in general and administrative
expenses were non-factory depreciation and amortization of $444,275 and
amortization of intangible assets of $119,207, compared to $440,028 and
$158,651, respectively in the second quarter of 2008.
 
 Operating
Income
 
 The
following table sets forth operating income by segment, in millions of
dollars:
 
 ThreeMonthsEndedJune30,2009
                    
                    
                    2008Amount
                    
                    
                    %of
                      operating
                      income
                    
                    
                    Amount
                    
                    
                    %of
                      operating
                      income
                    
                    
                    Dollar
                      Change
                    
                    
                    %ChangeP.R.C.
                    
                    $
                    10.4
                    
                    
                    
                    113
                    %
                    
                    $
                    12.7
                    
                    
                    
                    106
                    %
                    
                    $
                    (2.3
                    )
                    
                    
                    -18.1
                    %US
                    
                    $
                    (0.1
                    )
                    
                    
                    -1
                    %
                    
                    $
                    0.4
                    
                    
                    
                    3
                    %
                    
                    $
                    (0.5
                    )
                    
                    
                    -125.0
                    %Corporate
                    
                    $
                    (1.1
                    )
                    
                    
                    -12
                    %
                    
                    $
                    (1.1
                    )
                    
                    
                    -9
                    %
                    
                    $
                    -
                    
                    
                    
                    0.0
                    %Total
      operating income
                    
                    $
                    9.2
                    
                    
                    
                    100
                    %
                    
                    $
                    12.0
                    
                    
                    
                    100
                    %
                    
                    $
                    (2.8
                    )
                    
                    
                    -23.3
                    %
 
 Operating
income in the three months ended June 30, 2009, declined approximately $2.8
million, or 23.3%, compared to the same period in 2008, which was primarily due
to lower net sales and partially offset by cost savings initiatives implemented
by management.
 
 Operating
income in the P.R.C. segment decreased approximately $2.3 million, or
18.1%, in the second quarter of 2009 when compared to the same period in 2008,
primarily due to a decline in total net sales.
  - 56
-
 
 Operating
income in the US segment decreased approximately $0.5 million in the second
quarter of 2009 when compared to the same period in 2008, primarily as a result
of lower net sales. Also contributing to the decline was the underabsorption of
manufacturing overhead as production levels were lowered in response to weaker
global demand. Cost savings initiatives implemented by management helped reduce
certain manufacturing costs.
 
 Other
Income (Expense)
 
 Interest Income
(Expense)
 
 Three Months Ended June 30,
                    
                    
                    Change(in millions)
                    
                    2009
                    
                    
                    2008
                    
                    
                    Dollar
                    
                    
                    %Interest
      Income
                    
                    $
                    0.1
                    
                    
                    $
                    0.2
                    
                    
                    $
                    (0.1
                    )
                    
                    
                    -57.9
                    %Interest
      Expense
                    
                    $
                    (1.5
                    )
                    
                    $
                    (3.8
                    )
                    
                    $
                    2.3
                    
                    
                    
                    -61.2
                    %Net
      Interest Expense
                    
                    $
                    (1.4
                    )
                    
                    $
                    (3.6
                    )
                    
                    $
                    2.2
                    
                    
                    
                    -61.3
                    %as
      a percentage of net sales
                    
                    
                    -2.9
                    %
                    
                    
                    -5.8
                    %
                    
                    
                    
                    
                    
                    
                    2.9
                    %
 
 Net
interest expense in the second quarter of 2009 decreased by approximately $2.2
million versus the second quarter of 2008, which was primarily the result of the
repayment of Dalian’s short term bank loans and one time interest accrued and
amortization of costs relating to commission on debt issues resulting from the
Kuhn’s’ judgment amounting to $2.0 million in the second quarter of 2008. As a
percentage of net sales, net interest expense decreased from 5.8% for the second
quarter of 2008 to 2.9% during the second quarter of 2009.
 
 Change in fair value of
derivative instruments and liabilities
 
 The
Company analyzes all financial instruments with features of both liabilities and
equity under FAS 150, “Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity,” FAS 133 and EITF 00-19,
“Accounting for Derivative Financial Instruments Indexed to, and Potentially
Settled in, a Company’s Own Stock.” Before the adoption of EITF 07-5
"Determining Whether an Instrument (or Embedded Feature) is Indexed to an
Entity's Own Stock", the convertible note issued in 2007 did not require
bifurcation or result in liability accounting. However, with the recent adoption
of EITF 07-5, the embedded conversion feature must be bifurcated from its host
instrument and accounted for separately as a derivative liability.
 
 Emerging
Issues Task Force (“EITF”) 00-19 “Accounting for Derivative Financial
Instruments Indexed to and Potentially Settled in, a Company’s Own Stock,”
provides a criteria for determining whether freestanding contracts that are
settled in a company’s own stock, including common stock warrants, should be
designated as either an equity instrument, an asset or as a liability under
FAS  133 “Accounting for Derivative Instruments and Hedging Activities.”
Under the provisions of EITF 00-19, a contract designated as an asset or a
liability must be carried at fair value on a company’s balance sheet, with any
changes in fair value recorded in a company’s results of
operations.  Using the criteria in EITF 00-19, the Company determines
which options, warrants and embedded features require liability accounting and
records the fair values as a derivative liability. The changes in the values of
these instruments are shown in the accompanying consolidated statements of
income and other comprehensive income as “change in fair value of derivative
liabilities.”
  - 57
-





The fair
market values of our warrant and conversion option derivatives are determined by
the market price of our stock, strike price, volatility, risk free interest
rate, expected life and dividend yield. An increase in our stock price can
generate material losses on our warrant and conversion option
derivatives.





For the
three months ended June 30, 2009 and 2008, the Company recognized a loss in the
change in fair value of derivative liability – conversion option in the amounts
of $4,583,809 and $0, respectively.





For the
three months ended June 30, 2009 and 2008, the Company recognized a loss in the
change in fair value of derivative liability – warrants in the amounts of
$688,876 and $0, respectively.





The fair
market value of our derivative hedge is mainly determined based upon changes in
the forward market six month USD LIBOR rates and changes in the forward market
exchange rate between USD and Chinese RMB. A decline in forward market LIBOR
rates and accelerated depreciation in Chinese RMB against USD can generate
material losses on our derivative hedge. Since its effective date, the fair
value of this Swap Agreement changed to a payable of $7,890,432 and $4,377,076
as of June 30, 2009, and December 31, 2008, respectively.





Tax





Profit
before tax for Dalian was $10.4 million in the second quarter 2009 with losses
from Fayetteville and Telford before tax of $0.2 million.  Loss at the
Fushi Copperweld parent company level was $8.0 million primarily due to interest
expenses on the high yield notes, stock-based compensation, changes in fair
value of derivative liabilities related to convertible note conversion options,
and warrants, as well as professional fees and outside service expenses. On a
consolidated basis, profit before tax was $2.2 million and we recognized a tax
expense of $0.6 million.





Dalian
                
                
                Fayetteville &Telford
                
                
                Parent Company
                
                
                ConsolidatedProfit
      (Loss) before income tax
                
                
                10.4
                
                
                
                (0.2
                )
                
                
                (8.0
                )
                
                
                2.2Income
      tax expense (credit)
                
                
                1.3
                
                
                
                -
                
                
                
                (0.7
                )
                
                
                0.6Profit
      after income tax
                
                
                9.1
                
                
                
                (0.2
                )
                
                
                (7.3
                )
                
                
                1.6




- 58
-




Net
Income


Three Months Ended June 30,
                                  
                                  
                                  Change(in
      millions)
                                  
                                  2009
                                  
                                  
                                  2008
                                  
                                  
                                  Dollar
                                  
                                  
                                  %Net
      Income Before Taxes
                                  
                                  $
                                  2.2
                                  
                                  
                                  $
                                  8.5
                                  
                                  
                                  $
                                  (6.3
                                  )
                                  
                                  
                                  -74.4
                                  %(Benefit)
      Provision for Income Taxes
                                  
                                  $
                                  0.6
                                  
                                  
                                  $
                                  1.2
                                  
                                  
                                  $
                                  (0.6
                                  )
                                  
                                  
                                  -49.4
                                  %Net
      Income After Taxes
                                  
                                  $
                                  1.6
                                  
                                  
                                  $
                                  7.3
                                  
                                  
                                  $
                                  (5.7
                                  )
                                  
                                  
                                  -78.5
                                  %as
      a percentage of net sales
                                  
                                  
                                  3.2
                                  %
                                  
                                  
                                  11.6
                                  %
                                  
                                  
                                  
                                  
                                  
                                  
                                  -8.4
                                  %
  Net
income for the three months period ended June 30, 2009, was $1.6 million
compared to $7.3 million for the comparable period in 2008, a decrease of
approximately $5.7 million or 78.5%. Net income as a percentage of net sales
declined from 11.6% for the prior period to 3.2% primarily due to lower revenue
and significant non-cash losses in the change in fair values of derivative
liabilities.
  - 59
-
  Earnings
Per Share
 
 Three Months Ended June 30,2009
                        
                        
                        2008Unaduited
                        
                        
                        UnauditedNet
      Income for Basic Earnings Per Share
                        
                        
                        1,562,700
                        
                        
                        
                        7,280,846Basic
      Weighted Average Number of Shares
                        
                        
                        27,827,838
                        
                        
                        
                        27,354,215Net
      Income per Share - Basic
                        
                        
                        0.06
                        
                        
                        
                        0.27Net
      Income for Diluted Earnings Per Share
                        
                        
                        1,562,700
                        
                        
                        
                        7,096,143Diluted
      Weighted Average Number of Shares
                        
                        
                        28,323,611
                        
                        
                        
                        28,732,109Net
      Income per Share - Diluted
                        
                        
                        0.06
                        
                        
                        
                        0.25
  Basic and
diluted earnings per share (EPS) for the quarter ended June 30, 2009, were $0.06
and $0.06, compared to $0.27 and $0.25 for the second quarter last
year.
 
 Comparison
of the Six Fiscal Months Ended June 30, 2009 and June
30, 2008:
 
 Net
Sales
 
 Net SalesSix Fiscal Months Ended June 30,2009
                                                                                    
                                                                                    
                                                                                    2008Amount
                                                                                    
                                                                                    
                                                                                    % of NetSales
                                                                                    
                                                                                    
                                                                                    Amount
                                                                                    
                                                                                    
                                                                                    % of NetSales
                                                                                    
                                                                                    
                                                                                    DollarChange
                                                                                    
                                                                                    
                                                                                    % ChangeP.R.C.
                                                                                    
                                                                                    
                                                                                    65.8
                                                                                    
                                                                                    
                                                                                    
                                                                                    78.7
                                                                                    %
                                                                                    
                                                                                    
                                                                                    81.5
                                                                                    
                                                                                    
                                                                                    
                                                                                    70.0
                                                                                    %
                                                                                    
                                                                                    
                                                                                    -15.7
                                                                                    
                                                                                    
                                                                                    
                                                                                    -19.3
                                                                                    %US
                                                                                    
                                                                                    
                                                                                    17.8
                                                                                    
                                                                                    
                                                                                    
                                                                                    21.3
                                                                                    %
                                                                                    
                                                                                    
                                                                                    35.0
                                                                                    
                                                                                    
                                                                                    
                                                                                    30.0
                                                                                    %
                                                                                    
                                                                                    
                                                                                    -17.2
                                                                                    
                                                                                    
                                                                                    
                                                                                    -49.1
                                                                                    %Total
      net sales
                                                                                    
                                                                                    
                                                                                    83.6
                                                                                    
                                                                                    
                                                                                    
                                                                                    100.0
                                                                                    %
                                                                                    
                                                                                    
                                                                                    116.5
                                                                                    
                                                                                    
                                                                                    
                                                                                    100.0
                                                                                    %
                                                                                    
                                                                                    
                                                                                    -32.9
                                                                                    
                                                                                    
                                                                                    
                                                                                    -28.2
                                                                                    %
  Six Fiscal Months Ended June 30,2009
                                                                    
                                                                    
                                                                    2008Tonnage
                                                                    
                                                                    
                                                                    % of NetSales
                                                                    
                                                                    
                                                                    Tonnage
                                                                    
                                                                    
                                                                    % of NetSales
                                                                    
                                                                    
                                                                    TonnageChange
                                                                    
                                                                    % ChangeP.R.C.
                                                                    
                                                                    
                                                                    14,947
                                                                    
                                                                    
                                                                    
                                                                    79
                                                                    %
                                                                    
                                                                    
                                                                    13,166
                                                                    
                                                                    
                                                                    
                                                                    68
                                                                    %
                                                                    
                                                                    
                                                                    1,781
                                                                    
                                                                    
                                                                    
                                                                    13.5
                                                                    %US
                                                                    
                                                                    
                                                                    4,054
                                                                    
                                                                    
                                                                    
                                                                    21
                                                                    %
                                                                    
                                                                    
                                                                    6,157
                                                                    
                                                                    
                                                                    
                                                                    32
                                                                    %
                                                                    
                                                                    
                                                                    -2,103
                                                                    
                                                                    
                                                                    
                                                                    -34.2
                                                                    %Total
      sales volume
                                                                    
                                                                    
                                                                    19,001
                                                                    
                                                                    
                                                                    
                                                                    100
                                                                    %
                                                                    
                                                                    
                                                                    19,323
                                                                    
                                                                    
                                                                    
                                                                    100
                                                                    %
                                                                    
                                                                    
                                                                    -322
                                                                    
                                                                    
                                                                    
                                                                    -1.7
                                                                    %
  Net sales
decreased 28.2% over the same period one year earlier primarily due to a 26.2%
decline in average selling prices resulting from a decline in the costs of our
raw materials, which we pass on to our customers. This was partially offset by
an increase of 13.5% in tons sold from our P.R.C. segment over the same
period.
 
 The
P.R.C. segment experienced a decline of 19.3% in net sales for the six months
ended June 30, 2009 relative to the comparable 2008 periods. The majority of the
decrease in P.R.C. net sales for the six months ended June 30, 2009, is due to a
29.6% decline in the average selling price as a result of lower metal prices
relative to the comparable 2008 periods. We generally pass the cost of price
changes in raw materials to customers and set the base price for our products.
As raw material prices change we pass that change through, whether it results in
an increase or decrease in the base price for our products. This decline
was partially offset by a 13.5% increase in metric tons sold.  We
expect long-term demand for our P.R.C. products to be positively affected by the
build-out of the homegrown 3G network in the P.R.C. and continued traction of
the government stimulus package announced in November 2008.
  - 60
-
  The US
segment experienced a significant decline in net sales in all major geographic
regions with particular weakness in Europe and North America, experiencing a
decline of 49.1% for the six months ended June 30, 2009 relative to the
comparable 2008 periods. The decline in US segment net sales for the six months
period ended June 30, 2009 as relative to comparable 2008 periods is primarily
the result of a 34.2% decline in metric tons shipped and a 21.2% decline in
average selling price. We continue to remain optimistic that the electrical
utility industries provide strong growth opportunities for our CCS products
within the markets served by our US segment operations. However, delays in
disbursement of government stimulus packages and uncertainty in the global
economy may continue to depress capital spending by telecommunication and
electrical utility providers negatively impacting markets and consequently our
net sales within in the markets of the US segment.
 
 Metric
tons sold decreased 1.7% over the same quarter one year earlier primarily due to
a decrease of 34.2% in metric tons sold from our U.S. segment partially offset
by a 13.5% increase in our P.R.C. segment.
 
 Net
Sales by Industry
 
 Net SalesSix Fiscal Months Ended June 30,2009
                                                                          
                                                                          2008Amount
                                                                          
                                                                          
                                                                          % of NetSales
                                                                          
                                                                          Amount
                                                                          
                                                                          
                                                                          % of NetSales
                                                                          
                                                                          DollarChange
                                                                          
                                                                          % ChangeTelecommunication
                                                                          
                                                                          
                                                                          37.7
                                                                          
                                                                          
                                                                          
                                                                          45.1
                                                                          %
                                                                          
                                                                          
                                                                          62.1
                                                                          
                                                                          
                                                                          
                                                                          53.3
                                                                          %
                                                                          
                                                                          
                                                                          -24.4
                                                                          
                                                                          
                                                                          
                                                                          -39.3
                                                                          %Utility
                                                                          
                                                                          
                                                                          41.0
                                                                          
                                                                          
                                                                          
                                                                          49.0
                                                                          %
                                                                          
                                                                          
                                                                          48.1
                                                                          
                                                                          
                                                                          
                                                                          41.3
                                                                          %
                                                                          
                                                                          
                                                                          -7.1
                                                                          
                                                                          
                                                                          
                                                                          -14.8
                                                                          %Transportation
                                                                          
                                                                          
                                                                          0.8
                                                                          
                                                                          
                                                                          
                                                                          1.0
                                                                          %
                                                                          
                                                                          
                                                                          1.6
                                                                          
                                                                          
                                                                          
                                                                          1.4
                                                                          %
                                                                          
                                                                          
                                                                          -0.8
                                                                          
                                                                          
                                                                          
                                                                          -49.8
                                                                          %Other
                                                                          
                                                                          
                                                                          4.1
                                                                          
                                                                          
                                                                          
                                                                          4.9
                                                                          %
                                                                          
                                                                          
                                                                          4.7
                                                                          
                                                                          
                                                                          
                                                                          4.0
                                                                          %
                                                                          
                                                                          
                                                                          -0.6
                                                                          
                                                                          
                                                                          
                                                                          -12.5
                                                                          %Total
      net sales
                                                                          
                                                                          
                                                                          83.6
                                                                          
                                                                          
                                                                          
                                                                          100.0
                                                                          %
                                                                          
                                                                          
                                                                          116.5
                                                                          
                                                                          
                                                                          
                                                                          100.0
                                                                          %
                                                                          
                                                                          
                                                                          -32.9
                                                                          
                                                                          
                                                                          
                                                                          -28.2
                                                                          %
 
 The
following table presents the breakdown of metric tons shipped to customers by
industry:
 
 Net SalesSix Fiscal Months Ended June 30,2009
                                                                                    
                                                                                    
                                                                                    2008Tonnage
                                                                                    
                                                                                    
                                                                                    % of NetSales
                                                                                    
                                                                                    
                                                                                    Tonnage
                                                                                    
                                                                                    
                                                                                    % of NetSales
                                                                                    
                                                                                    
                                                                                    TonnageChange
                                                                                    
                                                                                    % ChangeTelecommunication
                                                                                    
                                                                                    
                                                                                    8,762
                                                                                    
                                                                                    
                                                                                    
                                                                                    46.1
                                                                                    %
                                                                                    
                                                                                    
                                                                                    9,646
                                                                                    
                                                                                    
                                                                                    
                                                                                    50.0
                                                                                    %
                                                                                    
                                                                                    
                                                                                    -884
                                                                                    
                                                                                    
                                                                                    
                                                                                    -9.2
                                                                                    %Utility
                                                                                    
                                                                                    
                                                                                    8,915
                                                                                    
                                                                                    
                                                                                    
                                                                                    46.9
                                                                                    %
                                                                                    
                                                                                    
                                                                                    8,427
                                                                                    
                                                                                    
                                                                                    
                                                                                    43.6
                                                                                    %
                                                                                    
                                                                                    
                                                                                    488
                                                                                    
                                                                                    
                                                                                    
                                                                                    5.8
                                                                                    %Transportation
                                                                                    
                                                                                    
                                                                                    124
                                                                                    
                                                                                    
                                                                                    
                                                                                    0.7
                                                                                    %
                                                                                    
                                                                                    
                                                                                    198
                                                                                    
                                                                                    
                                                                                    
                                                                                    1.0
                                                                                    %
                                                                                    
                                                                                    
                                                                                    -74
                                                                                    
                                                                                    
                                                                                    
                                                                                    -37.4
                                                                                    %Other
                                                                                    
                                                                                    
                                                                                    1,200
                                                                                    
                                                                                    
                                                                                    
                                                                                    6.3
                                                                                    %
                                                                                    
                                                                                    
                                                                                    1,052
                                                                                    
                                                                                    
                                                                                    
                                                                                    5.4
                                                                                    %
                                                                                    
                                                                                    
                                                                                    148
                                                                                    
                                                                                    
                                                                                    
                                                                                    14.1
                                                                                    %Total
      sales volume
                                                                                    
                                                                                    
                                                                                    19,001
                                                                                    
                                                                                    
                                                                                    
                                                                                    100.0
                                                                                    %
                                                                                    
                                                                                    
                                                                                    19,323
                                                                                    
                                                                                    
                                                                                    
                                                                                    100.0
                                                                                    %
  - 61
-
  We are
expanding our sales to the utility market. During the six month period ended
June 30, 2009, our sales to the utility segment increased by 488 metric
tons.  Shipments to the utility segment increased from 43.6% of total
shipments for the six months ended June 30, 2008, to 46.9% of total shipments
for the same period in 2009.  Shipments to the telecom segment
declined by 9.2% or by 884 tons and declined from 49.9% of total shipments to
46.1% when comparing the six months ended June 30, 2008 and 2009, respectively,
primarily due to decreased demand from North American and European
markets.
 
 Capacity
and Output
 
 The
following table summarizes installed cladding capacities and output for the six
months ended June 30, 2009:
 
 Six Fiscal Months Ended June 30, 2009P.R.C.
                                                
                                                
                                                USCapacity
                                                
                                                
                                                Output
                                                
                                                
                                                Capacity
                                                
                                                
                                                OutputCCA
                                                
                                                
                                                18,500
                                                
                                                
                                                
                                                14,657
                                                
                                                
                                                
                                                6,200
                                                
                                                
                                                
                                                974CCS
                                                
                                                
                                                400
                                                
                                                
                                                
                                                22
                                                
                                                
                                                
                                                8,150
                                                
                                                
                                                
                                                3,042Other
                                                
                                                
                                                -
                                                
                                                
                                                
                                                268
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                38Total
                                                
                                                
                                                18,900
                                                
                                                
                                                
                                                14,947
                                                
                                                
                                                
                                                14,350
                                                
                                                
                                                
                                                4,054
  As
of June 30, 2009, we had combined annual production capacity for CCA of
49,400, metric tons and CCS cladding capacity of 17,100 metric tons on an annual
basis based on our product mix. Installed capacity can increase or decrease
based on the size of the rod used in the cladding operation for CCA and on the
conductivity engineered into the CCS production. The above capacity figures
reflect a further 6,000 metric tons of annualized CCA capacity which was
successfully installed and commissioned at our Dalian facility during the second
quarter 2009.  We also have plans to install a further 8,200
metric tons of annualized CCS cladding capacity online at our Dalian facility by
the end of the first quarter 2010.  We expect the first 4,100
metric tons of annualized CCS cladding capacity to be fully operational at our
Dalian facility by the end of the third quarter 2009 and an additional 4,100
metric tons to be operational during the course of first quarter
2010.
 
 Product
Mix
 
 Metric Tons SoldSix Fiscal Months Ended June 30,2009
                                                                                    
                                                                                    2008Tonnage
                                                                                    
                                                                                    
                                                                                    % of NetSales
                                                                                    
                                                                                    Tonnage
                                                                                    
                                                                                    
                                                                                    % of NetSales
                                                                                    
                                                                                    TonnageChange
                                                                                    
                                                                                    % ChangeCCA
                                                                                    
                                                                                    
                                                                                    15,631
                                                                                    
                                                                                    
                                                                                    
                                                                                    82
                                                                                    %
                                                                                    
                                                                                    
                                                                                    14,619
                                                                                    
                                                                                    
                                                                                    
                                                                                    76
                                                                                    %
                                                                                    
                                                                                    
                                                                                    1,012
                                                                                    
                                                                                    
                                                                                    
                                                                                    7
                                                                                    %CCS
                                                                                    
                                                                                    
                                                                                    3,064
                                                                                    
                                                                                    
                                                                                    
                                                                                    16
                                                                                    %
                                                                                    
                                                                                    
                                                                                    4,296
                                                                                    
                                                                                    
                                                                                    
                                                                                    22
                                                                                    %
                                                                                    
                                                                                    
                                                                                    -1,232
                                                                                    
                                                                                    
                                                                                    
                                                                                    -29
                                                                                    %Others
                                                                                    
                                                                                    
                                                                                    306
                                                                                    
                                                                                    
                                                                                    
                                                                                    2
                                                                                    %
                                                                                    
                                                                                    
                                                                                    408
                                                                                    
                                                                                    
                                                                                    
                                                                                    2
                                                                                    %
                                                                                    
                                                                                    
                                                                                    -102
                                                                                    
                                                                                    
                                                                                    
                                                                                    -25
                                                                                    %Total
      sales volume
                                                                                    
                                                                                    
                                                                                    19,001
                                                                                    
                                                                                    
                                                                                    
                                                                                    100
                                                                                    %
                                                                                    
                                                                                    
                                                                                    19,323
                                                                                    
                                                                                    
                                                                                    
                                                                                    100
                                                                                    %
 
 The chart
above illustrates the growth of CCA as a percentage of tons sold comparing the
six month period ended June 30, 2009 to June 30, 2008 for the combined
facilities.  The demand for our CCA products in the PRC remained
strong during the first six months of the fiscal year 2009 compared to the same
periods in 2008 despite worsened macro-economic conditions. However, we
experienced a significant tapering of demand of 45.8% in CCA products in the
North American and European markets, which we primarily serve from our
Fayetteville and Telford facilities.
  - 62
-
  Gross
Margin
 
 Six Months Ended June 30,
                              
                              
                              Change(in
      millions)
                              
                              2009
                              
                              
                              2008
                              
                              
                              Dollar
                              
                              
                              %Gross
      Margin
                              
                              $
                              22.4
                              
                              
                              $
                              31.5
                              
                              
                              $
                              (9.1
                              )
                              
                              
                              -28.8
                              %as
      a percentage of net sales
                              
                              
                              26.8
                              %
                              
                              
                              27.0
                              %
                              
                              
                              
                              
                              
                              
                              -0.2
                              %
  Gross
margin profit decreased $9.1 million or 28.8% for the six months ended June
30, 2009 compared to the comparable period in 2008. The gross margin for the six
months period ended June 30, 2009, as a percentage of net sales stayed stable
relative to the same period in 2008 decreasing only 20 basis points to
26.8%.
 
 Selling
Expenses
 
 Six Months Ended June 30,
                              
                              
                              Change(in millions)
                              
                              2009
                              
                              
                              2008
                              
                              
                              Dollar
                              
                              
                              %Selling
      Expenses
                              
                              $
                              2.3
                              
                              
                              $
                              2.1
                              
                              
                              $
                              0.2
                              
                              
                              
                              11.6
                              %as
      a percentage of net sales
                              
                              
                              2.7
                              %
                              
                              
                              1.8
                              %
                              
                              
                              
                              
                              
                              
                              1.0
                              %
  Selling
expense increased by $0.2 million or 11.6% for the six month period ended June
30, 2009, compared to the same quarter of 2008.  Selling expenses
increased primarily because of increased efforts in sales to penetrate the
electrical utility market partially offset by cost savings initiatives
implemented. As a percentage of net sales, selling expenses increased from 1.8%
of net sales for the six month period ended June 30, 2008 period to 2.7% of net
sales during the same period in 2009.
 
 General
and Administrative Expenses
 
 Six Months Ended June 30,
                                
                                
                                Change(in
      millions)
                                
                                2009
                                
                                
                                2008
                                
                                
                                Dollar
                                
                                
                                %General
      and Administrative Costs
                                
                                $
                                6.2
                                
                                
                                $
                                7.9
                                
                                
                                $
                                (1.7
                                )
                                
                                
                                -21.7
                                %as
      a percentage of net sales
                                
                                
                                7.4
                                %
                                
                                
                                6.8
                                %
                                
                                
                                
                                
                                
                                
                                0.6
                                %
  General
and administrative expenses decreased by $1.7 million or 21.7% to $6.2 million
during the six month period ended June 30, 2009, compared to the same
period in 2008. This decrease is primarily a result of cost saving initiatives
implemented by management. As a percentage of net sales, general and
administrative expenses increased slightly by 0.6% to 7.4% from 6.8% for the
first six months of fiscal year 2008 as a result pf decreased revenue in
the first six months of fiscal year 2009. During the first six months of
fiscal year 2009, included in general and administrative expenses were
non-factory depreciation and amortization of $888,358 and amortization of
intangible assets of $238,283, compared to $842,480 and $178,073, respectively
during the same period in 2008.
  - 63
-
  Operating
Income
 
 Six Fiscal Months Ended June 30,2009
                                                              
                                                              2008Amount
                                                              
                                                              
                                                              % ofoperatingincome
                                                              
                                                              Amount
                                                              
                                                              
                                                              % ofoperatingincome
                                                              
                                                              DollarChange
                                                              
                                                              
                                                              % ChangeP.R.C.
                                                              
                                                              $
                                                              17.4
                                                              
                                                              
                                                              
                                                              125.2
                                                              %
                                                              
                                                              $
                                                              22.5
                                                              
                                                              
                                                              
                                                              104.7
                                                              %
                                                              
                                                              $
                                                              (5.1
                                                              )
                                                              
                                                              
                                                              -22.7
                                                              %US
                                                              
                                                              $
                                                              (1.4
                                                              )
                                                              
                                                              
                                                              -10.1
                                                              %
                                                              
                                                              $
                                                              1.7
                                                              
                                                              
                                                              
                                                              7.9
                                                              %
                                                              
                                                              $
                                                              (3.1
                                                              )
                                                              
                                                              
                                                              -182.4
                                                              %Corporate
                                                              
                                                              $
                                                              (2.1
                                                              )
                                                              
                                                              
                                                              -15.1
                                                              %
                                                              
                                                              $
                                                              (2.7
                                                              )
                                                              
                                                              
                                                              -12.6
                                                              %
                                                              
                                                              $
                                                              0.6
                                                              
                                                              
                                                              
                                                              -22.2
                                                              %Total
      operating income
                                                              
                                                              $
                                                              13.9
                                                              
                                                              
                                                              
                                                              100.0
                                                              %
                                                              
                                                              $
                                                              21.5
                                                              
                                                              
                                                              
                                                              100.0
                                                              %
                                                              
                                                              $
                                                              (7.6
                                                              )
                                                              
                                                              
                                                              -35.4
                                                              %
  Operating
income in the six months ended June 30, 2009 declined approximately $7.6
million, or 35.4%, compared to the same period in 2008, which was primarily due
to lower net sales and partially offset by cost savings initiatives implemented
by management.
 
 The
operating income in the P.R.C. segment decreased approximately $5.1
million, or 22.7%, in the six months ended June 30, 2009, when compared to the
same period in 2008, primarily due to a decline in total net sales.
 
 The
operating income in the US segment decreased approximately $3.1 million in the
six months ended June 30, 2009, when compared to the same period in 2008,
primarily, as a result of lower net sales. Also contributing to the decline
was the underabsorption of manufacturing overhead as production levels were
lowered in response to weaker global demand. Cost savings initiatives
implemented by management helped reduce certain manufacturing
costs.
 
 Other
Income (Expense)
 
 Interest Income
(Expense)
 
 Six
      Months Ended June 30,
                            
                            
                            Change(in
      millions)
                            
                            2009
                            
                            
                            2008
                            
                            
                            Dollar
                            
                            
                            %Interest
      Income
                            
                            $
                            0.2
                            
                            
                            $
                            0.4
                            
                            
                            $
                            (0.2
                            )
                            
                            
                            -50.0
                            %Interest
      Expense
                            
                            $
                            (3.0
                            )
                            
                            $
                            (5.6
                            )
                            
                            $
                            2.6
                            
                            
                            
                            -46.4
                            %Net
      Interest Expense
                            
                            $
                            (2.8
                            )
                            
                            $
                            (5.2
                            )
                            
                            $
                            2.4
                            
                            
                            
                            -46.2
                            %as
      a percentage of net sales
                            
                            
                            -3.3
                            %
                            
                            
                            -4.5
                            %
                            
                            
                            
                            
                            
                            
                            1.2
                            %
 
 Net
interest expense decreased by approximately $2.4 million, or 46.2%, during the
six month period ended June 30, 2009, compared to the same period in 2008. This
decrease is primarily the result of the repayment of Dalian’s short term bank
loans and one time interest accrued and amortization of costs relating to
commission on debt issues resulting from the Kuhn’s’ judgment amounting to $2.0
million in the second quarter of 2008. As a percentage of net sales, net
interest expense decreased from 4.5% for the second quarter of 2008 to 3.3%
during the second quarter of 2009.
  - 64
-
  Change in fair value of
derivative instruments and liabilities
 
 The
Company analyzes all financial instruments with features of both liabilities and
equity under FAS 150, “Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity,” FAS 133 and EITF 00-19,
“Accounting for Derivative Financial Instruments Indexed to, and Potentially
Settled in, a Company’s Own Stock.” Before the adoption of EITF 07-5
"Determining Whether an Instrument (or Embedded Feature) is Indexed to an
Entity's Own Stock", the convertible note issued in 2007 did not require
bifurcation or result in liability accounting. However, with the recent adoption
of EITF 07-5, the embedded conversion feature must be bifurcated from its host
instrument and accounted for separately as a derivative liability.
 
 Emerging
Issues Task Force (“EITF”) 00-19 “Accounting for Derivative Financial
Instruments Indexed to and Potentially Settled in, a Company’s Own Stock,”
provides a criteria for determining whether freestanding contracts that are
settled in a company’s own stock, including common stock warrants, should be
designated as either an equity instrument, an asset or as a liability under FAS
133 “Accounting for Derivative Instruments and Hedging Activities.” Under the
provisions of EITF 00-19, a contract designated as an asset or a liability must
be carried at fair value on a company’s balance sheet, with any changes in fair
value recorded in a company’s results of operations.  Using the
criteria in EITF 00-19, the Company determines which options, warrants and
embedded features require liability accounting and records the fair values as a
derivative liability. The changes in the values of these instruments are shown
in the accompanying consolidated statements of income and other comprehensive
income as “change in fair value of derivative liabilities.”
 
 The fair
market values of our warrant and conversion option derivatives are determined by
the market price of our stock, strike price, volatility, risk free interest
rate, expected life and dividend yield. An increase in our stock price can
generate material losses on our warrant and conversion option
derivatives.
 
 For the
six months ended June 30, 2009 and 2008, the Company recognized a loss in the
change in fair value of derivative liability – conversion option in the amounts
of $5,122,846 and $0, respectively.
 
 For the
six months ended June 30, 2009 and 2008, the Company recognized a loss in the
change in fair value of derivative liability – warrants in the amounts of
$752,114 and $0, respectively.
 
 The fair
market value of our derivative hedge is mainly determined based upon the changes
in the forward market six month USD LIBOR rates and changes in the forward
market exchange rate between USD and Chinese RMB. A decline in the forward
market LIBOR rates and accelerated depreciation in Chinese RMB against USD can
generate material losses on our derivative hedge. Since its effective date, the
fair value of this Swap Agreement changed to a payable of $7,890,432 and
$4,377,076 as of June 30, 2009, and December 31, 2008,
respectively.
 
 Tax
 
 Profit
before tax for Dalian was $17.3 million for the six months ended June 30, 2009,
with losses from Fayetteville and Telford before tax of $1.5
million.  Loss at the Fushi Copperweld parent company level was $11.2
million primarily due to interest expenses on the high yield notes, stock-based
compensation, changes in fair value of derivative liabilities related to
convertible notes conversion options, and warrants, as well as professional fees
and outside service expenses. On a consolidated basis, profit before tax was
$4.6 million and we recognized a net tax benefit of $0.1 million.
  - 65
-
  Dalian
                    
                    
                    Fayetteville &Telford
                    
                    
                    Parent Company
                    
                    
                    ConsolidatedProfit
      (Loss) before income tax
                    
                    
                    17.3
                    
                    
                    
                    (1.5
                    )
                    
                    
                    (11.2
                    )
                    
                    
                    4.6Income
      tax expense (credit)
                    
                    
                    2.3
                    
                    
                    
                    -
                    
                    
                    
                    (2.4
                    )
                    
                    
                    (0.1
                    )Profit
      after income tax
                    
                    
                    15.0
                    
                    
                    
                    (1.5
                    )
                    
                    
                    (8.8
                    )
                    
                    
                    4.7
 
 The
amount of taxable income that the US companies must generate in order to recover
the $10,168,733 deferred tax asset balance at June 30, 2009, is approximately
$29,908,038 in the next 20 years.  As of June 30, 2009, the
accumulated pretax loss is $35,782,999, of which $32,709,986 is incurred by
the parent company, Fushi Copperweld, and only $3,073,013 incurred by our
operations at Fayetteville facility. The parent company does not generate
revenues and its expenses primarily include interest expenses on the High Yield
Notes, stock-based compensation, changes in fair value of derivative liabilities
related to Convertible Notes conversion options, hedge and warrants, as well as
professional fees and outside service expenses.
 
 U.S.
operations at our Fayetteville facility experienced profits in the first three
quarters of fiscal year 2008 of $1,036,996, $244,546 and $102,198 respectively.
The net loss in the fourth quarter of 2008 and the first half of 2009 was mainly
due to the global economy downturn, but management believes Fayetteville will be
able to generate enough profit in the next 20 years to realize the deferred tax
assets at that time. Furthermore, we expect to realize taxable income in future
periods at our Fayetteville facility as a result of cost saving initiatives and
restructuring of manufacturing and sales that begin in the fourth quarter of
2008. With these cost saving measures in place, we believe that it is possible
to realize profit at current sales levels at our Fayetteville facility and that
we will be well positioned to experience increased profitability when the global
economic crisis subsides and sales begin to rebound to historical levels. We
currently estimate that the Fayetteville facility will start generating positive
annual pre-tax income in fiscal year 2010.
 
 As a
result, we did not record a valuation allowance at June 30, 2009. A valuation
allowance would not cause us to violate any debt covenants.
  The
Company has cumulative undistributed earnings from foreign subsidiaries of
approximately $115 million as of June 30, 2009, included in the consolidated
retained earnings and will continue to be indefinitely reinvested in
international operations.  Accordingly, no provision has been made for U.S.
deferred taxes related to future repatriation of these earnings, nor is it
practicable to estimate the amount of income taxes that would have to be
provided if we concluded that such earnings will be remitted in the
future.
 - 66
-
  Net
Income
 
 Six Months Ended June 30,
                          
                          
                          Change(in millions)
                          
                          2009
                          
                          
                          2008
                          
                          
                          Dollar
                          
                          
                          %Net
      Income Before Taxes
                          
                          $
                          4.6
                          
                          
                          $
                          16.5
                          
                          
                          $
                          (11.9
                          )
                          
                          
                          -72.3
                          %(Benefit)
      Provision for Income Taxes
                          
                          $
                          (0.1
                          )
                          
                          $
                          1.7
                          
                          
                          $
                          (1.8
                          )
                          
                          
                          -105.0
                          %Net
      Income After Taxes
                          
                          $
                          4.7
                          
                          
                          $
                          14.9
                          
                          
                          $
                          (10.2
                          )
                          
                          
                          -68.6
                          %
  Net
income for the six months period ending June 30, 2009, was $4.7 million compared
to $14.9 million for the comparable period in 2008, a decrease of
approximately $10.2 million or 68.6%. Net income as a percentage of net sales
declined from 12.7% for the prior period to 5.6%, principally a result
of lower revenue and a significant non-cash loss in the change in fair value of
derivative liability.
 
 Earnings
Per Share
 
 Six Months Ended June 30,2009
                        
                        
                        2008Unaduited
                        
                        
                        UnauditedNet
      Income for Basic Earnings Per Share
                        
                        
                        4,663,617
                        
                        
                        
                        14,851,343Basic
      Weighted Average Number of Shares
                        
                        
                        27,696,388
                        
                        
                        
                        27,201,127Net
      Income per Share - Basic
                        
                        
                        0.17
                        
                        
                        
                        0.55Net
      Income for Diluted Earnings Per Share
                        
                        
                        4,663,617
                        
                        
                        
                        14,694,402Diluted
      Weighted Average Number of Shares
                        
                        
                        28,054,226
                        
                        
                        
                        28,690,851Net
      Income per Share - Diluted
                        
                        
                        0.17
                        
                        
                        
                        0.51
  Basic and
diluted earnings per share (EPS) for the six months ended June 30, 2009, were
$0.17 and $0.17, compared to $0.55 and $0.51 for the same period last
year.
 
 Selected
Balance Sheet Data at June 30, 2009 (unaudited) and the year ended December 31,
2008:
 
 Selected
      Balance Sheet DataJune
      30, 2009
                                          
                                          
                                          December
      31, 2008
                                          
                                          
                                          Change(in
      millions)
                                          
                                          Unaudited
                                          
                                          
                                          
                                          
                                          
                                          Dollar
                                          
                                          
                                          %Cash
                                          
                                          $
                                          49.9
                                          
                                          
                                          $
                                          65.6
                                          
                                          
                                          $
                                          (15.7
                                          )
                                          
                                          
                                          -23.9
                                          %Accounts
      Receivable, net
                                          
                                          $
                                          59.6
                                          
                                          
                                          $
                                          49.8
                                          
                                          
                                          $
                                          9.8
                                          
                                          
                                          
                                          19.8
                                          %PP&E
                                          
                                          $
                                          117.7
                                          
                                          
                                          $
                                          119.8
                                          
                                          
                                          $
                                          (2.1
                                          )
                                          
                                          
                                          -1.7
                                          %Total
      Assets
                                          
                                          $
                                          287.2
                                          
                                          
                                          $
                                          294.5
                                          
                                          
                                          $
                                          (7.2
                                          )
                                          
                                          
                                          -2.5
                                          %Short
      Term Debt
                                          
                                          $
                                          14.5
                                          
                                          
                                          $
                                          27.3
                                          
                                          
                                          $
                                          (12.8
                                          )
                                          
                                          
                                          -46.9
                                          %Long
      Term Debt
                                          
                                          $
                                          35.7
                                          
                                          
                                          $
                                          40.0
                                          
                                          
                                          $
                                          (4.3
                                          )
                                          
                                          
                                          -10.8
                                          %Shareholders'
      Equity
                                          
                                          $
                                          206.8
                                          
                                          
                                          $
                                          203.0
                                          
                                          
                                          $
                                          3.8
                                          
                                          
                                          
                                          1.9
                                          %
  Our
financial condition continues to improve as measured by an increase of 1.9% in
shareholders’ equity during the first half of 2009. Cash decreased 23.9% during
the period primarily due to the repayment of $17.5 million short term loans.
Accounts receivable increased 19.8% as a result of extended credit terms in 2009
to certain credible customers that have long-standing business relationships
with us in order to capture increased market share. Short term debt decreased by
46.9% primarily as a result of repayments of short term loans at our PRC
operation. Long term debt declined by 10.8% because $5.0 million of our
outstanding $40.0 million notes was reclassified to short term debt because of a
January 2010 due date on such portion of the notes.
  - 67
-
  Plant and
equipment consisted of the following:
 
 June 30, 2009
                    
                    
                    December 31, 2008(Unaudited)Land
                    
                    $
                    100,726
                    
                    
                    $
                    100,726Buildings
      and improvements
                    
                    
                    43,373,862
                    
                    
                    
                    43,418,544Transportation
      equipment
                    
                    
                    4,134,392
                    
                    
                    
                    4,138,892Machinery
      and equipment
                    
                    
                    73,095,975
                    
                    
                    
                    55,147,707Office
      furniture
                    
                    
                    1,169,354
                    
                    
                    
                    1,166,477Construction
      in progress
                    
                    
                    16,752,253
                    
                    
                    
                    33,163,330Totals
                    
                    
                    138,626,562
                    
                    
                    
                    137,135,676Less
      accumulated depreciation
                    
                    
                    (20,943,149
                    )
                    
                    
                    (17,374,649
                    )Totals
                    
                    $
                    117,683,413
                    
                    
                    $
                    119,761,027
 
 Construction
in progress at June 30, 2009 consisted of the following:
 
 June 30, 2009
                                            
                                            Commencement
                                            
                                            ExpectedNo.
                                            
                                            Project Description
                                            
                                            (Unaudited)
                                            
                                            Date
                                            
                                            completion date1
                                            
                                            Manufacturing
      machinery and equipment for CCA/CCS
                                            
                                            $
                                            3,033,509
                                            
                                            Dec-07
                                            
                                            Dec-092
                                            
                                            Corporation
      administration office building
                                            
                                            
                                            13,052,689
                                            
                                            May-03
                                            
                                            Dec-103
                                            
                                            Manufacture
      building (Dalian)
                                            
                                            
                                            630,001
                                            
                                            Jan-08
                                            
                                            Dec-094
                                            
                                            Manufacturing
      machinery and equipment for CCA (Multiple)
                                            
                                            
                                            29,972
                                            
                                            Oct-07
      thru July-09
                                            
                                            Sep-095
                                            
                                            Building
      attachment (Fayetteville)
                                            
                                            
                                            6,082
                                            
                                            Apr-09
                                            
                                            Sep-09Total
                                            
                                            $
                                            16,752,253
 
 Construction
in progress as of December 31, 2008 consisted of the following:
 
 December 31,2008
                                        
                                        Commencement
                                        
                                        ExpectedNo.
                                        
                                        Project description
                                        
                                        
                                        
                                        date
                                        
                                        completion date1
                                        
                                        Manufacturing
      machinery and equipment for CCA/CCS
                                        
                                        $
                                        14,507,534
                                        
                                        Dec-07
                                        
                                        Dec-092
                                        
                                        Corporation
      administration office building
                                        
                                        
                                        12,964,718
                                        
                                        May-03
                                        
                                        Dec-103
                                        
                                        Manufacturing
      machinery and equipment for CCA (Multiple)
                                        
                                        
                                        3,298,681
                                        
                                        Oct-07
      thru Jan-08
                                        
                                        Mar-09
      thru Dec-094
                                        
                                        Manufacturing
      machinery and equipment for CCS (Multiple)
                                        
                                        
                                        1,775,300
                                        
                                        Mar-07
      thru Sep-08
                                        
                                        Mar-09
      thru Dec-095
                                        
                                        Manufacture
      building
                                        
                                        
                                        617,097
                                        
                                        Jan-08
                                        
                                        Dec-09Total
                                        
                                        $
                                        33,163,330
  - 68
-
  At June
30, 2009, construction in progress mainly consists of $13.1 million in Tower B
(corporate administration office building) located at our Dalian facility. The
building consists of two towers, Tower A and Tower B. For Tower A, approximately
$11 million had been recorded in construction in progress and transferred to
fixed assets when management determined that the building was completed and
ready for use in 2007. Tower A is currently utilized as administration
offices for our Dalian facility.  Tower B began construction in May
2003 and was originally designed to be constructed as a hotel; however,
construction plans were amended in 2007 to construct Tower B as solely
additional office space which will be solely used by the Company
instead. The Company does not expect any lease cancellation/moving
expenses/impairment charges as they are not moving out of their current office
space, which is Tower A. Tower B will be used as the Company’s additional office
space and the Company does not plan to lease any part of Tower B to others.
Total gross floor area of Tower B is approximately 13,000 square
meters. Tower B is still currently under construction and is expected to be
completed by December 2010.  All costs incurred relating to Tower B
have all been recorded in construction in progress Project No. 2 and have not
yet transferred to fixed assets. As of June 30, 2009, the total construction in
progress balance related to Project No.2 is $13,052,689. The estimated
costs to complete Tower B as of June 30, 2009, and December 31, 2008,
were approximately $2.99 million and $3.09 million,
respectively.
 
 Construction
in progress at June 30, 2009 also consists of a $3 million project of
manufacturing machinery and equipment related to CCA and CCS production lines
and ancillary equipment, which is used to produce CCA and CCS wire products
respectively. Management believes that these CCA and CCS related machinery and
equipment will be in service for a minimum of 10 years. Upon successful
installation, these production lines and ancillary equipment will increase the
Company’s CCA and CCS wire production capacity in Dalian which the Company
believes will have a positive impact on their future cash flow through increased
sales and profit. The designed/expected annual capacity of the $14.5 million
machinery/equipment as of December 31, 2008 is approximately 6,000 Metric tons
(not including relocated capacity between Fayetteville and Dalian
facilities).  At December 31, 2008, the production capacity in Dalian
was 34,800 Metric tons.  The Company believes the addition of this
machinery/equipment could result in a production capacity increase of
approximately 17%. The machinery and equipment is located in Dalian, China. The
estimated completion date of this project is December 2009. By June 30, 2009,
$12.5 million of the above mentioned machinery and equipment was completed and
transferred to fixed assets. The $3 million balance as of June 30, 2009 is
primarily related to relocated CCS product lines from Fayetteville facility to
Dalian facility, which will add about 8,200 Metric tons of CCS capacity annually
to the Dalian facility and the project is expected to be completed by the end of
2009. The estimated additional annual costs to operate and maintain the
relocated machinery and equipment range from approximately $100,000 to $150,000.
The estimated costs to complete this project as of June 30, 2009, and December
31, 2008 were $1.98 million and $2.34 million, respectively.
 
 - 69
-
 
 LIQUIDITY
AND CAPITAL RESOURCES
 
 We have
historically financed our operations and capital expenditures principally
through private placements of debt and equity, bank loans, and cash provided by
operations. Significant factors affecting our cash liquidity include (1) cash
provided by operating activities, (2) cash used for capital expenditures,
and (3) our available credit facilities and other borrowing arrangements. At
June 30, 2009, the majority of our liquid assets were held in RMB denominations
deposited in banks within the PRC. The PRC has strict rules for converting RMB
to other currencies and for movement of funds from the PRC to other countries.
Consequently, in the future, we may face difficulties in moving funds deposited
within the PRC to fund working capital or capital expenditure requirements for
our locations outside the PRC. To mitigate the difficulties of moving funds, we
plan to maintain and expand our working capital lines for Fayetteville and
Telford as necessary as our sales increases and our working capital needs
grow.
 
 Under PRC
Company Law and relevant rules and regulations, our PRC subsidiaries may pay
dividends only out of their retained earnings/net profit, if any, calculated
according to PRC accounting principles determined in accordance with PRC
accounting standards, and only after accumulated losses from preceding years
have been fully covered and the following appropriations have been
made:
 
 a)
appropriations to the statutory surplus reserve equivalent to 10% of its net
profits less any accumulated losses, as determined under PRC GAAP; no further
appropriations to the statutory surplus reserve are required once this reserve
reaches an amount equal to 50% of its respective registered
capital;
 
 b)
appropriations to a discretionary surplus reserve as approved by the
shareholders in shareholders' meeting.
 
 As is
customary in the industry, we provide payment terms to most of our customers
that exceed terms that we receive from our suppliers. Therefore, the Company’s
liquidity needs have generally consisted of working capital necessary to finance
receivables and raw material inventory. Capital expenditures have historically
been necessary to expand the production capacity of the Company’s manufacturing
operations.
 
 We
recognize revenue according to the shipment date to ensure that revenues are
recorded in the proper period. Every sales transaction has a formal written
customer order that identifies the price and quantities of the product and
payment terms.
  - 70
-


In
summary, our cash flows were:


Six Months Ended June 30,(in
      millions)
                            
                            2009
                            
                            
                            2008Net
      cash provided by (used in) operating activities
                            
                            $
                            4.5
                            
                            
                            $
                            (4.6
                            )Net
      cash used in investing activities
                            
                            $
                            (5.3
                            )
                            
                            $
                            (14.7
                            )Net
      cash (used in) provided by financing activities
                            
                            $
                            (14.9
                            )
                            
                            $
                            1.4Effect
      of exchange rate on cash
                            
                            $
                            (0.0
                            )
                            
                            $
                            4.8Cash
      and cash equivalents at beginning of period
                            
                            $
                            65.6
                            
                            
                            $
                            79.9Cash
      and cash equivalents at end of period
                            
                            $
                            49.9
                            
                            
                            $
                            66.9
  For the
six months ended June 30, 2009, net cash provided by operating activities was
$4.5 million, which is an increase of $9.1 million from a deficit of $4.6
million for the same period in 2008, reflecting a significant improvement in
operating cash flow year over year.  The favorable change is primarily
attributable to decreases in accounts receivable and advance to suppliers
consistent with decreased revenue, partially offset by a decrease in net income
and a decrease in accounts payable.
 
 For the
six months ended June 30, 2009, net cash used in investing activities was a
deficit of $5.3 million, and was primarily attributable to $5.6 million in
property and equipment purchases and advances. The repairs and maintenance
expense for the six months ended June 30, 2009 and 2008, amounted to $324,416
and $514,772 respectively. The repairs and maintenance expense for the three
months ended June 30, 2009 and 2008 amounted to $193,998 and $223,709,
respectively. We do not expect significant increases in repairs and maintenance
in the future.
 
 For the
six months ended June 30, 2009, net cash provided by financing activities was a
cash deficit of $14.9 million, which was primarily attributable to the
repayments on $17.5 million in bank loans and a decrease in our revolving line
of credit of $0.2 million partially offset by proceeds on a private placement of
$1.9 million.
 
 At June
30, 2009, our cash balance was $49.9 million compared to $66.9 million at
December 31, 2008.
 
 Days
sales outstanding (DSO) has increased from 82 days at December 31, 2008, to 128
days at June 30, 2009, while days payable outstanding remains stable at 15 days
as of June 30, 2009, compared to 16 days at December 31, 2008.
 
 Standard
Customer and Supplier Payment Terms (days) as below:
 
 Year ended December 31, 2008
                    
                    Six months ended June 30, 2009Customer
      Payment Term
                    Payment
      in advance to 90 days
                    
                    Payment
      in advance to 120 daysSupplier
      Payment Term
                    Payment
      in advance to 30 days
                    
                    Payment
      in advance to 30
days
 
 The
increase in DSO was because we extended credit terms for P.R.C. segment in late
2008 and 2009 to certain credible customers that have long-standing business
relationships with us in order to capture increased market share, which further
put pressure on smaller competitors whose limited capital resources have become
further strained due to the global economic crisis.  Prior to this
adjustment in customer credit policies, the standard number of days we give our
customers to pay is 90 days. We write off receivables specifically based on the
facts we obtain about the customers’ ability to pay.
 
 - 71
-
  Aging
Analysis of accounts receivable:
 
 June 30, 2009
                  
                  
                  December 31, 2008(Unaudited)1-30
      days
                  
                  $
                  19,383,593
                  
                  
                  $
                  7,967,99231-60
      days
                  
                  
                  16,383,269
                  
                  
                  
                  14,981,57461-90
      days
                  
                  
                  13,557,118
                  
                  
                  
                  17,033,52191-180
      days
                  
                  
                  9,511,415
                  
                  
                  
                  9,394,901180-365
      days
                  
                  
                  1,141,269
                  
                  
                  
                  723,089Over
      365 days
                  
                  
                  -
                  
                  
                  
                  -Bad
      debts allowance
                  
                  
                  (345,983
                  )
                  
                  
                  (318,529
                  )Total
                  
                  $
                  59,630,681
                  
                  
                  $
                  49,782,548
 
 Inventory
turnover days increased from 16 days at December 31, 2008, to 53 days at June
30, 2009. Meanwhile, advance to supplier’s turnover days has decreased from 45
days at December 31, 2008, to 24 days at June 30, 2009, as we utilized the
advances to purchase raw materials.
 
 The
primary reason for the increased investments in inventory is due to increased
demand forecasts of our products within the P.R.C. market as a result of
increased government spending related to infrastructure projects. Our principal
raw materials consist of aluminum and steel rods and copper strips. Changes in
the price of copper, which has an established history of volatility, directly
affect the prices of our products and influence the demand for our products. Our
decision to make advanced purchases of raw materials is mainly based upon (1)
the current market price of raw materials and projected future market price of
raw materials, (2) the demand and supply situation in the raw materials market,
and (3) forecasted demand of our products. By securing these raw materials in
advance, we believe that we are able to manage and control our cost of
products.  Furthermore, due to globally depressed commodity prices,
management believed there was an opportunity to lock-in lower purchase prices
through increasing the deposit (advance) to suppliers which in turn lowered the
average purchase price of raw materials and minimized the loss resulting from
the significant decline in spot prices in the fourth quarter 2008.
 
 Like all
businesses, we are assessing the current financial environment on a daily basis
from financial data published in the market place, discussions with our
customers regarding their current and future purchasing plans and through
discussions with our suppliers and others with some insight within the financial
realm in order to develop a better perspective of the future opportunities for
our company.  At this time, we believe that our sales will continue to
grow because of the infrastructure development in the PRC and throughout Asia.
In future periods, as a result of our acquisition of Copperweld, we believe we
can realize significant savings on capital expenditures by moving underutilized
equipment to locations with a need for that equipment. We anticipate that our
working capital requirements may increase as a result of the continued expansion
of our combined business, continued increases or recovery in sales, potential
increases in the price of copper and our other raw materials over the longer
term, competition and our relationship with suppliers or customers. We believe
that our existing cash, cash equivalents and cash flows from operations,
combined with availability under our revolving credit facility, will be
sufficient to meet our presently anticipated future cash needs for at least the
next 12 to 18 months. We may, however, require additional cash resources due to
changed business conditions or other future developments, including any
investments or acquisitions we may decide to pursue. Considering the current
global liquidity shortage, there can be no assurance that such finding will be
available when needed, or, if available, that it will be available on terms
acceptable to the Company.
  - 72
-
  COMMITMENTS
AND CONTINGENCIES
 
 Contractual
Obligations
 
 Set out
below are our contractual obligations at June 30, 2009:
 
 Contractual obligations
                          
                          Total
                          
                          
                          Payment due byless than 1 year
                          
                          
                          2–3 years
                          
                          
                          4-5 years
                          
                          
                          More than 5yearsLong-Term
      Debt Obligations-High Yield note principal
                          
                          $
                          40,000,000
                          
                          
                          $
                          10,000,000
                          
                          
                          $
                          30,000,000
                          
                          
                          $
                          0
                          
                          
                          $
                          0Estimated
      variable rate interest payment related to High Yield notes
      (semi-annual)
                          
                          $
                          5,727,000
                          
                          
                          $
                          2,684,531
                          
                          
                          $
                          3,042,469
                          
                          
                          $
                          0
                          
                          
                          $
                          0Long-Term
      Debt Obligations-SWAP settlement
                          
                          $
                          7,348,001
                          
                          
                          $
                          2,237,123
                          
                          
                          $
                          5,110,878
                          
                          
                          $
                          0
                          
                          
                          $
                          0Long-Term
      Debt Obligations-Convertible note principal
                          
                          $
                          5,000,000
                          
                          
                          $
                          0
                          
                          
                          $
                          5,000,000
                          
                          
                          $
                          0
                          
                          
                          $
                          0Estimated
      fixed rate interest payment related to Convertible
      notes(semi-annual)
                          
                          $
                          450,000
                          
                          
                          $
                          150,000
                          
                          
                          $
                          300,000
                          
                          
                          $
                          0
                          
                          
                          $
                          0Long-Term
      Debt Obligations-Estimated interest  upon redemption of
      Convertible Notes at Mature
                          
                          $
                          5,305,158
                          
                          
                          $
                          0
                          
                          
                          $
                          5,305,158
                          
                          
                          $
                          0
                          
                          
                          $
                          0Total
                          
                          $
                          63,830,159
                          
                          
                          $
                          15,071,654
                          
                          
                          $
                          48,758,505
                          
                          
                          $
                          0
                          
                          
                          $
                          0
 
 Assumption:
 
 ·       We will repay the HY Note strictly
according to the mandatory redemption schedule defined in the HY note
agreement.  Six months LIBOR as of January 21, 2009 is 1.56% and
spread rate is 5.60%. The USD/CNY Spot Rate is 6.8302.
 
 ·       CB Note will not be converted and
will be redeemed by January 24, 2012, the maturity date.
 
 Legal
Proceedings
 
 On August
5, 2008, a judgment was entered in the Kuhn’s Brothers, Inc., Kuhn’s Brothers
Securities Corp., and Kuhn’s Bros. & Co. Inc. (collectively “Kuhn’s”) matter
awarding the plaintiffs $7.2 million which we have already accrued $7.2 million
for this litigation settlement as a contingent liability in the second quarter
of 2008 and allocated the amount into deferred commissions, additional paid in
capital and current expenses based on the nature of each charge due to Kuhn’s as
below:
  - 73
-
  Description
                                      
                                      
                                      Amount
                                      
                                      Accounting
      TreatmentPlacement
      agent fees associated with the Copperweld acquisition and Common stock
      issuance and to be deducted from the proceeds and debit to additional
      paid-in capital
                                      
                                      $
                                      3,487,250
                                      
                                      Allocated
      to additional paid-in capital in 2008 under SAB Topic
  5A.Deferred
      placement agent fee related to $60 million Citadel Notes
      issuance
                                      
                                      
                                      3,000,000
                                      
                                      Being
      amortized over the Notes' life and $1,762,500 has been amortized as at 31
      March 2009 under FAS 91.Interests
      of all due placement agent fees
                                      
                                      
                                      710,544
                                      
                                      Expensed
      in 2008Total
                                      
                                      $
                                      7,197,794
 
 As
disclosed in the Current Report on Form 8-K filed on May 26, 2009, we entered
into a Settlement and Forbearance Agreement and Release with Kuhn’s in which
Kuhn’s agreed to reduce the judgment to $7,000,000 (the “Judgment”) and we
agreed to withdraw the appeal.
 
 Pursuant
to the Settlement Agreement, the Judgment shall be satisfied in full no later
than January 15, 2010 through a combination of cash and shares. As partial
payment to reduce the Judgment, we delivered to Kuhn’s on May 21, 2009,
$1,000,000 plus accrued interest (the “Escrow Payment”), which was being held in
an escrow account (the “Escrow Assets”) located in the U.S. that was governed by
an Escrow Agreement between us and Kuhn’s, dated October 3, 2007. This is the
only cash payment to be made per the settlement agreement (cash was not
transferred out of China), therefore, we do not believe that it has any material
adverse effect on our liquidity. At a closing which was held on June 5, 2009
(the “Closing Date”), we (i) delivered to Kuhns a stock certificate for 100,000
shares of Common Stock (the “Initial Shares”), which had been part of the Escrow
Assets, and (ii) deposited a stock certificate for 2.2 million shares of Common
Stock in escrow (the “Escrow Shares”) with the Escrow Agent along with an
executed stock power in blank, to be held pursuant to the Escrow Agreement. We
agreed to deposit a total of 2.2 million shares of Common Stock. However, Kuhn’s
can only receive proceeds from the sale of such number of Escrow Shares
necessary to satisfy the Judgment, after reducing the Judgment by the Escrow
Assets.  Once the Judgment has been satisfied Kuhn’s shall instruct
the Escrow Agent to return any remaining Escrow Shares to us and such Escrow
Shares shall be cancelled.
 
 Off-Balance
Sheet Arrangements
 
 We have
not engaged in any off-balance sheet transactions.
  Critical
Accounting Policies
 
 Use of
estimates
 
 The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period. For
example, the Company estimates the fair value of its derivative instrument.
Actual results could differ from those estimates.
  - 74
-




Revenue
recognition




The
Company's revenue recognition policies are in accordance with Staff Accounting
Bulletin (“SAB”) 104. Sales revenue is recognized at the date of shipment to
customers when a formal arrangement exists, the price is fixed or determinable,
the delivery is completed, no other significant obligations of the Company exist
and collectability is reasonably assured. Payments received before all of the
relevant criteria for revenue recognition are recorded as customer
deposits.





Segment
reporting





For the
quarter ended June 30, 2009, we adopted SFAS No. 131 (“SFAS 131”), “Disclosure
about Segments of an Enterprise and Related Information,” which requires use of
the “management approach” model for segment reporting. The management approach
model is based on the way a company’s management organizes segments within the
company for making operating decisions and assessing performance. As of June 30,
2009, the Company has two reportable segments: China and US. The China segment,
through the Dalian manufacturing facility, is engaged in developing, designing,
manufacturing, marketing and distributing copper-cladded bi-metallic engineered
conductor products, principally copper-clad aluminum (CCA) and primarily
services the Asia-Pacific region, and specifically the PRC market. The US
segment, consisting of two manufacturing facilities, one in Fayetteville,
Tennessee, USA and a second in Telford, England, are engaged in developing,
designing, manufacturing, marketing and distributing copper-cladded bimetallic
engineered conductor products, principally CCA and copper-clad steel (CCS) and
primarily service the North and South American, European, Middle Eastern and
North African markets.





Adoption of EITF
07-5





Effective
January 1, 2009, the Company adopted the provisions of EITF 07-5,
“Determining Whether an Instrument (or Embedded Feature) is Indexed to an
Entity’s Own Stock,” which is effective for financial statements for fiscal
years beginning after December 15, 2008 and which replaced the previous guidance
on this topic in EITF Issue 01-6.  Paragraph 11a of FAS 133 specifies
that a contract that would otherwise meet the definition of a derivative
but is both (a) indexed to the Company’s own stock and (b) classified in
stockholders’ equity in the statement of financial position would not be
considered a derivative financial instrument.  EITF 07-5 provides a
new two-step model to be applied in determining whether a financial instrument
or an embedded feature is indexed to an issuer’s own stock and thus able to
qualify for the FAS 133 paragraph 11(a) scope exception.





The
conversion option embedded in the Company’s Convertible Notes previously met the
criteria in EITF Issue 01-6, as well as the other criteria of FAS 133, paragraph
11(a) and, accordingly, it was not separately accounted for as a derivative
instrument liability.  However, the conversion option does not
meet the criteria of EITF 07-5 because it requires that the conversion price be
adjusted in certain circumstances that do not meet the “fixed-for-fixed’
criteria in that Issue.  As a result, the Company is now required to
separately account for the embedded conversion option as a derivative instrument
liability, carried at fair value and marked-to-market each period, with changes
in the fair value each period charged or credited to income.


- 75
-





In
accordance with the transition provisions of EITF 07-5, the new guidance has
been applied to the $5,000,000 of the Company’s Convertible Notes that were
outstanding as of January 1, 2009.  The cumulative effect of this
change in accounting principle of $1,357,150 has been recognized as a reduction
of the opening balance of Retained Earnings as of that date.  That
cumulative effect adjustment is the difference between the amounts previously
recognized in the Company’s balance sheet as of December 31, 2008 and the
amounts that would have been recognized if the guidance in EITF 07-5 had been
applied from the issuance date of the outstanding Convertible
Notes.





Recent
Accounting Pronouncements





In
January 2009, the FASB issued FSP EITF 99-20-1, “Amendments to the Impairment
Guidance of EITF Issue No. 99-20, and EITF Issue No. 99-20, Recognition of
Interest Income and Impairment on Purchased and Retained Beneficial Interests in
Securitized Financial Assets”. FSP EITF 99-20-1 changes the impairment model
included within EITF 99-20 to be more consistent with the impairment model of
FAS 115. FSP EITF 99-20-1 achieves this by amending the impairment model in EITF
99-20 to remove its exclusive reliance on “market participant” estimates of
future cash flows used in determining fair value. Changing the cash flows used
to analyze other-than-temporary impairment from the “market participant” view to
a holder’s estimate of whether there has been a “probable” adverse change in
estimated cash flows allows companies to apply reasonable judgment in assessing
whether an other-than-temporary impairment has occurred. The adoption of FSP
EITF 99-20-1 did not have a material impact on our consolidated financial
statements because all of our investments in debt securities are classified as
trading securities.





In April
2009, the FASB issued FSP FAS 157-4, “Determining Fair Value When the Volume and
Level of Activity for the Asset or Liability Have Significantly Decreased and
Identifying Transactions That Are Not Orderly”. FSP FAS 157-4 amends SFAS 157
and provides additional guidance for estimating fair value in accordance with
SFAS 157 when the volume and level of activity for the asset or liability have
significantly decreased and also includes guidance on identifying circumstances
that indicate a transaction is not orderly for fair value measurements. This FSP
shall be applied prospectively with retrospective application not permitted.
This FSP shall be effective for interim and annual periods ending after
June 15, 2009, with early adoption permitted for periods ending after
March 15, 2009. An entity early adopting this FSP must also early adopt FSP
FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary
Impairments”. Additionally, if an entity elects to early adopt either FSP FAS
107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial
Instruments” or FSP FAS 115-2 and FAS 124-2, it must also elect to early adopt
this FSP. The adoption of FSP FAS 157-4 did not have a material impact on the
Company’s consolidated financial statements.




- 76
-


In April
2009, the FASB issued FSP FAS 115-2 and FAS 124-2. This FSP amends SFAS 115,
“Accounting for Certain Investments in Debt and Equity Securities,” SFAS 124,
“Accounting for Certain Investments Held by Not-for-Profit Organizations,” and
EITF Issue No. 99-20, “Recognition of Interest Income and Impairment on
Purchased Beneficial Interests and Beneficial Interests That Continue to Be Held
by a Transferor in Securitized Financial Assets,” to make the
other-than-temporary impairments guidance more operational and to improve the
presentation of other-than-temporary impairments in the financial statements.
This FSP will replace the existing requirement that the entity’s management
assert it has both the intent and ability to hold an impaired debt security
until recovery with a requirement that management assert it does not have the
intent to sell the security, and it is more likely than not it will not have to
sell the security before recovery of its cost basis. This FSP provides increased
disclosure about the credit and noncredit components of impaired debt securities
that are not expected to be sold and also requires increased and more frequent
disclosures regarding expected cash flows, credit losses, and an aging of
securities with unrealized losses. Although this FSP does not result in a change
in the carrying amount of debt securities, it does require that the portion of
an other-than-temporary impairment not related to a credit loss for a
held-to-maturity security be recognized in a new category of
other comprehensive income and be amortized over the remaining life of the
debt security as an increase in the carrying value of the security. This FSP
shall be effective for interim and annual periods ending after June 15,
2009, with early adoption permitted for periods ending after March 15,
2009. An entity may early adopt this FSP only if it also elects to early adopt
FSP FAS 157-4. Also, if an entity elects to early adopt either FSP FAS 157-4 or
FSP FAS 107-1 and APB 28-1, the entity also is required to early adopt this FSP.
The adoption of FSP FAS 115-2 and FAS 124-2 did not have a material impact on
the Company’s consolidated financial statements.




In April
2009, the FASB issued FSP FAS 107-1 and APB 28-1. This FSP amends SFAS 107,
“Disclosures about Fair Value of Financial Instruments,” to require disclosures
about fair value of financial instruments not measured on the balance sheet at
fair value in interim financial statements as well as in annual financial
statements. Prior to this FSP, fair values for these assets and liabilities were
only disclosed annually. This FSP applies to all financial instruments within
the scope of SFAS 107 and requires all entities to disclose the method(s) and
significant assumptions used to estimate the fair value of financial
instruments. This FSP shall be effective for interim periods ending after
June 15, 2009, with early adoption permitted for periods ending after
March 15, 2009. An entity may early adopt this FSP only if it also elects
to early adopt FSP FAS 157-4 and FSP FAS 115-2 and FAS 124-2. This FSP does not
require disclosures for earlier periods presented for comparative purposes at
initial adoption. In periods after initial adoption, this FSP requires
comparative disclosures only for periods ending after initial adoption. The
adoption of FSP FAS 107-1 and APB 28-1 did not have a material impact on the
Company’s consolidated financial statements.





In May
2009, the FASB issued FAS 165, Subsequent Events [ASC 855-10-05], which provides
guidance to establish general standards of accounting for and disclosures of
events that occur after the balance sheet date but before financial statements
are issued or are available to be issued. FAS 165 also requires entities to
disclose the date through which subsequent events were evaluated as well as the
rationale for why that date was selected. FAS 165 is effective for interim and
annual periods ending after June 15, 2009, and accordingly, the Company adopted
this Standard during the second quarter of 2009. FAS 165 requires that public
entities evaluate subsequent events through the date that the financial
statements are issued. The Company has evaluated subsequent events through the
time of filing these consolidated financial statements with the SEC on August
10, 2009.





In June
2009, the FASB issued Statement of Financial Accounting Standards No. 166,
Accounting for Transfers of Financial Assets — an amendment of FASB Statement
No. 140 (“FAS 166”) [ASC 860], which requires entities to provide more
information regarding sales of securitized financial assets and similar
transactions, particularly if the entity has continuing exposure to the risks
related to transferred financial assets. FAS 166 eliminates the concept of a
“qualifying special-purpose entity,” changes the requirements for derecognizing
financial assets and requires additional disclosures. FAS 166 is effective for
fiscal years beginning after November 15, 2009. The Company has not completed
the assessment of the impact FAS 166 will have on the Company’s financial
condition, results of operations or cash flows.


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In June
2009, the FASB issued Statement of Financial Accounting Standards No. 167,
Amendments to FASB Interpretation No. 46(R) (“FAS 167”) [ASC 810-10], which
modifies how a company determines when an entity that is insufficiently
capitalized or is not controlled through voting (or similar rights) should be
consolidated. FAS 167 clarifies that the determination of whether a company is
required to consolidate an entity is based on, among other things, an entity’s
purpose and design and a company’s ability to direct the activities of the
entity that most significantly impact the entity’s economic performance. FAS 167
requires an ongoing reassessment of whether a company is the primary beneficiary
of a variable interest entity. FAS 167 also requires additional disclosures
about a company’s involvement in variable interest entities and any significant
changes in risk exposure due to that involvement. FAS 167 is effective for
fiscal years beginning after November 15, 2009. The Company has not completed
the assessment of the impact FAS 167 will have on the Company’s financial
condition, results of operations or cash flows.





In June
2009, the FASB issued Statement of Financial Accounting Standards No. 168, The
FASB Accounting Standards CodificationTM and the Hierarchy of Generally Accepted
Accounting Principles a Replacement of FASB Statement No. 162 (“FAS 168”). This
Standard establishes the FASB Accounting Standards CodificationTM (the
“Codification”) as the source of authoritative accounting principles recognized
by the FASB to be applied by nongovernmental entities in the preparation of
financial statements in conformity with U.S. GAAP. The Codification does not
change current U.S. GAAP, but is intended to simplify user access to all
authoritative U.S. GAAP by providing all the authoritative literature related to
a particular topic in one place. The Codification is effective for interim and
annual periods ending after September 15, 2009, and as of the effective date,
all existing accounting standard documents will be superseded. The Codification
is effective for the Company in the third quarter of 2009, and accordingly, the
Company’s Quarterly Report on Form 10-Q for the quarter ending September 30,
2009 and all subsequent public filings will reference the Codification as the
sole source of authoritative literature.





Item
3. Quantitative and Qualitative Disclosures About Market Risk





Commodity
Price Risk





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





We are
primarily exposed to price risk related to our purchase of copper used in the
manufacturing of our products. Our copper price management strategy involves the
use of natural techniques, where possible, such as purchasing copper for future
delivery at fixed prices. We did not have any commodity price derivatives or
hedging arrangements outstanding at June 30, 2009, and did not employ any
commodity price derivatives during the six months ended June 30,
2009.


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Foreign
Exchange Risk





While our
reporting currency is the US dollar, a substantial percentage of our revenues
and costs are denominated in RMB and a significant portion of our assets and
liabilities are denominated in RMB. As a result, we are exposed to foreign
exchange risk as our revenues and results of operations may be affected by
fluctuations in the exchange rate between the US Dollar and RMB. If the RMB
depreciates against the US Dollar, the value of our RMB revenues and assets as
expressed in our US Dollar consolidated financial statements will
decline.





The RMB
is currently freely convertible under the “current account”, which includes
dividends, trade and service-related foreign exchange transactions, but not
under the “capital account”, which includes foreign direct investment. On May
19, 2007, the People’s Bank of China announced a policy to expand the maximum
daily floating range of RMB trading prices against the U.S. dollar in the
inter-bank spot foreign exchange market from 0.3% to 0.5%. While the
international reactions to the RMB revaluation and widening of the RMB’s daily
trading band have generally been positive, with the increased floating range of
the RMB’s value against foreign currencies, the RMB may appreciate or depreciate
significantly in value against the U.S. dollar or other foreign currencies in
the long term, depending on the fluctuation of the basket of currencies against
which it is currently valued.





We
recognized a foreign currency translation gain adjustment of $39,957 and
$12,163,352 for the six months ended June 30, 2009 and 2008,
respectively.





Interest
Rate Risk





We are
primarily exposed to interest rate risk arising from the 6 month LIBOR rate on
which the interest rate for our Guaranteed Senior Secured Floating Rate Notes
due 2012 (“HY Notes”) totaling $40 million or 50% of our total liability, is
based. If there was a hypothetical 1% change in the 6-month LIBOR interest rate,
the net impact to earnings would be approximately $0.4 million on an annualized
basis.





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


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The fair
value of the Swap is determined based on our own model which reflects the
present values of the difference between estimated future variable-rate receipts
in USD and future fixed-rate payments in RMB. Since its effective date, the fair
value of this Swap agreement changed to a payable of $7,890,432 and $4,377,076
as of June 30, 2009, and December 31, 2008, respectively.





For the
six months ended June 30, 2009, changes in fair value of the Swap resulted in an
increase in the liability and a loss to other comprehensive income of
$3,513,356. For the six months ended June 30, 2008, changes in fair value of the
Swap resulted in an increase in the liability and a loss to other comprehensive
income of $731,505, net of taxes.





For the
three months ended June 30, 2009, changes in fair value of the Swap resulted in
an increase in the liability and a loss to other comprehensive income of
$751,227. For the three months ended June 30, 2008, changes in fair value of the
Swap resulted in an decrease in the liability and a gain to other comprehensive
income of $4,377,975, net of taxes.





Credit
Risk





We have
not experienced significant credit risk, as most of our customers are long-term
customers with excellent payment records. We review our accounts receivable on a
regular basis to determine if the allowance for doubtful accounts is adequate at
each quarter-end. We only extend 30 to 120 day trade credit to our largest
customers, which tend to be well-established and large businesses, and we have
not seen any major customer’s accounts receivable go uncollected beyond 180 days
or experienced any material write-off of accounts receivable in the
past.





Inflation
Risk





In recent
years, China 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 (NBS) (www.stats.gov.cn), the change in
Consumer Price Index (CPI) in China was 1.5%, 4.7% and 5.9% in 2006, 2007 and
2008, respectively. Inflationary factors, such as increases in the cost of our
products and overhead costs, could impair our operating results. Although we do
not believe that inflation has had a material impact on our financial position
or results of operations to date, a high rate of inflation may have an adverse
effect on our ability to maintain current levels of gross margin and selling,
general and administrative expenses as a percentage of sales revenue if the
selling prices of our products do not increase with these increased
costs.





Item
4. Controls and Procedures





(a)
Evaluation of Disclosure Controls and Procedures





We
maintain disclosure controls and procedures (as such term is defined in Exchange
Act Rules 13a-15(e) and 15d-15(e)) that are designed to ensure that information
required to be disclosed in our reports filed pursuant to the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in the SEC’s rules, regulations and related forms, and that such information is
accumulated and communicated to our management, including our principal
executive officer and principal financial officer, as appropriate, to allow
timely decisions regarding required disclosure.


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Under the
supervision and with the participation of our management, including our
principal executive officer and principal financial officer, the Company
conducted an evaluation of the effectiveness of the design and operation of our
disclosure controls and procedures as of the end of the period covered by this
report.   Based on this evaluation, our principal executive
officer and principal financial officer concluded that as of June 30, 2009, our
disclosure controls and procedures were effective.





(b)
Changes in internal controls.





As part
of the evaluation and assessment process, when any change in internal control
over financial reporting is made that has materially affected, or is reasonably
likely to materially affect our internal control over financial
reporting,  management is required to disclose such
changes.





During
the second quarter, we addressed the material weakness disclosed in our Annual
Report on Form 10-K for the year ended December 31, 2008 (“Form
10-K”).  The identified material weakness was related to specific
instances of management’s override of control over cash disbursements. Our
control system governing cash disbursement practices were adequately designed,
faithfully implemented and properly documented. However, there occurred
instances that management was able to override these controls and did not
maintain segregation of duties within our business
operations.   For example, our CEO approved certain payments to
our vendors. However, our Accounting Department Manager overrode the controls
and instructed the cashier to wire money to a payee which was not consistent
with the originally approved payee when the original payee contacted the
Accounting Department Manager and requested payment to their
subsidiary.  In response, we have taken the following remedial
measures to rectify these instances:





·
            We
      reorganized and established clear roles, responsibilities and
      accountability to our financial reporting structure starting from
      management to staff;


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


·
            We
      increased the level of awareness of designed controls and have established
      a more effective control environment by communicating to management that
      under no circumstance can the controls be overridden going
      forward.





Additionally,
we addressed the significant deficiency noted in our Form 10-K.  The
deficiency that was identified was that the Company’s controls were not
effective to ensure the accurate and timely accounting for, and the disclosure
of fixed assets at the end of the monthly closing process, which was directly
related to certain construction in progress (“CIP”).  This resulted in
a failure to maintain effective controls over the financial closing
process.  CIP was not being moved and accounted for as PPE until the
closing of the quarter, when it should have been moved and accounted for as PPE
at the close of each month during the quarter.  During the second
quarter 2009, we addressed the identified significant deficiency by implementing
and putting in place additional controls to continuously improve our period-end
closing procedures to ensure account reconciliations and analyses are adequately
reviewed for completeness and accuracy on a monthly basis to timely identify
adjustments to re-classify completed projects as depreciable fixed
assets.


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A control
system, no matter how well conceived and operated, can provide only reasonable,
not absolute, assurance that the objectives of the control systems are met.
Because of the inherent limitations in all control systems no evaluation of
controls can provide absolute assurance that all control issues, if any, within
a company have been detected. Such limitations include the fact that human
judgment in decision-making can be faulty and that breakdowns in internal
control can occur because of human failures, such as simple errors or mistakes
or intentional circumvention of the established process.





PART
II.  OTHER INFORMATION





Item
1.  Legal Proceedings





On
November 27, 2006, Kuhns Brothers, Inc., Kuhns Brothers Securities Corp. and
Kuhns Brothers & Co. (collectively, “Kuhns”) filed a lawsuit against us
alleging a breach of an engagement letter, dated May 27, 2005, between us and
Kuhns.  On August 5, 2008, a judgment was entered against us in the
amount of $7,197,794, plus interest and attorneys fees, which we subsequently
appealed.




On May
19, 2009 (the “Execution Date”), we entered into a Settlement and Forbearance
Agreement and Release (the “Settlement Agreement”) with Kuhns, in which Kuhns
agreed to reduce the judgment to $7,000,000 (the “Judgment”) and we agreed to
withdraw the appeal.  In the second quarter of 2008, we accrued a $7.2
million contingent liability for this litigation settlement as a contingent
liability in the second quarter of 2008 and allocated the amount between equity
and expenses accordingly.  On the Execution Date, we also entered into
an Escrow Agreement (the “Escrow Agreement”), among the Company, Kuhns and
Continental Stock Transfer & Trust Company, as Escrow Agent (the “Escrow
Agent”).




Pursuant
to the Settlement Agreement, the Judgment shall be satisfied in full no later
than January 15, 2010 through a combination of cash and shares. As partial
payment of the Judgment, we paid to Kuhns on May 21, 2009, $1,000,000
plus accrued interest of $29,922.61(the “Escrow Payment”), which had
been held in an escrow account (the “Escrow Assets”), that was governed by
an escrow agreement between us and Kuhns, dated October 3, 2007.  At a
closing which was held on June 5, 2009 (the “Closing Date”), we (i) delivered to
Kuhns a stock certificate for 100,000 shares of Common Stock (the “Initial
Shares”), which had been part of the Escrow Assets, and (ii) deposited a stock
certificate for 2.2 million shares of Common Stock in escrow (the “Escrow
Shares”) with the Escrow Agent along with an executed stock power in
blank, to be held pursuant to the Escrow Agreement. While we
deposited a total of 2.2 million shares of Common Stock, Kuhns can only
receive proceeds from the sale of such number of Escrow Shares necessary to
satisfy the Judgment, after reducing the Judgment by the Escrow
Assets.  Once the Judgment has been satisfied, Kuhns shall instruct
the Escrow Agent to return any remaining Escrow Shares to us and such Escrow
Shares shall be cancelled. The Company may pre-pay the balance of the Judgment
to Kuhns at any time without any pre-payment penalty.  If at any time
prior to January 15, 2010, the Company (i) prior to any sales of Escrow Shares,
prepays the entire outstanding balance of the Judgment, or (ii) taking into
account the cash proceeds received by Kuhns for sales of Escrow Shares up to
such time, pays the remaining balance of the Judgment to Kuhns, then any
remaining Escrow Shares shall be released to the Company and
cancelled.  Upon payment in full of the Judgment, Kuhns shall deliver
to the Company a satisfaction of Judgment.


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The
Judgment has been reduced by (i) the amount of the Escrow Payment; and
shall be reduced further by (ii) the Initial Share Value (as described in more
detail below), (iii) the amount of cash proceeds received by Kuhns from sales of
the Escrow Shares, or their delivery to Kuhns as restricted shares if there is
not an effective registration statement covering such Escrow Shares; and/ or
(iv) any other payments made to Kuhns by the Company.  Kuhns
shall continue to have all rights as a Judgment creditor, subject to its
forbearance obligations pursuant to the Settlement Agreement, until the Judgment
is satisfied.




On or
prior to the thirtieth day after the Closing Date, the Company was obligated to
file a registration statement on Form S-3 (the “Registration Statement”) with
the U.S. Securities and Exchange Commission (“SEC”) under the Securities Act of
1933, as amended (the “Securities Act”) to register the Initial Shares and
Escrow Shares for resale, so that they may be sold in the public markets in
accordance with the Escrow Agreement.  The Company shall use its best
efforts to have the Registration Statement declared effective under the
Securities Act as promptly as possible after the filing thereof, but in any
event no later than 120 days from the Closing Date (the “Registration
Deadline”). The registration statement of which this prospectus forms a
part, registers for resale the Initial Shares and Escrow Shares.





The
Judgment has been reduced by $343,084, the Initial ShareValue, which amount was
equal to forty percent (40%) of the VWAP for the ten trading days before the
Closing Date multiplied by 100,000.  However, if the Registration
Statement is declared effective by the Registration Deadline and it remains
effective through the earlier of (i) the sale of the Initial Shares or (ii)
December 31, 2009, the Judgment shall instead by reduced by ninety percent (90%)
of the VWAP for the ten trading days before the effective date of the
Registration Statement.




In the
event the Registration Statement is declared effective, then, upon written
notice to the Escrow Agent, the Escrow Agent will deposit the Escrow Shares into
a brokerage account and will thereafter sell the Escrow Shares in such amounts
and at such times as Kuhns directs.  The Judgment shall be
reduced by an amount equal to the cash proceeds distributed by the Escrow
Agent to Kuhns in connection with sales of the Escrow Shares.  The
Escrow Shares shall be sold in this manner until such time as the Judgment,
including any accrued interest, has been paid in full.  Kuhns shall use its
reasonable efforts to direct the sale of the Escrow Shares resulting in full
payment of the Judgment by January 15, 2010.  If the Company fails to meet
the Registration Deadline, but causes a Registration Statement to be declared
effective by October 31, 2009, the Judgment shall instead by further reduced by
an amount equal to ninety percent (90%) of the cash proceeds distributed by the
Escrow Agent to Kuhns in connection with sales of the Escrow
Shares.




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In the
event that (i) the Company’s Registration Statement is not declared effective by
the Registration Deadline and (ii) for so long as the Registration
Statement is not effective subsequent to the Registration Deadline, the Current
Judgment Amount as defined in the Settlement Agreement shall accrue interest at
the rate of eighteen percent per annum.  In addition, upon such
events, Kuhns shall be entitled to receive Escrow Shares from the Escrow Agent
(the “Restricted Shares”) in such amounts, and at such times, as it determines
until the Judgment is satisfied.  The Current Judgment Amount as
defined in the Settlement Agreement shall thereupon be reduced by the restricted
share value, which shall mean an amount equal to fifty percent (50%) of the
daily volume weighted average price of the Common Stock on the Nasdaq Global
Select Market as reported by Bloomberg (“VWAP”) for the ten trading days before
the date of delivery of the Restricted Shares to Kuhns.





Item
1A. Risk Factors





The risk
factors included in our Annual Report on Form 10-K for the fiscal year ended
December 31, 2008 have not materially changed as of June 30, 2009.





Item
2.  Unregistered Sales of Equity Securities and Use of
Proceeds




The
Company’s 300,000 Series A, Series B and Series C Warrants in the aggregate (the
“Warrants”), originally issued on February 23, 2009, were amended and restated
on June 30, 2009. The Warrants were amended to remove certain cash redemption
clauses resulting in a reclassification of the Warrants from a derivative
liability to additional paid in capital. No consideration was paid to the
Company or to the holders of the Warrants in connection with the amendment of
the Warrants. A form of the Amended and Restated Warrant is attached as Exhibit
4.1 to this Quarterly Report on Form 10-Q.


Item
3.  Defaults Upon Senior Securities




Our
subsidiary, Copperweld Bimetallics, LLC maintains a revolving line of credit
with Wells Fargo Bank.  Pursuant to the terms of the revolving line of
credit, availability is the lower of $12.8 million or the collateral
balances. The outstanding balance was $4,489,366 and $4,712,075 at June 30, 2009
and December 31, 2008, respectively.





The
asset-based revolving line of credit with Wells Fargo contains various covenants
that may limit Copperweld’s discretion in operating its business. These
covenants include limitations on Coppwerweld’s ability to declare or pay
dividends or distribute equity interest, make acquisitions, dispose of assets,
incur additional indebtedness, incur guarantee obligations, create liens, pledge
or encumbrances, make investments, engage in mergers, change the nature of its
business or engage in certain transactions with a related party, enter into
operating leases or incur obligations on capital expenditures. In addition,
Copperweld is required to comply with certain financial covenants that are
reported on a quarterly basis, including maintenance of a fixed charge coverage
ratio of at least 1.0 to 1.0 and maintenance of a tangible net worth of 4.4
million starting from January 31, 2009.





For both
quarters ended on June 30, 2009 and March 31, 2009, Copperweld reported a
negative fixed charge ratio due to the loss incurred on a rolling 12 months
basis, thus Copperweld was in violation of maintaining a fixed charge ratio of
at least 1.0 to 1.0. This was the sole violation of the covenant under the terms
of the revolving line of credit agreement with Wells Fargo.  On May 6,
2009, Wells Fargo exercised its right to implement the 2% additional default
rate of interest effective April 1, 2009, for the covenant violation as of March
31, 2009.


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Copperweld
is currently in discussions with Wells Fargo Bank regarding the existing
defaults, and a possible modification of certain of the borrowing terms and
existing covenants under the line of credit.





We will
not be in compliance with the fixed charge ratio for the quarter ended September
30, 2009. Fixed charge ratio is calculated based on rolling 12 months net income
(loss) and Copperweld is still picking up 2008’s loss to calculate Q3’s fixed
charge ratio.





Item
4.  Submission of Matters to a Vote of Security Holders





Our 2009
Annual Meeting of Stockholders was held on May 14, 2009.  At the
Annual Meeting, (i) each of the six nominees was elected to serve as a director
until the end of their respective terms and (ii) the appointment of Moore
Stephens Wurth Frazer and Torbet, LLP, as our independent public accountants,
was ratified by the stockholders. The election results are as
follows:





Election
of Six Directors (Proposal No. 1):





Name
              
              For
              
              WithheldLi
      Fu
              
              17,297,793
              
              890,216Wenbing
      Christopher Wang
              
              16,996,107
              
              1,191,902Barry
      Raeburn
              
              17,297,793
              
              890,016Feng
      Bai
              
              17,005,097
              
              1,182,912Jiping
      Hua
              
              17,005,097
              
              1,182,912John
      Francis Perkowski
              
              17,005,097
              
              1,182,912





Ratification
of Appointment of Independent Registered Public Accountants (Proposal No.
2):




For
                
                Against
                
                Abstain18,184,193
                
                2,366
                
                1,450





Item
5.  Other Information





None.





Item
6.  Exhibits





Exhibit
                            No.
                          
                          Document Description4.1
                          
                          Form
      of Amended and Restated Warrant31.1
                          
                          Certification
      of the 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 Principal Accounting and 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 the Principal Executive Officer and of the Principal Accounting and
      Financial Officer pursuant to 18 U.S.C. 1350 (Section 906 of the
      Sarbanes-Oxley Act of 2002).99.1
                          
                          Condensed
      Parent-Only Financial Statements of Fushi Copperweld, Inc. under Schedule
      I of Article 5-04 of Regulation
S-X.


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SIGNATURES





Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.




FUSHI
      COPPERWELD, INC.Date:
      August 10, 2009
                  By:
                  /s/Wenbing Chris WangName:
      Wenbing Chris WangTitle:
      Chief Financial Officer
                    (Principal
      Accounting and Financial
Officer)




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Exhibit
Index





Exhibit
                      No.
                    
                    Document Description4.1
                    
                    Form
      of Amended and Restated Warrant31.1
                    
                    Certification
      of the 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 Principal Accounting and 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 the Principal Executive Officer and of the Principal Accounting and
      Financial Officer pursuant to 18 U.S.C. 1350 (Section 906 of the
      Sarbanes-Oxley Act of 2002).99.1
                    
                    Condensed
      Parent-Only Financial Statements of Fushi Copperweld, Inc. under Schedule
      I of Article 5-04 of Regulation
S-X.


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