UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549





FORM
10-Q





x QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934




For the
quarterly period ended September 30, 2010




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.)




TYG
Center Tower B, Suite 2601,


Dong
San Huan Bei Lu Bing 2,


Beijing,
PRC 100027




(Address
of principal executive offices) (Zip Code)





(011)-86-10-8441-7742


(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  ̈





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





Indicate
by check mark 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 ̈Accelerated filerxNon-accelerated filer (Do
not check if a smaller reporting company) ̈Smaller reporting
company ̈





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





As of
November 5, 2010 the registrant had 37,797,239 shares of common stock
outstanding.








TABLE OF CONTENTS





PAGEPART
      I. FINANCIAL INFORMATIONItem
      1. Financial Statements
                  
                  3Consolidated
      Balance Sheets as of September 30, 2010 (Unaudited) and December 31,
      2009
                  
                  3Consolidated
      Statements of Income and Other Comprehensive Income for the Three and Nine
      Months Ended September 30, 2010 and 2009 (Unaudited)
                  
                  4Consolidated
      Statements of Cash Flows for the Nine Months Ended September 30, 2010 and
      2009 (Unaudited)
                  
                  5Consolidated
      Statement of Stockholders’ Equity for the Nine Months Ended September 30,
      2010 (Unaudited) and the Year Ended December 31, 2009
                  
                  6Notes
      to Consolidated Financial Statements
                  
                  7Item
      2. Management’s Discussion and Analysis of Financial Condition and Results
      of Operations
                  
                  34Item
      3. Quantitative and Qualitative Disclosures About Market
    Risk
                  
                  47Item
      4. Controls and Procedures
                  
                  48PART
      II. OTHER INFORMATIONItem
      1. Legal Proceedings
                  
                  48Item
      1A. Risk Factors
                  
                  48Item
      2. Unregistered Sales of Equity Securities and Use of
    Proceeds
                  
                  49Item
      3. Defaults Upon Senior Securities
                  
                  49Item
      5. Other Information
                  
                  49Item
      6. Exhibits
                  
                  49Signatures
                  
                  50


2





PART I. FINANCIAL INFORMATION





Item 1.
Financial Statements





FUSHI
COPPERWELD, INC. AND SUBSIDIARIES





CONSOLIDATED
BALANCE SHEETS


AS OF
SEPTEMBER 30, 2010 AND DECEMBER 31, 2009





September 30,
                              
                              
                              December 31,2010
                              
                              
                              2009UnauditedASSETSCURRENT
      ASSETS:Cash
                              
                              $
                              117,866,998
                              
                              
                              $
                              60,597,849Accounts
      receivable, trade, net of allowance of bad debt of $522,729 and $1,024,684
      as of September 30, 2010 and December 31, 2009,
    respectively
                              
                              
                              64,520,827
                              
                              
                              
                              67,284,600Inventories
                              
                              
                              22,702,154
                              
                              
                              
                              10,875,782Notes
      receivables
                              
                              
                              257,883
                              
                              
                              
                              122,972Other
      receivables and prepaid expenses
                              
                              
                              505,709
                              
                              
                              
                              1,137,566Advances
      to suppliers
                              
                              
                              21,228,320
                              
                              
                              
                              8,582,346Deposit
      in derivative hedge
                              
                              
                              -
                              
                              
                              
                              1,000,000Total
      current assets
                              
                              
                              227,081,891
                              
                              
                              
                              149,601,115PLANT
      AND EQUIPMENT, net
                              
                              
                              129,748,890
                              
                              
                              
                              117,385,566OTHER
      ASSETS:Advances
      to suppliers, non-current
                              
                              
                              540,482
                              
                              
                              
                              1,356,404Notes
      receivables, non-current
                              
                              
                              179,106
                              
                              
                              
                              699,106Intangible
      assets, net of accumulated amortization
                              
                              
                              14,277,324
                              
                              
                              
                              11,924,056Deferred
      loan expense, net
                              
                              
                              181,514
                              
                              
                              
                              2,045,349Deferred
      tax assets
                              
                              
                              15,407,083
                              
                              
                              
                              11,722,469Total
      other assets
                              
                              
                              30,585,509
                              
                              
                              
                              27,747,384Total
      assets
                              
                              $
                              387,416,290
                              
                              
                              $
                              294,734,065LIABILITIES AND SHAREHOLDERS'
      EQUITYCURRENT
      LIABILITIES:Revolver
      line of credit
                              
                              $
                              -
                              
                              
                              $
                              4,033,783Accounts
      payable, trade
                              
                              
                              6,202,910
                              
                              
                              
                              4,002,773Current
      portion of long-term debts
                              
                              
                              650,000
                              
                              
                              
                              10,000,000Other
      payables and accrued liabilities
                              
                              
                              5,009,902
                              
                              
                              
                              3,928,374Taxes
      payable
                              
                              
                              4,267,648
                              
                              
                              
                              2,599,055Cross
      currency hedge payable
                              
                              
                              -
                              
                              
                              
                              436,702Obligation
      under capital lease, current
                              
                              
                              79,084
                              
                              
                              
                              71,503Loan
      payable to shareholder
                              
                              
                              15,000,000
                              
                              
                              
                              -Total
      current liabilities
                              
                              
                              31,209,544
                              
                              
                              
                              25,072,190LONG-TERM
      LIABILITIES:Long-term
      debts
                              
                              
                              5,850,000
                              
                              
                              
                              25,000,000Obligation
      under capital lease, non-current
                              
                              
                              88,232
                              
                              
                              
                              153,626Fair
      value of derivative instrument
                              
                              
                              -
                              
                              
                              
                              7,532,527Total
      long-term liabilities
                              
                              
                              5,938,232
                              
                              
                              
                              32,686,153Total
      liabilities
                              
                              
                              37,147,776
                              
                              
                              
                              57,758,343COMMITMENTS
      AND CONTINGENCIES
                              
                              
                              5,075,000SHAREHOLDERS'
      EQUITY:Preferred
      stock, $0.001 par value, 5,000,000 shares authorized, none issued or
      outstanding as of September 30, 2010 and December 31, 2009
                              
                              
                              -
                              
                              
                              
                              -Common
      stock, $0.006  par value, 100,000,000 shares authorized,
      September 30, 2010: 37,779,839 shares issued and outstanding December 31,
      2009: 29,772,780 shares issued and outstanding
                              
                              
                              226,680
                              
                              
                              
                              178,638Additional
      paid in capital
                              
                              
                              166,297,828
                              
                              
                              
                              105,540,676Statutory
      reserves
                              
                              
                              20,793,298
                              
                              
                              
                              16,282,793Retained
      earnings
                              
                              
                              126,454,574
                              
                              
                              
                              97,283,748Accumulated
      other comprehensive income
                              
                              
                              31,421,134
                              
                              
                              
                              17,689,867Total
      shareholders' equity
                              
                              
                              345,193,514
                              
                              
                              
                              236,975,722Total
      liabilities and shareholders' equity
                              
                              $
                              387,416,290
                              
                              
                              $
                              294,734,065





The
accompanying notes are an integral part of these consolidated
statements.


3


FUSHI
COPPERWELD, INC.  AND SUBSIDIARIES





CONSOLIDATED
STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME (LOSS)


FOR THE
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009


(UNAUDITED)





Three months ended September 30,
                  
                  
                  Nine months ended September 30,2010
                  
                  
                  2009
                  
                  
                  2010
                  
                  
                  2009REVENUES
                  
                  $
                  66,507,433
                  
                  
                  $
                  47,676,346
                  
                  
                  $
                  195,062,641
                  
                  
                  $
                  131,234,427COST
      OF GOODS SOLD
                  
                  
                  46,842,955
                  
                  
                  
                  32,506,879
                  
                  
                  
                  137,986,750
                  
                  
                  
                  93,672,906GROSS
      PROFIT
                  
                  
                  19,664,478
                  
                  
                  
                  15,169,467
                  
                  
                  
                  57,075,891
                  
                  
                  
                  37,561,521OPERATING
      EXPENSES:Selling
      expenses
                  
                  
                  1,457,154
                  
                  
                  
                  1,078,158
                  
                  
                  
                  4,074,280
                  
                  
                  
                  3,366,719General
      and administrative expenses
                  
                  
                  3,242,826
                  
                  
                  
                  3,510,034
                  
                  
                  
                  11,161,896
                  
                  
                  
                  9,747,637Total
      operating expenses
                  
                  
                  4,699,980
                  
                  
                  
                  4,588,192
                  
                  
                  
                  15,236,176
                  
                  
                  
                  13,114,356INCOME
      FROM OPERATIONS
                  
                  
                  14,964,498
                  
                  
                  
                  10,581,275
                  
                  
                  
                  41,839,715
                  
                  
                  
                  24,447,165OTHER
      INCOME (EXPENSE):Interest
      income
                  
                  
                  200,295
                  
                  
                  
                  76,094
                  
                  
                  
                  590,236
                  
                  
                  
                  242,717Interest
      expense
                  
                  
                  (46,021
                  )
                  
                  
                  (1,201,014
                  )
                  
                  
                  (560,476
                  )
                  
                  
                  (4,150,086
                  )Bargain
      purchase gain
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  5,070,389
                  
                  
                  
                  -Loss
      on cross currency hedge
                  
                  
                  -
                  
                  
                  
                  (1,199,438
                  )
                  
                  
                  (753,666
                  )
                  
                  
                  (1,581,812
                  )Loss
      on derivative instrument settlement
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (6,650,000
                  )
                  
                  
                  -Gain
      (loss) on debt extinguishment
                  
                  
                  -
                  
                  
                  
                  3,842,935
                  
                  
                  
                  (2,395,778
                  )
                  
                  
                  3,842,935Change
      in fair value of derivative liability - warrants
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (752,114
                  )Change
      in fair value of derivative liability - conversion option
                  
                  
                  -
                  
                  
                  
                  (2,058,352
                  )
                  
                  
                  -
                  
                  
                  
                  (7,181,198
                  )Other
      (expense) income, net
                  
                  
                  (176,001
                  )
                  
                  
                  53,421
                  
                  
                  
                  (194,445
                  )
                  
                  
                  (193,061
                  )Total
      other expense, net
                  
                  
                  (21,727
                  )
                  
                  
                  (486,354
                  )
                  
                  
                  (4,893,740
                  )
                  
                  
                  (9,772,619
                  )INCOME
      BEFORE INCOME TAXES
                  
                  
                  14,942,771
                  
                  
                  
                  10,094,921
                  
                  
                  
                  36,945,975
                  
                  
                  
                  14,674,546(PROVISION)
      BENEFIT FOR INCOME TAXES:Deferred
      income tax benefit
                  
                  
                  158,599
                  
                  
                  
                  888,378
                  
                  
                  
                  3,684,614
                  
                  
                  
                  3,253,085Current
      income tax expense
                  
                  
                  (2,230,608
                  )
                  
                  
                  (1,788,366
                  )
                  
                  
                  (6,949,258
                  )
                  
                  
                  (4,069,081
                  )Provision
      for income taxes, net
                  
                  
                  (2,072,009
                  )
                  
                  
                  (899,988
                  )
                  
                  
                  (3,264,644
                  )
                  
                  
                  (815,996
                  )NET
      INCOME
                  
                  
                  12,870,762
                  
                  
                  
                  9,194,933
                  
                  
                  
                  33,681,331
                  
                  
                  
                  13,858,550OTHER
      COMPREHENSIVE INCOME (LOSS):Foreign
      currency translation adjustment
                  
                  
                  4,433,165
                  
                  
                  
                  72,136
                  
                  
                  
                  6,198,740
                  
                  
                  
                  112,093Change
      in fair value of derivative instrument
                  
                  
                  -
                  
                  
                  
                  237,768
                  
                  
                  
                  882,527
                  
                  
                  
                  (3,275,588
                  )Reclassification
      of change in cash flow hedge to earnings
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  6,650,000
                  
                  
                  
                  -COMPREHENSIVE
      INCOME
                  
                  $
                  17,303,927
                  
                  
                  $
                  9,504,837
                  
                  
                  $
                  47,412,598
                  
                  
                  $
                  10,695,055EARNINGS
      PER SHARE:Basic
                  
                  $
                  0.34
                  
                  
                  $
                  0.33
                  
                  
                  $
                  0.92
                  
                  
                  $
                  0.50Diluted
                  
                  $
                  0.34
                  
                  
                  $
                  0.31
                  
                  
                  $
                  0.91
                  
                  
                  $
                  0.48WEIGHTED
      AVERAGE SHARES:Basic
                  
                  
                  37,694,626
                  
                  
                  
                  28,084,416
                  
                  
                  
                  36,553,784
                  
                  
                  
                  27,827,152Diluted
                  
                  
                  38,077,845
                  
                  
                  
                  29,206,508
                  
                  
                  
                  37,030,499
                  
                  
                  
                  28,676,832





The
accompanying notes are an integral part of these consolidated
statements.


4


FUSHI
COPPERWELD, INC.  AND SUBSIDIARIES





CONSOLIDATED
STATEMENTS OF CASH FLOWS


FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009


(UNAUDITED)





2010
                      
                      
                      2009CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income
                      
                      $
                      33,681,331
                      
                      
                      $
                      13,858,550Adjustments
      to reconcile net income provided by operating activities:Allowance
      for doubtful accounts adjustment
                      
                      
                      (513,846
                      )
                      
                      
                      -Bad
      debt expense
                      
                      
                      -
                      
                      
                      
                      862,302Write-off
      of non-current advances to suppliers
                      
                      
                      527,095
                      
                      
                      
                      -Write-off
      of patent
                      
                      
                      131,250
                      
                      
                      
                      -Reserve
      for inventories
                      
                      
                      255,027
                      
                      
                      
                      62,914Write-off
      of inventories
                      
                      
                      -
                      
                      
                      
                      119,133Depreciation
                      
                      
                      8,997,857
                      
                      
                      
                      7,191,842Loss
      on sale of property and equipment
                      
                      
                      -
                      
                      
                      
                      117,430Deferred
      taxes
                      
                      
                      (3,684,614
                      )
                      
                      
                      (3,253,085
                      )Reserve
      for notes receivables
                      
                      
                      500,000
                      
                      
                      
                      -Amortization
      of intangible assets
                      
                      
                      401,539
                      
                      
                      
                      357,449Amortization
      of loan commission
                      
                      
                      251,097
                      
                      
                      
                      817,349Amortization
      of stock compensation expense
                      
                      
                      528,207
                      
                      
                      
                      1,108,254Loss
      on cross currency hedge
                      
                      
                      753,666
                      
                      
                      
                      1,581,812Loss
      on derivative instrument settlement
                      
                      
                      6,650,000
                      
                      
                      
                      -Loss
      (gain) on debt extinguishment
                      
                      
                      2,395,778
                      
                      
                      
                      (3,842,935
                      )Bargain
      purchase gain
                      
                      
                      (5,070,389
                      )
                      
                      
                      -Change
      in fair value of derivative liability - conversion option
                      
                      
                      -
                      
                      
                      
                      7,181,198Change
      in fair value of derivative liability - warrants
                      
                      
                      -
                      
                      
                      
                      752,114Change
      in operating assets and liabilities:Accounts
      receivable
                      
                      
                      7,379,296
                      
                      
                      
                      (20,177,587
                      )Inventories
                      
                      
                      (10,326,609
                      )
                      
                      
                      (3,756,514
                      )Notes
      receivables
                      
                      
                      (112,473
                      )
                      
                      
                      100,700Other
      receivables and prepayments
                      
                      
                      574,714
                      
                      
                      
                      401,070Advances
      to suppliers - current
                      
                      
                      (11,648,978
                      )
                      
                      
                      15,073,210Accounts
      payable
                      
                      
                      (862,992
                      )
                      
                      
                      (3,839,555
                      )Other
      payables and accrued liabilities
                      
                      
                      (1,926,906
                      )
                      
                      
                      (3,113,988
                      )Taxes
      payable
                      
                      
                      1,233,444
                      
                      
                      
                      3,984,006Net
      cash provided by operating activities
                      
                      
                      30,113,494
                      
                      
                      
                      15,585,669CASH
      FLOWS FROM INVESTING ACTIVITIES:Payment
      for purchase of subsidiaries
                      
                      
                      (6,375,000
                      )
                      
                      
                      -Cash
      acquired from acquisition of subsidiaries
                      
                      
                      901,463
                      
                      
                      
                      -Payments
      on cross currency hedge payable
                      
                      
                      (1,190,368
                      )
                      
                      
                      (614,580
                      )Payment
      for unwind of cross currency hedge
                      
                      
                      (5,650,000
                      )
                      
                      
                      -Proceeds
      from sale of property and equipment
                      
                      
                      -
                      
                      
                      
                      424,444Purchases
      of property and equipment
                      
                      
                      (1,926,580
                      )
                      
                      
                      (3,292,007
                      )Net
      of payments on prepayment of equipment
                      
                      
                      -
                      
                      
                      
                      (1,877,177
                      )Net
      of claimed VAT on purchases of property and equipment
                      
                      
                      57,551
                      
                      
                      
                      -Net
      cash used in investing activities
                      
                      
                      (14,182,934
                      )
                      
                      
                      (5,359,320
                      )CASH
      FLOWS FROM FINANCING ACTIVITIES:Proceeds
      from shareholder loan
                      
                      
                      15,000,000
                      
                      
                      
                      4,552,000Net
      payments on revolver line of credit
                      
                      
                      (4,033,783
                      )
                      
                      
                      (723,566
                      )Payments
      on short-term bank loans
                      
                      
                      -
                      
                      
                      
                      (17,553,600
                      )Proceeds
      from term loans
                      
                      
                      6,500,000
                      
                      
                      
                      -Release
      of restricted cash
                      
                      
                      -
                      
                      
                      
                      1,000,000Payment
      on capital lease obligation
                      
                      
                      (57,814
                      )
                      
                      
                      (23,575
                      )Payment
      on high yield notes payable
                      
                      
                      (35,600,000
                      )
                      
                      
                      (5,000,000
                      )Proceeds
      on issuance of common stock
                      
                      
                      56,361,500
                      
                      
                      
                      1,920,000Proceeds
      from exercise of warrants
                      
                      
                      1,180,599
                      
                      
                      
                      -Proceeds
      from exercise of stock options
                      
                      
                      27,225
                      
                      
                      
                      -Net
      cash provided by (used in) financing activities
                      
                      
                      39,377,727
                      
                      
                      
                      (15,828,741
                      )EFFECT
      OF EXCHANGE RATE ON CASH
                      
                      
                      1,960,862
                      
                      
                      
                      230CHANGE
      IN CASH
                      
                      
                      57,269,149
                      
                      
                      
                      (5,602,162
                      )CASH,
      beginning of period
                      
                      
                      60,597,849
                      
                      
                      
                      65,611,770CASH,
      end of period
                      
                      $
                      117,866,998
                      
                      
                      $
                      60,009,608Supplemental
      cash flow disclosures:Interest
      paid
                      
                      $
                      1,425,833
                      
                      
                      $
                      3,650,785Income
      tax paid
                      
                      $
                      6,161,271
                      
                      
                      $
                      3,609,505





The
accompanying notes are an integral part of these consolidated
statements.


5


FUSHI
COPPERWELD, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENT 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, 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
                            
                            
                            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
      issued for convertible notes extinguishment @ $9.08
                            
                            
                            440,529
                            
                            
                            
                            2,643
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            3,997,357
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            4,000,000Shares
      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 options for common shares
                            
                            
                            4,153
                            
                            
                            
                            25
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            (25
                            )
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            -Stock
      compensation expense
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            1,108,254
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            1,108,254Net
      income
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            13,858,550
                            
                            
                            
                            
                            
                            
                            
                            13,858,550Adjustment
      to statutory reserve
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            2,663,714
                            
                            
                            
                            (2,663,714
                            )
                            
                            
                            
                            
                            
                            
                            -Change
      in fair value of derivative instrument
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            (3,275,588
                            )
                            
                            
                            (3,275,588
                            )Foreign
      currency translation gain
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            112,093
                            
                            
                            
                            112,093BALANCE,
      September 30, 2009, unaudited
                            
                            
                            28,343,716
                            
                            
                            
                            170,063
                            
                            
                            
                            2,200,000
                            
                            
                            
                            13,200
                            
                            
                            
                            105,197,671
                            
                            
                            
                            (5,919,597
                            )
                            
                            
                            14,979,861
                            
                            
                            
                            88,450,844
                            
                            
                            
                            17,549,007
                            
                            
                            
                            220,441,049Shares
      removed from escrow as payment of liability
                            
                            
                            1,370,752
                            
                            
                            
                            8,225
                            
                            
                            
                            (1,370,752
                            )
                            
                            
                            (8,225
                            )
                            
                            
                            
                            
                            
                            
                            5,919,597
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            5,919,597Shares
      cancelled from escrow
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            (829,248
                            )
                            
                            
                            (4,975
                            )
                            
                            
                            4,975
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            -Exercise
      of warrants for cash @ $3.1064
                            
                            
                            52,352
                            
                            
                            
                            314
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            166,312
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            166,626Exercise
      of stock options for common shares
                            
                            
                            1,109
                            
                            
                            
                            7
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            (7
                            )
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            -Stock
      compensation expense
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            171,754
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            171,754Correction
      of 2007 warrant exercise calculation error
                            
                            
                            4,851
                            
                            
                            
                            29
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            (29
                            )
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            -Net
      income
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            10,135,836
                            
                            
                            
                            
                            
                            
                            
                            10,135,836Adjustment
      to statutory reserve
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            1,302,932
                            
                            
                            
                            (1,302,932
                            )
                            
                            
                            
                            
                            
                            
                            -Change
      in fair value of derivative instrument
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            120,137
                            
                            
                            
                            120,137Foreign
      currency translation gain
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            20,723
                            
                            
                            
                            20,723BALANCE,
      December 31, 2009
                            
                            
                            29,772,780
                            
                            
                            
                            178,638
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            105,540,676
                            
                            
                            
                            -
                            
                            
                            
                            16,282,793
                            
                            
                            
                            97,283,748
                            
                            
                            
                            17,689,867
                            
                            
                            
                            236,975,722Shares
      issued for cash @ $8.00
                            
                            
                            7,475,000
                            
                            
                            
                            44,850
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            56,316,650
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            56,361,500Exercise
      of stock options for common shares
                            
                            
                            34,907
                            
                            
                            
                            209
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            134,679
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            134,888Exercise
      of warrants for common shares
                            
                            
                            233,994
                            
                            
                            
                            1,404
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            1,179,195
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            1,180,599Stock
      compensation expense
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            528,207
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            528,207Common
      shares issued for purchase of Hongtai
                            
                            
                            263,158
                            
                            
                            
                            1,579
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            2,598,421
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            2,600,000Net
      income
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            33,681,331
                            
                            
                            
                            
                            
                            
                            
                            33,681,331Adjustment
      to statutory reserve
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            4,510,505
                            
                            
                            
                            (4,510,505
                            )
                            
                            
                            
                            
                            
                            
                            -Change
      in fair value of derivative instrument
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            882,527
                            
                            
                            
                            882,527Reclassification
      of change in cash flow hedge to earnings
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            6,650,000
                            
                            
                            
                            6,650,000Foreign
      currency translation gain
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            6,198,740
                            
                            
                            
                            6,198,740BALANCE,
      September 30, 2010, unaudited
                            
                            
                            37,779,839
                            
                            
                            $
                            226,680
                            
                            
                            
                            -
                            
                            
                            $
                            -
                            
                            
                            $
                            166,297,828
                            
                            
                            $
                            -
                            
                            
                            $
                            20,793,298
                            
                            
                            $
                            126,454,574
                            
                            
                            $
                            31,421,134
                            
                            
                            $
                            345,193,514





The
accompanying notes are an integral part of these consolidated
statements.


6


FUSHI
COPPERWELD, INC. AND SUBSIDIARIES


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


SEPTEMBER
30, 2010


(Unaudited)





Note
1 – Organization and line of business





Fushi
Copperweld, Inc (“Fushi”), a Nevada corporation, is the holding company of Fushi
Holdings, Inc. (“Fushi Holdings”). Fushi Holding, a Delaware corporation,
is a holding company of Fushi International (Dalian) Bimetallic Cable Co., Ltd
(“Fushi International”), which is organized under the laws of the People’s
Republic of China (“PRC”). Fushi International is engaged in the manufacturing
and sale of bimetallic wire products. Dalian Fushi Bimetallic Manufacturing
Co., Ltd (“Dalian Fushi”), a limited liability company organized under the laws
of the PRC, is a variable interest entity through a contractual relationship
(Note 2).





On
October 29, 2007, Fushi acquired Copperweld Bimetallics, LLC, (“Copperweld”), a
limited liability company registered in the state of Delaware, which is the
parent company of Copperweld Bimetallics UK, Ltd. (“Copperweld UK”), a private
company registered in the United Kingdom. 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.





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, South America, Europe, North Africa, the Middle East, and
Asia.





Current
Developments





On
February 5, 2010, Fushi International acquired Dalian Jinchuan Electric Cable
Co., Ltd. (“Jinchuan”), a leading low and medium voltage power cable
manufacturer organized under the laws of the PRC.





On May
31, 2010, Fushi International, through its Chief Executive Officer, Li Fu, a
designated representative of the Company, acquired Shanghai Hongtai Industrial
Co., Ltd. (“Hongtai”), a bimetallic wire manufacturer located in southeast China
and organized under the laws of the PRC. On June 18, 2010, the Company
established Fushi International (JiangSu) Bimetallic Cable Co., Ltd. (“Fushi
JiangSu”) in Yixing city. The company is in the process of relocating the assets
and key personnel of Hongtai to Fushi JiangSu in Yixing. By relocating to
Yixing, Fushi JiangSu will be able to leverage the center’s extensive
transportation network to deliver its CCA and CCAM products to customers within
the Shanghai economic zone more quickly and cost effectively. There have been no
operations of Hongtai and Fushi JiangSu as of September 30,
2010.  Hongtai will be dissolved once Fushi JiangSu starts operations.
See Note 19 for details of this acquisition transaction.





Fushi,
Fushi Holdings, Fushi International, Dalian Fushi, Jinchuan, Hongtai, Fushi
JiangSu, Copperweld and Copperweld UK are hereinafter referred to as the
“Company.”





Note
2 – Summary of significant accounting policies





Basis of
presentation





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 2009 annual report filed on Form
10-K.





Principles of
consolidation





The
accompanying consolidated financial statements include the financial statements
of its wholly owned subsidiaries and its 100% VIE. All significant inter-company
transactions and balances have been eliminated in consolidation.





In
accordance with the interpretation of Generally Accepted Accounting Principles
(GAAP), 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.





Fushi
International owns 0% of Dalian Fushi Bimetallic Manufacturing Co., Ltd (Dalian
Fushi); however, pursuant to the Entrusted Management Agreement, Voting Proxy
Agreement and the Share Pledge Agreement (collectively, “Restructuring
Agreements”) reached by Fushi International, Dalian Fushi and its registered
shareholders in 2005, Fushi International has full control over Dalian
Fushi’s remaining operations and financial affairs as a result. Fushi
International is the primary beneficiary of Dalian Fushi, thus Dalian Fushi is a
100% VIE of Fushi International, which means 100% voting rights and 100%
Financial Obligation to Fushi International. Thus, Dalian Fushi is considered a
VIE and is consolidated within the financial statements.


7


FUSHI
COPPERWELD, INC. AND SUBSIDIARIES


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


SEPTEMBER
30, 2010


(Unaudited)





Use of
estimates





The
preparation of financial statements in conformity with GAAP requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. For example, the Company estimates the fair value
of its derivative instrument. Actual results could differ from those
estimates.





Revenue
recognition





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. The Company does not establish reserve funds for potential
customer claims because, historically, it has not experienced significant
customer complaints or returns.





Shipping and handling
costs





Shipping
and handling costs related to costs of goods sold are included in selling costs
which totaled $2,211,333 and $1,547,274 for the nine months ended September 30,
2010 and 2009, respectively, and $854,743 and $562,051 for the three months
ended September 30, 2010 and 2009, respectively.





Foreign currency
translation and
other comprehensive income





The
reporting and functional currency of the Company is the US dollar (USD). The
subsidiaries, in China, use the local currency Renminbi (RMB) to conduct
business. The subsidiary in the United Kingdom (UK) conducts business in British
Pounds (GBP).





For the
subsidiaries whose functional currencies are other than the USD, all assets and
liabilities accounts were translated at the exchange rate on the balance sheet
date; stockholder’s equity is translated at 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 September 30, 2010 were
translated at 6.691 RMB and 0.636 GBP to $1.00 USD, respectively. The balance
sheet amounts with the exception of equity at December 31, 2009 were
translated at 6.826 RMB and 0.619 GBP to $1.00, respectively. The average
translation rates applied to income and cash flow statement amounts for nine
months ended September 30, 2010 were 6.806 RMB and 0.652 GBP to $1.00 USD,
respectively.  The average translation rates applied to income and
cash flow statement amounts for nine months ended September 30, 2009 were 6.832
RMB and 0.648 GBP to $1.00 USD, respectively.





Cash
flows from the Company’s operations are 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
UK and the United States (“US”).





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 US and UK. Balances at financial institutions or state owned
banks within the PRC are not covered by insurance. As of September 30, 2010 and
December 31, 2009, the Company had deposits in excess of federally insured
limits totaling $102,445,571 and $60,231,401, respectively. 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 the US. 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.


8


FUSHI
COPPERWELD, INC. AND SUBSIDIARIES


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


SEPTEMBER
30, 2010


(Unaudited)





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 sales have spread
across international markets during the first three quarters of 2010 and 2009,
respectively.





September 30,
                  2010
                
                
                September 30,
                  2009(Unaudited)
                
                
                (Unaudited)China
                
                $
                152,803,500
                
                
                $
                103,028,466USA
                
                
                31,494,741
                
                
                
                21,692,506Europe
                
                
                6,425,984
                
                
                
                3,357,305Other
      countries
                
                
                4,338,416
                
                
                
                3,156,150Total
      sales
                
                $
                195,062,641
                
                
                $
                131,234,427





The
following chart shows that the sales were spread across international markets
during the three months ended September 30, 2010 and 2009,
respectively.





September30,
                  2010
                
                
                September30,
                  2009(Unaudited)
                
                
                (Unaudited)China
                
                $
                52,658,717
                
                
                $
                38,817,579USA
                
                
                10,622,814
                
                
                
                6,758,832Europe
                
                
                2,216,621
                
                
                
                1,414,149Other
      countries
                
                
                1,009,281
                
                
                
                685,786Total
      sales
                
                $
                66,507,433
                
                
                $
                47,676,346





Major customers and
suppliers





Ten major
customers accounted for 25% and 27% of sales for the nine months ended September
30, 2010 and 2009, respectively. Ten major customers accounted for 30% and 27%
of sales for the three months ended September 30, 2010 and 2009, respectively.
Total receivables balance due from the top ten customers at September 30, 2010
and December 31, 2009 amounted to $17,397,508 and $18,484,819,
respectively.





Five
major suppliers provided approximately 63% and 72% of the Company’s raw
materials for the nine months ended September 30, 2010 and 2009, respectively.
Five major suppliers provided approximately 54% and 52% of the Company’s raw
materials for the three months ended September 30, 2010 and 2009, respectively.
At September 30, 2010, our advances to the major five suppliers were
$20,542,414, all of which was current. At December 31, 2009, our advances to the
major five suppliers were $6,816,228, all of which was current.





Accounts receivables and
allowance for doubtful accounts





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 September 30,
2010 and December 31, 2009, 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 prefabricated copper, aluminum and
steel used in production. The cost of finished goods includes 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.


9


FUSHI
COPPERWELD, INC. AND SUBSIDIARIES


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


SEPTEMBER
30, 2010


(Unaudited)





Derivative
instrument





Effective
January 1, 2009, the Company began disclosing qualitative disclosures about
objectives and strategies for using derivatives and quantitative disclosures
about the fair value of gains and losses on derivative instruments. The Company
used 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.





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 income. 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.





During
the first quarter of 2010, the derivative financial instrument, with an
outstanding USD notional amount of $30,000,000 and an outstanding CNY notional
amount of 233,175,000 was terminated at a price of $6,650,000. See Note 12
for additional information related to the instrument.





Financial
instruments





The
Company analyzes all financial instruments with features of both liabilities and
equity under GAAP requirements. The convertible note issued in 2007 did not
require bifurcation or result in liability accounting. However, with the
adoption of amended GAAP requirements in the first quarter of 2009, the embedded
conversion feature was 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.





The
Company adopted Fair Value Measurements on January 1, 2008 which defines fair
value and establishes a three-level valuation hierarchy for disclosures of fair
value measurement. 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
and 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 carrying amounts of other long-term liabilities
approximate their fair values based on current rates of interest for
instruments with similar characteristics. 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.





·
            Level
      2 inputs to the valuation methodology included quoted prices for similar
      assets and liabilities in active markets, and inputs that are observable
      for the assets or liabilities, 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.





As of
September 30, 2010, the Company did not identify any assets or liabilities that
are required to be presented on the balance sheet at fair value.





Derivative
liability





Using the
criteria under GAAP, a contract is designated as an asset or a liability
and is carried at fair value on a company’s balance sheet, with any changes in
fair value recorded in a company’s results of operations.  The Company
then 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.”





Prior to
January 1, 2009, the conversion option embedded in the Company’s $5,000,000
convertible notes was not separately accounted for as a derivative instrument
liability.  However, effective January 1, 2009, the conversion option
met the criteria of a derivative instrument liability because it required 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
was 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.


10


FUSHI
COPPERWELD, INC. AND SUBSIDIARIES


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


SEPTEMBER
30, 2010


(Unaudited)





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 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 Convertible Notes had been accounted for as a
derivative instrument liability from the issuance date.





The
Company repurchased all convertible notes during the third quarter of 2009.
Thus, for the nine months ended September 30, 2010 and 2009, the Company
recognized a loss in the change in fair value of derivative liability –
conversion option in the amounts of $0 and $7,181,198, respectively. For
the three months ended September 30, 2010 and 2009, the Company recognized a
loss in the change in fair value of derivative liability – conversion option in
the amounts of $0 and $2,058,352, respectively.





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. Because of certain cash
redemption clauses related to these warrants, the Company at issuance followed
the criteria in the accounting standards and recorded the fair value of these
warrants as “derivative liability – warrants” in the accompanying consolidated
financial statements.





On June
30, 2009, the Company 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 had 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.  Thus, for the nine months ended
September 30, 2010 and 2009 the Company recognized a loss in the change in fair
value of derivative liability – warrants in the amounts of $0 and $752,114,
respectively. For the three months ended September 30, 2010 and 2009, the
Company recognized a loss in the change in fair value of derivative liability –
warrants in the amounts of $0 and $0, respectively.





Stock-based
compensation





The
Company records and reports stock-based compensation by measuring 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 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:





Estimated Useful LifeBuildings
      and improvements
                
                20-39.5
      yearsMachinery
      and equipment
                
                7-15
      yearsOffice
      furniture and 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 nine months ended
September 30, 2010 and 2009 amounted to $0 and $1,350, respectively. No interest
was capitalized for the three months ended September 30, 2010 and
2009.





If a cost
does not extend an asset’s 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 nine months ended September 30, 2010
and 2009, there were no amounts expended for major renewals and betterments that
were capitalized.





The
repairs and maintenance expense for the nine months ended September 30, 2010 and
2009 amounted to $995,058 and $391,809, respectively, and for the three months
ended September 30, 2010 and 2009 amounted to $367,872, and $66,696,
respectively.


11


FUSHI
COPPERWELD, INC. AND SUBSIDIARIES


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


SEPTEMBER
30, 2010


(Unaudited)





Long-lived
assets





The
Company evaluates the carrying value of long-lived assets each reporting period.
When estimated cash flows generated by those assets are less than the carrying
amounts of the asset, the Company recognizes an impairment loss. Based on its
review, the Company believes that, as of September 30, 2010 and December 31,
2009, there was no impairments of its long-lived assets.





Intangible
assets





Land use
rights – Land in the PRC is government owned. As a result, 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 their legal life of 7-20
years.





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 September 30, 2010 and December 31, 2009, the
impairments of its intangible assets amounted to $131,250 and 0,
respectively.





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 $82,848 and $138,155 for the nine months
ended September 30, 2010 and 2009, respectively and $70,182 and $30,454 for the
three months ended September 30, 2010 and 2009, respectively.





Earnings per
share





The
Company reports earnings per share and presents both 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 nine and three months ended
September 30, 2010 and 2009, the Company properly excluded options and warrants
with anti-dilutive effects from the diluted earnings per share
calculation.





Income
taxes





The
provision for income taxes consists of taxes currently due plus deferred taxes.
The recognition of deferred income tax liabilities and assets for the estimated
future tax effects is attributable to temporary differences and operating loss
and tax credit carryforwards. A 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 allowance if, 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.


12


FUSHI
COPPERWELD, INC. AND SUBSIDIARIES


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


SEPTEMBER
30, 2010


(Unaudited)





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.  Penalties and
interest incurred related to underpayment of income tax are classified as income
tax expense in the year incurred.  No significant penalties or interest
relating to income taxes have been incurred during the nine months ended
September 30, 2010 and 2009.  GAAP 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 17.5% 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.





Segment
reporting





The
Company uses a “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, PRC and US (See
Note 20).





Recently issued accounting
pronouncements





In
October 2009, the FASB issued an ASU regarding accounting for own-share lending
arrangements in contemplation of convertible debt issuance or other
financing.  This ASU requires that at the date of issuance of the
shares in a share-lending arrangement entered into in contemplation of a
convertible debt offering or other financing, the shares issued shall be
measured at fair value and be recognized as an issuance cost, with an offset to
additional paid-in capital. Further, loaned shares are excluded from basic and
diluted earnings per share unless default of the share-lending arrangement
occurs, at which time the loaned shares would be included in the basic and
diluted earnings-per-share calculation.  This ASU is effective for
fiscal years beginning on or after December 15, 2009, and interim periods within
those fiscal years for arrangements outstanding as of the beginning of
those fiscal years. The adoption of this ASU did not have a material impact on
the Company’s consolidated financial statements.





In
December 2009, FASB issued ASU No. 2009-16, Accounting for Transfers of
Financial Assets. This Accounting Standards Update amends the FASB Accounting
Standards Codification for the issuance of FASB Statement No. 166, Accounting
for Transfers of Financial Assets—an amendment of FASB Statement No. 140.The
amendments in this Accounting Standards Update improve financial reporting
by eliminating the exceptions for qualifying special-purpose entities from the
consolidation guidance and the exception that permitted sale accounting for
certain mortgage securitizations when a transferor has not
surrendered control over the transferred financial assets. In addition, the
amendments require enhanced disclosures about the risks that a transferor
continues to be exposed to because of its continuing involvement in transferred
financial assets. Comparability and consistency in accounting for transferred
financial assets will also be improved through clarifications of the
requirements for isolation and limitations on portions of financial assets that
are eligible for sale accounting. This ASU is effective for fiscal years
beginning after November 15, 2009, and interim periods within those fiscal
years.  The adoption of this ASU did not have a material impact on the
Company’s consolidated financial statements.





In
December, 2009, FASB issued ASU No. 2009-17, Improvements to Financial Reporting
by Enterprises Involved with Variable Interest Entities. This Accounting
Standards Update amends the FASB Accounting Standards Codification for the
issuance of FASB Statement No. 167, Amendments to FASB Interpretation No. 46(R).
The amendments in this Accounting Standards Update replace the
quantitative-based risks and rewards calculation for determining which reporting
entity, if any, has a controlling financial interest in a variable interest
entity with an approach focused on identifying which reporting entity has
the power to direct the activities of a variable interest entity that most
significantly impact the entity’s economic performance and (1) the obligation to
absorb losses of the entity or (2) the right to receive benefits from the
entity. An approach that is expected to be primarily qualitative will be more
effective for identifying which reporting entity has a controlling
financial interest in a variable interest entity. The amendments in this Update
also require additional disclosures about a reporting entity’s involvement in
variable interest entities, which will enhance the information provided to users
of financial statements. This ASU is effective for fiscal years
beginning on or after November 15, 2009, and interim periods within those fiscal
years.  The adoption of this ASU did not have a material impact on the
Company’s consolidated financial statements.


13


FUSHI
COPPERWELD, INC. AND SUBSIDIARIES


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


SEPTEMBER
30, 2010


(Unaudited)





In
January 2010, FASB issued ASU No. 2010-01, Accounting for Distributions to
Shareholders with Components of Stock and Cash. The amendments in this Update
clarify that the stock portion of a distribution to shareholders that allows
them to elect to receive cash or stock with a potential limitation on the total
amount of cash that all shareholders can elect to receive in the aggregate is
considered a share issuance that is reflected in EPS prospectively and is not a
stock dividend for purposes of applying Topics 505 and 260 (Equity and Earnings
Per Share). The amendments in this update are effective for interim and
annual periods ending on or after December 15, 2009, and should be applied on a
retrospective basis. The adoption of this ASU did not have a material
impact on its consolidated financial statements.





In
January 2010, FASB issued ASU No. 2010-02 – Accounting and Reporting for
Decreases in Ownership of a Subsidiary – a Scope Clarification. The amendments
in this Update affect accounting and reporting by an entity that experiences a
decrease in ownership in a subsidiary that is a business or nonprofit activity.
The amendments also affect accounting and reporting by an entity that exchanges
a group of assets that constitutes a business or nonprofit activity for an
equity interest in another entity.  The amendments in this update are
effective beginning in the period that an entity adopts SFAS No. 160,
“Non-controlling Interests in Consolidated Financial Statements – An Amendment
of ARB No. 51.” If an entity has previously adopted SFAS No. 160 as of the
date the amendments in this update are included in the Accounting Standards
Codification, the amendments in this update are effective beginning in the first
interim or annual reporting period ending on or after December 15, 2009.
The amendments in this update should be applied retrospectively to the first
period that an entity adopted SFAS No. 160. The adoption of this ASU did not
have a material impact on the Company’s consolidated financial
statements.





In
January 2010, FASB issued ASU No. 2010-06 – Improving Disclosures about Fair
Value Measurements. This update provides amendments to Subtopic 820-10 that
requires new disclosure as follows: 1) Transfers in and out of Levels 1 and
2.  A reporting entity should disclose separately the amounts of
significant transfers in and out of Level 1 and Level 2 fair value measurements
and describe the reasons for the transfers.  2)  Activity in
Level 3 fair value measurements.  In the reconciliation for fair value
measurements using significant unobservable inputs (Level 3), a reporting entity
should present separately information about purchases, sales, issuances, and
settlements (that is, on a gross basis rather than as one net number). This
update provides amendments to Subtopic 820-10 that clarifies existing
disclosures as follows: 1) Level of disaggregation. A reporting entity
should provide fair value measurement disclosures for each class of assets and
liabilities. A class is often a subset of assets or liabilities within a line
item in the statement of financial position. A reporting entity needs to use
judgment in determining the appropriate classes of assets and liabilities.
2) Disclosures about inputs and valuation techniques. A reporting entity
should provide disclosures about the valuation techniques and inputs used
to measure fair value for both recurring and nonrecurring fair value
measurements. Those disclosures are required for fair value measurements that
fall in either Level 2 or Level 3. The new disclosures and clarifications of
existing disclosures are effective for interim and annual reporting periods
beginning after December 15, 2009, except for the disclosures about purchases,
sales, issuances, and settlements in the roll forward of activity in Level
3 fair value measurements. Those disclosures are effective for fiscal years
beginning after December 15, 2010, and for interim periods within those fiscal
years. The Company is currently evaluating the impact of this ASU; however, the
Company does not expect the adoption of this ASU to have a material impact
on its consolidated financial statements.





In
February 2010, the FASB issued Accounting Standards Update 2010-09, “Subsequent
Events (Topic 855): Amendments to Certain Recognition and Disclosure
Requirements,” or ASU 2010-09. ASU 2010-09 primarily rescinds the requirement
that, for listed companies, financial statements clearly disclose the date
through which subsequent events have been evaluated. Subsequent events must
still be evaluated through the date of financial statement issuance; however,
the disclosure requirement has been removed to avoid conflicts with other SEC
guidelines. ASU 2010-09 was effective immediately upon issuance and was adopted
in February 2010. The adoption of ASU 2010-09 did not have a material
impact on our consolidated financial statements.





In July
2010, the FASB issued Accounting Standards Update 2010-20 which amends
“Receivables” (Topic 310). ASU 2010-20 is intended to provide additional
information to assist financial statement users in assessing an entity’s risk
exposures and evaluating the adequacy of its allowance for credit losses. The
disclosures as of the end of a reporting period are effective for interim and
annual reporting periods ending on or after December 15, 2010. The disclosures
about activity that occurs during a reporting period are effective for interim
and annual reporting periods beginning on or after December 15, 2010. The
amendments in ASU 2010-20 encourage, but do not require, comparative disclosures
for earlier reporting periods that ended before initial adoption. However, an
entity should provide comparative disclosures for those reporting periods ending
after initial adoption. While ASU 2010-20 will not have a material impact on our
consolidated financial statements, we expect that it will expand our disclosures
related to notes receivables.





Reclassification





Certain
reclassifications have been made to the 2009 consolidated financial statements
to conform to the 2010 consolidated financial statement presentation. These
reclassifications had no effect on net income or cash flows as previously
reported.


14


FUSHI
COPPERWELD, INC. AND SUBSIDIARIES


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


SEPTEMBER
30, 2010


(Unaudited)





Note
3 - Accounts receivable





Accounts
receivable consisted of the following:





September 30, 2010
                
                
                December 31, 2009(Unaudited)Trade
      accounts receivable
                
                $
                65,043,556
                
                
                $
                68,309,284Allowance
      for bad debts
                
                
                (522,729
                )
                
                
                (1,024,684
                )Trade
      accounts receivable, net
                
                $
                64,520,827
                
                
                $
                67,284,600





The
following table consists of allowance for doubtful accounts:





Allowance
      for doubtful accounts at December 31, 2008
                  
                  $
                  318,529Additional
      reserves
                  
                  
                  862,302Effect
      of foreign currency translation
                  
                  
                  534Allowance
      for doubtful accounts at September 30, 2009 (Unaudited)
                  
                  
                  1,181,365Reserve
      adjustment
                  
                  
                  (156,477)Effect
      of foreign currency translation
                  
                  
                  (204)Allowance
      for doubtful accounts at December 31, 2009
                  
                  
                  1,024,684Reserve
      adjustment
                  
                  
                  (513,846)Effect
      of foreign currency translation
                  
                  
                  11,891Allowance
      for doubtful accounts at September 30, 2010 (Unaudited)
                  
                  $
                  522,729





Note 4 -
Inventories





Inventories
consisted of the following:





September30, 2010
                
                
                December 31, 2009(Unaudited)Raw
      materials
                
                $
                15,083,186
                
                
                $
                5,137,002Work
      in process
                
                
                2,945,515
                
                
                
                2,777,890Finished
      goods
                
                
                4,974,869
                
                
                
                3,007,279Totals
                
                
                23,003,570
                
                
                
                10,922,171Less
      allowance for obsolete inventory
                
                
                (301,416
                )
                
                
                (46,389
                )Totals
                
                $
                22,702,154
                
                
                $
                10,875,782





The
following table consists of allowance for obsolete inventory:





Allowance
      for obsolete inventory at December 31, 2008
                    
                    $
                    160,487Additional
      reserves
                    
                    
                    62,914Allowance
      for obsolete inventory at September 30, 2009 (Unaudited)
                    
                    
                    223,401Reserves
      write-off
                    
                    
                    (177,012)Allowance
      for obsolete inventory at December 31, 2009
                    
                    
                    46,389Additional
      reserves
                    
                    
                    255,027Allowance
      for obsolete inventory at September 30, 2010 (Unaudited)
                    
                    $
                    301,416


15


FUSHI
COPPERWELD, INC. AND SUBSIDIARIES


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


SEPTEMBER
30, 2010


(Unaudited)





Note
5 - Plant and equipment, net





Plant and
equipment consisted of the following:





September 30,
                  2010
                
                
                December 31,
                  2009(Unaudited)Land
                
                $
                100,726
                
                
                $
                100,726Buildings
      and improvements
                
                
                67,187,791
                
                
                
                43,665,594Transportation
      equipment
                
                
                4,286,386
                
                
                
                4,177,943Machinery
      and equipment
                
                
                86,774,989
                
                
                
                74,463,717Office
      furniture
                
                
                1,238,229
                
                
                
                1,172,121Construction
      in progress
                
                
                5,390,539
                
                
                
                19,449,384Totals
                
                
                164,978,660
                
                
                
                143,029,485Less
      accumulated depreciation
                
                
                (35,229,770
                )
                
                
                (25,643,919
                )Totals
                
                $
                129,748,890
                
                
                $
                117,385,566





Construction
in progress a September 30, 2010, consisted of the following:





No.
                                                              
                                                              Project Description
                                                              
                                                              September 30,
                                                                2010
                                                              
                                                              Commencement
                                                                Date
                                                              
                                                              Expected
                                                                completion
                                                                date1
                                                              
                                                              Manufacturing
      machinery and equipment for CCA/CCS (Multiple)
                                                              
                                                              $
                                                              2,595,298
                                                              
                                                              Dec
      2007
                                                              
                                                              Dec,
      20102
                                                              
                                                              Manufacturing
      machinery and equipment for CCA/CCS (Multiple)
                                                              
                                                              
                                                              2,616,163
                                                              
                                                              Dec
      2009
                                                              
                                                              Mar,
      20113
                                                              
                                                              Manufacturing
      machinery and equipment for CCA
                                                              
                                                              
                                                              132,742
                                                              
                                                              Oct
      2009
                                                              
                                                              Dec,
      20114
                                                              
                                                              Building
      attachment
                                                              
                                                              
                                                              46,336
                                                              
                                                              Sep
      2010
                                                              
                                                              Dec,
      2012Total
                                                              
                                                              $
                                                              5,390,539





Project
No. 1 “Manufacturing Machinery and Equipment for CCA/CCS” is related to CCA and
CCS production lines and ancillary equipment located in Dalian, China. The
estimated cost to complete Project No. 1 as of September 30, 2010 is
approximately $0.3 million.





Project
No. 2 “Manufacturing Machinery and Equipment for CCA/CCS” is primarily related
to ancillary equipment relocated to Dalian, China in December 2009. The
estimated cost to complete Project No. 2 as of September 30, 2010 is
approximately $0.2 million.





Construction
in progress as of December 31, 2009 consisted of the following:





No.
                                                                    
                                                                    Project Description
                                                                    
                                                                    December 31,
                                                                      2009
                                                                    
                                                                    Commencement
                                                                      Date
                                                                    
                                                                    Expected
                                                                      completion date1
                                                                    
                                                                    Manufacturing
      machinery and equipment for CCA/CCS (Multiple)
                                                                    
                                                                    $
                                                                    4,276,753
                                                                    
                                                                    Dec
      2007
                                                                    
                                                                    Mar,
      20102
                                                                    
                                                                    Corporation
      administration office building
                                                                    
                                                                    
                                                                    13,144,394
                                                                    
                                                                    May
      2003
                                                                    
                                                                    Dec,
      20103
                                                                    
                                                                    Manufacture
      building (Dalian)
                                                                    
                                                                    
                                                                    630,389
                                                                    
                                                                    Jan
      2008
                                                                    
                                                                    Jun,
      20104
                                                                    
                                                                    Manufacturing
      machinery and equipment for CCA/CCS (Multiple)
                                                                    
                                                                    
                                                                    1,322,848
                                                                    
                                                                    Dec
      2009
                                                                    
                                                                    Mar,
      20115
                                                                    
                                                                    Manufacturing
      machinery and equipment for CCA
                                                                    
                                                                    
                                                                    75,000
                                                                    
                                                                    Oct
      2009
                                                                    
                                                                    Mar,
      2010Total
                                                                    
                                                                    $
                                                                    19,449,384





Project
No 2. Corporate Administration Office Building represents Tower B of our
corporate office building located at our Dalian facility was completed by March
2010.





Project
No 3. Manufacturing Building located at our Dalian facility was completed by
March 2010.





The
change in plant and equipment is as follows:





Plant and equipmentBalance
      as of December 31, 2009
                  
                  $
                  143,029,485Acquired
      through acquisition of Jinchuan and Hongtai
                  
                  
                  16,934,177Acquired
      through cash payment
                  
                  
                  806,371Acquired
      from advanced payments
                  
                  
                  1,508,652Acquired
      from accounts payable
                  
                  
                  26,387Fixed
      assets transferred from CIP
                  
                  
                  15,134,299CIP
      transferred to fixed assets
                  
                  
                  (15,134,299
                  )VAT
      claimed on purchase of capital assets
                  
                  
                  (212,315
                  )FX
      rate effect
                  
                  
                  2,885,903Balance
      as of September 30, 2010 (Unaudited)
                  
                  $
                  164,978,660


16


FUSHI
COPPERWELD, INC. AND SUBSIDIARIES


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


SEPTEMBER
30, 2010


(Unaudited)





Depreciation
expense for the nine months ended September 30, 2010 and 2009 amounted to
$8,997,857 and $7,191,842, respectively, and the three months ended September
30, 2010 and 2009 amounted to $3,175,573 and $2,579,437,
respectively.





Note
6 – Advances to suppliers





Advances
to suppliers 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:





September 30,
                  2010
                
                
                December 31,
                  2009(Unaudited)Advances
      for inventories – current
                
                $
                21,228,320
                
                
                $
                8,582,346Advances
      for equipment – non current
                
                
                540,482
                
                
                
                1,356,404Total
      advances to suppliers
                
                $
                21,768,802
                
                
                $
                9,938,750





Note
7 – Intangible assets





Intangible
assets consist of land use rights and patents. Intangible assets consisted of
the following:





September 30,
                  2010
                
                
                December 31,
                  2009(Unaudited)Patents
                
                $
                2,581,750
                
                
                $
                1,754,270Land
      use rights
                
                
                14,453,075
                
                
                
                12,472,131Total:
                
                
                17,034,825
                
                
                
                14,226,401Less:
      accumulated amortization
                
                
                (2,757,501
                )
                
                
                (2,302,345
                )Intangible
      assets, net
                
                $
                14,277,324
                
                
                $
                11,924,056





Amortization
expense for the nine months ended September 30, 2010 and 2009 amounted to
$401,539 and $357,449, and for the three months ended September 30, 2010 and
2009 amounted to $145,557 and $119,166, respectively.





Estimated
amortization expense for each of the years ended is as follows:




September 30,
                  
                  Amount2011
                  
                  $
                  567,4642012
                  
                  
                  567,4642013
                  
                  
                  445,8222014
                  
                  
                  423,3112015
                  
                  
                  423,311Thereafter
                  
                  
                  11,849,952


17


FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
30, 2010
 (Unaudited)




Note
8 – Prepaid taxes, taxes payable and deferred tax asset





Prepaid
taxes and taxes payable consisted of the following:





September 30,
                  2010
                
                
                December 31,
                  2009(Unaudited)Income
      tax
                
                $
                2,857,826
                
                
                $
                1,796,019VAT
      provision
                
                
                1,229,523
                
                
                
                769,025Others
                
                
                180,299
                
                
                
                34,011Total
      taxes payable
                
                $
                4,267,648
                
                
                $
                2,599,055





Income
tax





The
Company and its subsidiaries had the following tax rates for the nine months
ended September 30:





2010
                  
                  
                  2010
                  
                  
                  2009
                  
                  
                  2009Statutory
                  
                  
                  Income
                  
                  
                  Statutory
                  
                  
                  IncomeIncome
                  
                  
                  Tax
                  
                  
                  Income
                  
                  
                  TaxEntities
                  
                  
                  
                  Tax Rate
                  
                  
                  Exemption
                  
                  
                  TaxRate
                  
                  
                  ExemptionFushi
      International
                  
                  China
      (a)
                  
                  
                  25
                  %
                  
                  
                  12.5
                  %
                  
                  
                  25
                  %
                  
                  
                  12.5
                  %Dalian
      Fushi
                  
                  China
      (a)
                  
                  
                  25
                  %
                  
                  
                  -
                  
                  
                  
                  25
                  %
                  
                  
                  -Jinchuan
                  
                  China
      (a)
                  
                  
                  25
                  %
                  
                  
                  -
                  
                  
                  
                  n/a
                  
                  
                  
                  n/aHongtai
                  
                  China
      (a)
                  
                  
                  25
                  %
                  
                  
                  -
                  
                  
                  
                  n/a
                  
                  
                  
                  n/aFushi
      JiangSu
                  
                  China
      (a)
                  
                  
                  25
                  %
                  
                  
                  -
                  
                  
                  
                  n/a
                  
                  
                  
                  n/aCopperweld
      UK
                  
                  UK
      (b)
                  
                  
                  21
                  %
                  
                  
                  -
                  
                  
                  
                  21
                  %
                  
                  
                  -Fushi,
      Fushi holding, Copperweld
                  
                  US
      (c)
                  
                  
                  34
                  %
                  
                  
                  -
                  
                  
                  
                  34
                  %
                  
                  
                  -Copperweld
      US
                  
                  State
                  
                  
                  6.5
                  %
                  
                  
                  -
                  
                  
                  
                  6.5
                  %
                  
                  
                  -





(a)  China income tax





The
Company’s subsidiaries incorporated in PRC are subject to PRC income tax of 25%.
Fushi International, Dalian Fushi, Jinchuan and Hongtai were incorporated in the
PRC. Beginning January 1, 2008, the new Chinese Enterprise Income Tax (“EIT”)
law replaced the former income tax laws for Domestic Enterprises (“DEs”) and
Foreign Invested Enterprises (“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.





Thus,
Fushi International, a production-oriented FIEs, continues to enjoy the former
50% income tax exemption for the years ending December 31, 2008, 2009 and 2010.
The applicable income tax rate for Fushi International in 2010 is
12.5%.





The
estimated tax savings from the tax exemptions for the nine months ended
September 30, 2010, amounted to $6,035,787. The net effect on earnings per share
had the income tax been applied would decrease basic earnings per share from
$0.92 to $0.76 and diluted earnings per share from $0.91 to $0.75. The estimated
tax savings from the tax exemptions for the nine months ended September 30,
2009, amounted to $3,607,474. The net effect on earnings per share had the
income tax been applied would decrease basic earnings per share from $0.50 to
$0.37 and diluted earnings per share from $0.48 to $0.36.





The
estimated tax savings from the tax exemptions for the three months ended
September 30, 2010, amounted to $1,892,079. The net effect on earnings per share
had the income tax been applied would decrease basic earnings per share from
$0.34 to $0.29 and diluted earnings per share from $0.34 to $0.29. The
estimated tax savings from the tax exemptions for the three months ended
September 30, 2009, amounted to $1,136,700. The net effect on earnings per share
had the income tax been applied would decrease basic earnings per share from
$0.33 to $0.29 and diluted earnings per share from $0.31 to $0.28.





Jinchuan
was acquired in February 2010 and Hongtai was acquired in May 2010. The tax rate
only applied to their results of operations included in the consolidated
financial statements for year 2010.


18


FUSHI
COPPERWELD, INC. AND SUBSIDIARIES


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


SEPTEMBER
30, 2010


(Unaudited)





The
provision for China income tax for the nine months ended September 30, 2010 and
2009 was $6,949,258 and $4,069,081, respectively; and for the three months ended
September 30, 2010 and 2009 amounted to $2,230,608 and $1,788,366,
respectively.





(b)
UK income tax





Copperweld
UK is organized as a United Kingdom private company and subject to 21% to 28%
statutory taxes on its taxable income. Copperweld UK had no material income
or loss from operations in the first nine months in year 2010 and 2009, so
no provision for income tax was made during these periods.





(c)
US income tax





The
Company is also subject to the United States federal income tax at a tax rate of
34%. Fushi, Fushi Holdings and Copperweld were incorporated in the United States
and as a consolidated unit 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 in varying amounts in the years 2025 to
2030 if not utilized.





The
Company has cumulative undistributed earnings from foreign subsidiaries of
approximately $164 million and $127 million as of September 30, 2010 and
December 31 2009, respectively, included in the consolidated retained earnings
and will continue to be indefinitely reinvested in international
operations.  Accordingly, no provision has been made for US 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.





The
current and deferred (provision)/benefit and the effective income tax were as
follows for the periods ended September 30, 2010 and 2009:





Three months ended September 30,
                
                
                Nine months ended September30,2010
                
                
                2009
                
                
                2010
                
                
                2009(Unaudited)
                
                
                (Unaudited)
                
                
                (Unaudited)
                
                
                (Unaudited)Effective
      foreign income taxes – current
                
                
                (2,230,608
                )
                
                
                (1,788,366
                )
                
                
                (6,949,258
                )
                
                
                (4,069,081
                )US
      federal income tax – deferred
                
                
                158,599
                
                
                
                888,378
                
                
                
                3,684,614
                
                
                
                3,253,085Provision
      for income tax
                
                
                (2,072,009
                )
                
                
                (899,988
                )
                
                
                (3,264,644
                )
                
                
                (815,996
                )Effective
      tax rate
                
                
                13.9%
                
                
                
                8.9%
                
                
                
                8.8%
                
                
                
                5.6%





Deferred tax
assets





The
Company recognizes 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 liabilities or assets
attributable to temporary differences are accounted for using the balance sheet
liability method in respect to temporary differences between income tax basis
and financial reporting basis of assets and liabilities. Deferred tax assets
consists primarily of the Company’s US operating loss
carryforwards.





AmountThe
      deferred tax activity consisted of the following:Deferred
      tax assets at December 31, 2008
                
                $
                7,804,027Additions
      to deferred tax assets
                
                
                3,918,442Deferred
      tax assets at December 31, 2009
                
                $
                11,722,469Additions
      to deferred tax assets
                
                
                3,684,614Deferred
      tax assets at September 30, 2010 (unaudited)
                
                $
                15,407,083


19


FUSHI
COPPERWELD, INC. AND SUBSIDIARIES


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


SEPTEMBER
30, 2010


(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 US will have taxable
income in future periods. US companies must generate a total of $45.3 million of
taxable net income (including the recovery of time difference) by years
2025 to 2030 (the recovery of time difference is not subject to those years) in
order to recover the deferred tax asset balance.





Value added
tax





VAT on
sales and VAT on purchases in Dalian China amounted to $27,299,557 and
$18,678,143 for the nine months ended September 30, 2010, and $17,881,148
and $13,971,442 for the nine months ended September 30, 2009, respectively. For
the three months ended September 30, 2010, VAT on sales and VAT on purchases in
Dalian China amounted to $9,716,237 and $5,984,700, and for the three months
ended September 30, 2009, amounted to $6,693,229 and $4,898,754,
respectively.





VAT on
sales and VAT on purchases in Copperweld UK amounted to $178,408 and $463,762
for the nine months ended September 30, 2010 and $95,958 and $189,476 for
the nine months ended September 30, 2009, respectively. For the three
months ended September 30, 2010, VAT on sales and VAT on purchases in Copperweld
UK amounted to $56,627 and $149,412, and for the three months ended September
30, 2009, amounted to $45,391 and $77,649, 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 – Credit facility





Credit
facilityconsisted
of the following:





Name of lender
                
                September 30,
                  2010
                
                
                December 31,
                  2009(Unaudited)Wells
      Fargo Bank revolving credit line (1)
                
                $
                -
                
                
                $
                4,033,783Total
                
                $
                -
                
                
                $
                4,033,783





Name of lender
                
                September 30,
                  2010
                
                
                December 31,
                  2009(Unaudited)Regions
      bank term loan – current portion (2)
                
                $
                650,000
                
                
                $
                -Regions
      bank term loan – non current portion (2)
                
                
                5,850,000
                
                
                
                -Total
                
                $
                6,500,000
                
                
                $
                -





Principal
payments on the term loan will be made as follows:





September 30,
                  
                  Amount2011
                  
                  $
                  650,0002012
                  
                  
                  650,0002013
                  
                  
                  650,0002014
                  
                  
                  650,0002015
                  
                  
                  650,000Thereafter
                  
                  
                  3,250,000




Copperweld
US





(1)
Copperweld maintained a revolving line of credit with Wells Fargo Bank under a
Financing Agreement dated April 5, 2007. On February 2, 2010, the Company paid
off its entire obligation on the revolving line of credit to Wells Fargo in the
amount totaling $4,024,270 and closed the line. The corresponding annual
interest rate during year 2010 was equal to the daily three month LIBOR rate
(0.25%) plus six percent before the line was paid off and
closed.


20


FUSHI
COPPERWELD, INC. AND SUBSIDIARIES


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


SEPTEMBER
30, 2010


(Unaudited)





(2) On
August 31, 2010, Copperweld entered into a secured credit agreement (the
“Regions Bank credit facility”) with Regions Bank (“the Lender”). The Regions
Bank credit facility provides for a $2.5 million revolving credit facility and a
term facility of up to $6.5 million which shall be repaid in 120 equal monthly
payments of principal plus interest each month till August 31, 2020. The
borrowings are secured by substantially all the assets of Copperweld and are
unconditionally guaranteed by the Company. The funds are available for working
capital needs and general corporate purposes of Copperweld in the ordinary
course of business.  As of September 30, 2010, the company had no
balance under the revolving credit facility and had a $6.5 million outstanding
balance under the term facility, of which $650,000 is due within twelve
months.





The
corresponding annual interest rate is the 30 day London Interbank Offered Rate
(the “LIBOR Rate”) plus the Applicable Margin of 2.5% to 4.0% per annum. 
Copperweld paid an initial commitment fee of 1.0% of the total amount of the
credit facility, and is also required to pay a monthly unused line fee ranging
from 0.25% to 0.50% on available but unused amounts under the revolving credit
facility. The Applicable Margin and the applicable unused line fee percentage
are determined based on changes in Copperweld’s Fixed Charge Coverage Ratio, as
discussed below, and are set on the first day of each calendar quarter,
beginning with the receipt of Copperweld’s 2010 yearend audit.  As of
September 30, 2010, the Applicable Margin is 3.5% and the applicable unused line
fee is 0.375%.





The
Regions Bank credit facility contains financial covenants where certain
covenants must be met on a quarterly or annual basis. Copperweld is required to
maintain a Minimum Tangible Net Worth equal to the sum of $18,500,000 and 50%
of Copperweld’s cumulative positive net income from and after the closing
date on an annual basis beginning with the year ended December 31, 2010.
Additionally, on a quarterly basis, Copperweld’s Fixed Charge Coverage Ratio
must be equal to or greater than 1.30 calculated on a trailing twelve month
basis.





The
Regions Bank credit facility contains customary events of default and covenants,
including covenants that restrict the ability of Copperweld to incur
certain additional indebtedness, create or permit liens on assets, and engage in
mergers or consolidations, and certain restrictive financial covenants as noted
above.  If any event of default shall occur and be continuing, the
Lender may elect to declare the loan immediately due and payable and the Lender
may elect to charge a default interest rate which is equal to the applicable
interest rate in effect at such time plus 2.0% per annum. As of September 30,
2010, Copperweld was in compliance of all covenants.





Copperweld
UK





Copperweld
UK maintains an invoice discounting credit facility with a limit of
approximately $1,180,000 (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 September 30, 2010 and December 31, 2009.





Total
interest expense on the revolving credit lines and term loans for the nine
months ended September 30, 2010 and 2009 amounted to $45,182 and $201,512,
respectively. Interest for the three months ended September 30, 2010 and 2009
was $21,854 and $64,574, respectively.





Note
10 – Notes payable





Notes
payable consisted of the following:





September 30,
                  2010
                
                
                December 31,
                  2009(Unaudited)Guaranteed
      senior secured floating rate notes (“HY Notes”)
                
                
                -
                
                
                
                35,000,000Less
      current portion
                
                
                -
                
                
                
                10,000,000Total
      notes payable, noncurrent
                
                $
                -
                
                
                $
                25,000,000


21


FUSHI
COPPERWELD, INC. AND SUBSIDIARIES


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


SEPTEMBER
30, 2010


(Unaudited)





On
January 24, 2007, the Company and Citadel Equity Fund Ltd ("Citadel") entered a
Notes Purchase Agreement.  In this transaction, Citadel
purchased   $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 a $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.





Convertible
Notes of $15 million were converted at the option of the holder into the
Company’s 2,142,857 shares of common stock at an initial conversion price of $7
per share on January 8, 2008; the remaining $5 million of the Convertible
Notes was repurchased by the Company on August 13, 2009 and thus a
$3,842,935gain on
debt extinguishment was recognized during third quarter of 2009.





The HY
notes bear interest at LIBOR + 7% and changes to LIBOR + 5.6% permanently upon
successful completion of Qualifying IPO within eighteen months from January 24,
2007.  The HY Notes are guaranteed on a senior secured basis, by all
of the Company’s wholly-owned existing and future domestic
subsidiaries.





On
February 26, 2010, the Company entered into a Notes Purchase Agreement with the
holders (the “Holders”) of the Company’s originally issued HY Notes that are due
during the year 2012, whereby the Company would repurchase the HY Notes from
each holder for a purchase price in cash equal to $30,600,000 (102% of the
outstanding principal amount) plus $165,644 (accrued and unpaid interest on the
Notes to the Purchase Date). The aggregate purchase price for all of the HY
Notes was $30,765,644 which was paid to note Holders on February 26,
2010.





Thus, on
February 26, 2010, the company recognized a $2,395,778 loss on debt
extinguishment, which includes the write off of deferred commissions on long
term notes that amounted to $1,795,778 and the additional purchase price paid to
HY notes Holder other than principal and interest in the amount of
$600,000.





Amortization
of commission costs for the nine months ended September 30, 2010 and 2009
amounted to $160,000 and $787,492, respectively. Amortization of commission
costs for the three months ended September 30, 2010 and 2009 amounted to $0 and
$262,497, respectively. Interest on long term notes for the nine months ended
September 30, 2010 and 2009 amounted to $318,492 and $2,978,223, respectively.
Interest on long term notes, for the three months ended September 30, 2010, and
2009 amounted to $0 and $792,681, respectively. Both amortized commission and
interest on long term notes are recorded as interest expense.





Note
11 – Capital lease





In July
2009, the Company entered into a non-cancellable capital lease agreement for
lighting equipment installed in one of its plant facilities. The lease has a
three year term and contains a bargain purchase option of $1.00 at the end of
the term. The lease requires monthly payments of $8,414.





The
following is an analysis of the leased property which is combined into Plant and
Equipment, net, on the consolidated balance sheet.





September 30,
                  2010
                
                
                December 31,
                  2009Plant
      facility
                
                $
                266,598
                
                
                $
                266,598Less:
      accumulated depreciation
                
                
                (28,881
                )
                
                
                (8,887
                )Net
      leased plant facility
                
                $
                237,717
                
                
                $
                257,711


22


FUSHI
COPPERWELD, INC. AND SUBSIDIARIES


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


SEPTEMBER
30, 2010


(Unaudited)





The
following is a schedule of future minimum lease payments under the capital lease
together with the present value of the net minimum lease payment as of September
30, 2010.





Year ending September 30,
                  
                  Minimum lease
                    Payment2011
                  
                  $
                  100,9762012
                  
                  
                  84,147Thereafter
                  
                  
                  -Total
      minimum lease payments
                  
                  
                  185,123Less:
      interest *1
                  
                  
                  (17,807
                  )Present
      value of net minimum lease payments *2
                  
                  $
                  167,316





*1.
Amount necessary to reduce minimum lease payments to present value calculated at
the rate implicit in the lease at the inception of the lease.





*2. The
present value of the minimum lease payments is reflected in the balance sheet as
current and non-current obligations under capital lease of $79,084 and $88,232,
respectively.





Interest
expense related to capital leases amounted to $17,918 and $16,593 for the nine
months ended September 30, 2010 and 2009, respectively. Interest expense related
to capital leases amounted to $5,284 and $16,593 for the three months ended
September 30, 2010 and 2009, respectively.





Note
12 – Derivative instrument





The
Company's operations are exposed to a variety of global market risks, including
the effect of changing interest rates and foreign currency exchange rates. This
exposure is managed, in part, with the use of financial derivatives. The Company
uses financial derivatives only to hedge exposures in the ordinary course of
business and does not invest in derivative instruments for speculative
purposes.





On April
10, 2007, effective January 24, 2007, the Company entered into a cross currency
swap transaction (the SWAP) with Merrill Lynch Capital Services, Inc. (“MLCS”)
on the $40 million HY notes which converts the USD based variable interest
rate of initially LIBOR + 7% per annum and LIBOR + 5.6% per annum after a
qualified step-down to an 8.3% per annum RMB fixed interest rate. 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 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. In July, 2008, the Company placed the $1,000,000 deposit with MLCS to
secure the agreement.





Effective
March 31, 2010 (the termination date), the SWAP, with an outstanding USD
notional amount of $30,000,000 and an outstanding CNY notional amount of
233,175,000 was unwound with a premium payment price of $6,650,000 to
MLCS.





On March
31, 2010, the $1,000,000 deposit with MLCS to secure the agreement was released
to MLCS as partial payment of the $6,650,000 payment price, and the remaining
$5,650,000 payment was made to Merrill Lynch on April 6, 2010.





Changes
in the fair values of derivative instruments accounted for as cash flow hedges
to the extent they qualify for hedge accounting, are recorded in accumulated
other comprehensive income.  For the nine months ended September 30,
2010 and 2009, a gain of $882,527 and loss of $3,275,588 was recorded on
the derivative instrument, respectively, in other comprehensive income. For
the three months ended September 30, 2010 and 2009, a gain of $0 and
$237,768 was recorded on the derivative instrument, respectively, in other
comprehensive income.





On March
31, 2010, $6,650,000 was transferred from the accumulated other comprehensive
loss into earnings as a loss from termination of the SWAP.  There were
no amounts recorded in the consolidated statements of income in relation to
ineffectiveness of this interest SWAP prior to unwinding of the
transaction.





During
the nine and three months ended September 30, 2010 and prior to the termination
date, the Company paid $1,190,368 and $0 as hedging payment related to the
cross currency hedge payable and recognized $753,666 and $0 of loss from
derivative transactions as cash flow hedge. During the nine and three
months ended September 30, 2009, the Company paid $614,580 and $500,000 as
hedging payment related to the cross currency hedge payable and recognized
$1,581,812and
$1,199,438 of loss related to derivative transactions as cash flow
hedge.




Changes
of cross currency hedge are as follows:





Cross
      currency hedge payable balance at December 31, 2009
                
                $
                436,702Proceeds
      from cross currency hedge
                
                
                -Payments
      for cross currency hedge
                
                
                (1,190,368)Loss
      on cross currency hedge
                
                
                753,666Cross
      currency hedge payable balance at September 30, 2010
      (Unaudited)
                
                $
                -


23


FUSHI
COPPERWELD, INC. AND SUBSIDIARIES


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


SEPTEMBER
30, 2010


(Unaudited)





Note
13 - Earnings per share





The
following is information of net income per share:





Three months ended September 30,
                  
                  
                  Nine months ended September30,2010
                  
                  
                  2009
                  
                  
                  2010
                  
                  
                  2009(Unaudited)
                  
                  
                  (Unaudited)
                  
                  
                  (Unaudited)
                  
                  
                  (Unaudited)Net
      income for basic and diluted earnings per share
                  
                  $
                  12,870,762
                  
                  
                  $
                  9,194,933
                  
                  
                  $
                  33,681,331
                  
                  
                  $
                  13,858,550Weighted
      average shares used in basic computation
                  
                  
                  37,694,626
                  
                  
                  
                  28,084,416
                  
                  
                  
                  36,553,784
                  
                  
                  
                  27,827,152Dilutive
      effect of warrants, options and convertible note
                  
                  
                  383,219
                  
                  
                  
                  1,122,092
                  
                  
                  
                  476,715
                  
                  
                  
                  849,680Weighted
      average shares used in diluted computation
                  
                  
                  38,077,845
                  
                  
                  
                  29,206,508
                  
                  
                  
                  37,030,499
                  
                  
                  
                  28,676,832Earnings
      per shareBasic
                  
                  $
                  0.34
                  
                  
                  $
                  0.33
                  
                  
                  $
                  0.92
                  
                  
                  $
                  0.50Diluted
                  
                  $
                  0.34
                  
                  
                  $
                  0.31
                  
                  
                  $
                  0.91
                  
                  
                  $
                  0.48





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-dilutive05/21/2007
      to 11/13/2007
                    
                    Options
                    
                    $
                    11.75-20.94
                    
                    
                    
                    495,000
                    
                    Anti-dilutive04/10/2008
      to 6/25/2008
                    
                    Options
                    
                    $
                    15.04-23.25
                    
                    
                    
                    126,000
                    
                    Anti-dilutive





Note 14 - Stockholders'
Equity





During
the year of 2010, the following activities were recorded:





On
February 1, 2010, the Company closed an offering of 7,475,000 shares of its
common stock at a public offering price of $8.00 per share, which included
public offering of 6,500,000 shares and the sale of 975,000 shares of its
common stock as a result of the exercise of the over-allotment option by the
Company’s underwriter.  The gross proceeds received were $59.8
million. The Company received net proceeds of approximately $56.4 million from
the offering, after deducting underwriting discounts.





Warrants





The
following is a summary of the outstanding and exercisable warrant balance as of
September 30, 2010:





Exercise
                                Price
                              
                              
                              Number
                              
                              
                              Average
                                Remaining Life
                                (years)$
                              3.11
                              
                              
                              
                              245,778
                              
                              
                              
                              1.25$
                              16.80
                              
                              
                              
                              100,000
                              
                              
                              
                              1.15$
                              6.00
                              
                              
                              
                              100,000
                              
                              
                              
                              0.29445,778
                              
                              
                              
                              1.01


24


FUSHI
COPPERWELD, INC. AND SUBSIDIARIES


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


SEPTEMBER
30, 2010


(Unaudited)





The
following is a summary of the warrant activity:





Number of
                    Warrants
                    Outstanding
                  
                  
                  Weighted
                    -Average
                    Exercise
                    Price
                  
                  
                  Average
                    Remaining
                    Contractual
                    LifeBalance,
      at December 31, 2008
                  
                  
                  432,124
                  
                  
                  $
                  6.28
                  
                  
                  2.92
      yearsGranted
                  
                  
                  300,000
                  
                  
                  $
                  5.58Forfeited
                  
                  
                  -Exercised
                  
                  
                  (52,352
                  )
                  
                  $
                  3.11Balance,
      at December 31, 2009
                  
                  
                  679,772
                  
                  
                  $
                  6.22
                  
                  
                  1.24
      yearsGranted
                  
                  
                  -Forfeited
                  
                  
                  -Exercised
                  
                  
                  (233,994
                  )
                  
                  $
                  5.05Balance,
      at September 30, 2010 (unaudited)
                  
                  
                  445,778
                  
                  
                  $
                  6.83
                  
                  
                  1.01
      years





The
warrants are each convertible into one share of the Company’s common
stock.





Note
15 – 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
majority of the options awarded under the 2007 Plan vest in two years from the
grant date and the majority of the options granted expire in 3 years. 
Under the 2007 Plan, the Company granted share options and restricted stock to
all executives, directors and employees as summarized in below two
tables:




Grant
                                    Year
                                  
                                  Granted
                                    Options
                                    (Shares)
                                  
                                  
                                  Forfeited andExpired
                                    Option
                                    (Shares)
                                  
                                  
                                  Exercise Price
                                    Option
                                    ($)2007
                                  
                                  
                                  335,000
                                  
                                  
                                  
                                  190,000
                                  
                                  
                                  $
                                  16.44-$20.942008
                                  
                                  
                                  151,000
                                  
                                  
                                  
                                  25,000
                                  
                                  
                                  $
                                  15.04-$23.252009
                                  
                                  
                                  688,000
                                  
                                  
                                  
                                  166,725
                                  
                                  
                                  $
                                  4.95-$7.932010
                                  
                                  
                                  164,530
                                  
                                  
                                  
                                  32,928
                                  
                                  
                                  $
                                  8.61-$9.13Total
                                  
                                  
                                  1,338,530
                                  
                                  
                                  
                                  414,653





Grant
                    Year
                  
                  Granted
                    Restricted Stock
                    (Shares)
                  
                  
                  Forfeited and
                    Expired
                    Restricted Stock
                    (Shares)
                  
                  
                  Vested
                    RestrictedStock
                    (Shares)
                  
                  
                  GrantDate Fair
                    MarketValue
                    ($)2009
                  
                  
                  50,000
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  $
                  8.082010
                  
                  
                  51,000
                  
                  
                  
                  -
                  
                  
                  
                  38,250
                  
                  
                  $
                  8.61Total
                  
                  
                  101,000
                  
                  
                  
                  -
                  
                  
                  
                  38,250





The fair
value of each restricted stock award is estimated on the date of grant using the
fair market value of the Company’s common stock, which is the closing price on
the stock market.


25


FUSHI
COPPERWELD, INC. AND SUBSIDIARIES


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


SEPTEMBER
30, 2010


(Unaudited)





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:




Nine months
                  ended,
                  2010
                
                Year ended,
                  2009
                
                Year ended
                  2008
                
                Year ended
                  2007Risk-free
      interest rate (1)
                
                0.87%-1.18%
                
                0.78%-2.2%
                
                1.84%-2.82%
                
                3.54%-4.57%Expected
      dividend yield (2)
                
                -
                
                -
                
                -
                
                -Expected
      option life (3)
                
                2-4
      Years
                
                2-5
      Years
                
                0.5-2
      Years
                
                2
      YearsExpected
      stock price volatility (4)
                
                60%
                
                60%
                
                50%
                
                50%Weighted
      average fair value of options granted
                
                $2.95
                
                $2.77
                
                $4.57
                
                $4.08





(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 the
      expected 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.





(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
      accounting standards. 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.  The
forfeitures are estimated at the time of grant and revised in subsequent periods
pursuant to actual forfeitures, if it differs from those estimates.





The
Company recognized $528,207 and $1,108,254 share-based compensation expense in
general and administrative expenses for the nine months ended September 30, 2010
and 2009, respectively. For the three months ended September 30, 2010 and 2009,
the Company recognized share-based compensation expense of $154,558 and
$179,527, respectively.





As of
September 30, 2010 and 2009, the total compensation cost related to stock
options not yet recognized was $1,112,364 and $539,296 and will be
recognized over the weighted average life of 3.3 years and 0.27 years,
respectively. At September 30, 2010 and 2009 the total compensation cost related
to restricted stock not yet recognized was $513,778 and $0 and will be
recognized over the weighted average life of 1.5 years and 0 years,
respectively.





As of
September 30, 2010, the 686,000 executive options, 240,000 director options and
293,377 employee options outstanding had fair values of approximately
$2,719,012, $912,761 and $843,521, respectively.


26


FUSHI
COPPERWELD, INC. AND SUBSIDIARIES


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


SEPTEMBER
30, 2010


(Unaudited)





The
following is a summary of all stock option activity including the 2007
incentive plan:





Number of
                  Options
                  Outstanding
                
                
                Weighted
                  -Average
                  Exercise
                  Price
                
                
                Aggregate
                  Intrinsic
                  ValueBalance,
      December 31, 2008
                
                
                1,067,333
                
                
                $
                14.90
                
                
                
                -Granted
                
                
                488,000
                
                
                $
                5.48
                
                
                
                -Forfeited
                
                
                (40,050
                )
                
                $
                4.95
                
                
                
                -Expired
                
                
                -
                
                
                $
                
                
                
                
                -Exercised
                
                
                (10,250
                )
                
                $
                4.95
                
                
                
                -Balance,
      September 30, 2009 (unaudited)
                
                
                1,505,033
                
                
                $
                12.15
                
                
                
                -Granted
                
                
                200,000
                
                
                $
                7.93
                
                
                
                -Forfeited
                
                
                (9,000
                )
                
                $
                4.95
                
                
                
                -Expired
                
                
                (95,000
                )
                
                $
                17.19
                
                
                
                -Exercised
                
                
                (2,750
                )
                
                $
                4.95
                
                
                
                -Balance,
      December 31, 2009
                
                
                1,598,283
                
                
                $
                11.38
                
                
                $
                2,383,162Granted
                
                
                164,530
                
                
                $
                8.64
                
                
                
                -Forfeited
                
                
                (139,678
                )
                
                $
                7.46
                
                
                
                -Expired
                
                
                (362,258
                )
                
                $
                12.70
                
                
                
                -Exercised
                
                
                (41,500
                )
                
                $
                4.95
                
                
                
                -Balance,
      September 30, 2010 (unaudited)
                
                
                1,219,377
                
                
                $
                11.30
                
                
                $
                1,159,627





Following
is a summary of the status of options outstanding at September 30,
2010:





Outstanding Option
              
              
              Exercisable OptionsExercise
                Price
              
              
              Number
              
              
              Average
                Remaining
                Contractual
                Life
              
              
              Average
                Exercise
                Price
              
              
              Number
              
              
              Weighted
                Average
                Exercise
                Price$
              12.30
              
              
              
              75,000
              
              
              0.64
      years
              
              
              $
              12.30
              
              
              
              75,000
              
              
              $
              12.30$
              11.75
              
              
              
              150,000
              
              
              1.76
      years
              
              
              $
              11.75
              
              
              
              150,000
              
              
              $
              11.75$
              13.70
              
              
              
              125,000
              
              
              0.99
      years
              
              
              $
              13.70
              
              
              
              125,000
              
              
              $
              13.70$
              16.44
              
              
              
              33,750
              
              
              0.57
      years
              
              
              $
              16.44
              
              
              
              33,750
              
              
              $
              16.44$
              17.94
              
              
              
              33,750
              
              
              1.07
      years
              
              
              $
              17.94
              
              
              
              33,750
              
              
              $
              17.94$
              19.44
              
              
              
              33,750
              
              
              1.57
      years
              
              
              $
              19.44
              
              
              
              33,750
              
              
              $
              19.44$
              20.94
              
              
              
              33,750
              
              
              2.07
      years
              
              
              $
              20.94
              
              
              
              33,750
              
              
              $
              20.94$
              16.36
              
              
              
              10,000
              
              
              1.12
      years
              
              
              $
              16.36
              
              
              
              10,000
              
              
              $
              16.36$
              23.25
              
              
              
              59,000
              
              
              1.25
      years
              
              
              $
              23.25
              
              
              
              59,000
              
              
              $
              23.25$
              15.04
              
              
              
              17,000
              
              
              1.53
      years
              
              
              $
              15.04
              
              
              
              17,000
              
              
              $
              15.04$
              20.04
              
              
              
              50,000
              
              
              2.64
      years
              
              
              $
              20.04
              
              
              
              50,000
              
              
              $
              20.04$
              4.95
              
              
              
              266,775
              
              
              2.25
      years
              
              
              $
              4.95
              
              
              
              266,775
              
              
              $
              4.95$
              7.93
              
              
              
              200,000
              
              
              9.13
      years
              
              
              $
              7.93
              
              
              
              -
              
              
              $
              7.93$
              8.61
              
              
              
              123,602
              
              
              6.24
      years
              
              
              $
              8.61
              
              
              
              46,445
              
              
              $
              8.61$
              9.13
              
              
              
              8,000
              
              
              8.82
      years
              
              
              $
              9.13
              
              
              
              -
              
              
              $
              9.13Total
              
              
              
              1,219,377
              
              
              
              
              
              
              
              
              
              
              934,220





Note
16 - Statutory reserves





The laws
and regulations of the PRC 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 China entities 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 China entities registered capital. As of September 30, 2010, the
Company’s China entities have total registered capital of approximately $119
million (RMB 796 million). As of September 30, 2010 and December 31, 2009, the
Company had statutory reserves amounting to $20,793,298 and $16,282,793,
respectively. The Company’s China entities are required to contribute an
additional $37 million from future earnings if the company’s China facility
has net income for future years.


27


FUSHI
COPPERWELD, INC. AND SUBSIDIARIES


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


SEPTEMBER
30, 2010


(Unaudited)





The
transfer to this reserve must be made before distribution of any dividend to
shareholders. The Company’s China entities will transfer at year end 10% of its
year’s net income determined in accordance with PRC accounting rules and
regulations.





The
surplus reserve fund is non-distributable other than during liquidation and can
be used to fund previous years’ losses, if any, and may be utilized for business
expansion or converted into share capital by issuing new shares to existing
shareholders in proportion to their shareholding or by increasing the par value
of the shares currently held by them, provided that the remaining reserve
balance after such issue is not less than 50% of the registered
capital.





Note
17 – Employee pension





The
Company’s employee pension for China employees generally includes two parts: the
first to be paid by the Company is 20% of the employee’s actual salary in the
prior year. The other part, paid by the employee, is 8% of the actual salary.
The Company made $135,637 and $100,919 in contributions of employment benefits
for China employees in the nine months ended September 30, 2010 and 2009,
respectively. For the three months ended September 30, 2010 and 2009, the
Company made contributions of employee benefits for China employees of $53,882
and $23,316, 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. As of June 1, 2009, the Company no longer matches employee
contributions for US employees. The Company made $0 and $47,933 in contributions
of employment benefits for US employees in the nine months ended September 30,
2010 and 2009, respectively. For the three months ended September 30, 2010 and
2009, the Company made contributions of employment benefits for US employees of
$0 and $204, 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 $6,858 and
$8,187 in contributions of employment benefits for UK employees in the nine
months ended September 30, 2010 and 2009. For the three months ended September
30, 2010 and 2009, the Company made contributions of employment benefits for UK
employees of $2,333 and $2,787, respectively.





Note
18 - Commitments and contingencies





Fushi
JiangSu was established on June 18, 2010 with a registered capital of
$49,980,000. Fushi JiangSu had received $15,000,000 investment as of September
30, 2010, and is in the process of obtaining the capital verification. Of the
remaining registered capital, $10,000,000 and $24,980,000 are required to be
invested by June 17, 2011 and June 17, 2012, respectively.





Please
refer to Note 19 – Business combinations for contingent consideration related to
the acquisition of Jinchuan.





Note
19 – Business combination





The
Company adopted ASC 805-10, “Business Combinations,” which requires an acquiring
entity to recognize all the assets acquired and liabilities assumed in a
transaction at the acquisition-date to be measured at fair value.





Acquisition of
Jinchuan





On
January 21, 2010, the Company’s PRC subsidiary, Fushi International had entered
into an agreement to purchase 100% of the equity interest of Jinchuan, a Chinese
manufacturer of electric wire and electric cables, from Jinchuan’s
shareholders.





The
acquisition of Jinchuan was part of the Company's strategic expansion into the
power cable industry, as well as the execution of its strategy of expanding its
downstream processing capabilities through vertical integration. The acquisition
allows the Company to expand into Northeastern China.  The Jinchuan
brand of low- and medium-voltage power cable is well known and respected among
customers in Northeastern China and other industry participants. The acquisition
allows the Company to access the growing power market through Jinchuan's broad
sales network, existing customer relationships, research and development
program, manufacturing equipment and facilities in Dalian, and the experience
and relationships of its management team.





The total
acquisition price of Jinchuan agreed upon by the Company and former shareholders
of Jinchuan amounted to a total aggregate contingent purchase price of $10.15
million, payable in cash.  The purchase price was determined to be
paid in two equal installments of $5,075,000.  The installments were
agreed upon to be paid as follows:


28


FUSHI
COPPERWELD, INC. AND SUBSIDIARIES


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


SEPTEMBER
30, 2010


(Unaudited)





(1) The
initial installment was determined to be paid upon the closing of the
acquisition, which was anticipated to be 30 days after the execution of the
agreement.





(2) The
determination of the second installment is based upon contingent financial
performance of Jinchuan during the fiscal year ended December 31,
2010.  If certain net income targets are achieved by Jinchuan for the
fiscal year ended 2010, as confirmed by an audit to be performed by the
Company’s auditors, the remaining balance of the purchase price shall be paid to
Jinchuan shareholders.  If Jinchuan fails to achieve a certain net
income target for 2010, the balance of the purchase price payable shall be
reduced proportionally at the rate of 2.91 times the p/e ratio of the audited
net income for 2010.





On
February 5, 2010 (“the acquisition-date”), Fushi International completed the
acquisition of Jinchuan.





The
acquisition-date fair value of the total consideration transferred was
$10,150,000, which comprised of:





(1) Cash
payment in the amount of $5,075,000 paid on the acquisition date as the first
installment of the purchase price; and





(2) A
liability due to former Jinchuan shareholders in the amount of $5,075,000 as a
contingent consideration arrangement.





The
contingent consideration arrangement requires Fushi International to pay the
former Jinchuan shareholders an amount equal to 2.91 times the audited net
income of 2010 as full purchase price up to a maximum amount of $10.15 million.
Considering $5,075,000 first installment was paid on acquisition date, the
potential undiscounted amount of all future payments that Fushi International
could be required to pay under the contingent consideration arrangement is
between $0 to $5,075,000. The fair value of the contingent consideration
arrangement of $5,075,000 was estimated by applying the income approach.
That measure is based on significant inputs determined by management that are
not observable in the market, which ASC Topic 820 refers to as Level 3 inputs.
Key assumptions include (a) the combined impact of upgrading plans of national
power grid systems in PRC and the synergies from acquisition of Jinchuan will
enhance Jinchuan’s revenue by 21% compared with 2009 and (b) the synergies from
acquisition of Jinchuan will further reduce Jinchuan’s cost by 2% compared with
2009.  As of September 30, 2010 and through the issuance of these
consolidated financial statements, management believes that Jinchuan is able to
meet such net income target for 2010 to recognize the full amount of the
contingent consideration.





No
material acquisition-related costs were incurred and recognized in the Company’s
income statement for the nine months ended September 30, 2010.





On
February 5, 2010 (the acquisition-date), the fair value of the assets acquired
and liabilities assumed of the transaction are listed below:





Book Value
                  
                  
                  Fair ValueCurrent
      assets
                  
                  $
                  4,739,337
                  
                  
                  $
                  4,739,337Property,
      plant and equipment, net
                  
                  
                  5,982,992
                  
                  
                  
                  10,000,111Land
      use right
                  
                  
                  799,522
                  
                  
                  
                  1,693,759Total
      assets
                  
                  
                  11,521,851
                  
                  
                  
                  16,433,207Total
      liabilities
                  
                  
                  2,977,257
                  
                  
                  
                  2,977,257Net
      assets
                  
                  $
                  8,544,594
                  
                  
                  $
                  13,455,950





The fair
value of the acquired assets of Jinchuan is based on an independent appraisal
report issued by Liaoning Hongxing Appraisal, LLC, Dalian, China.  The
appraiser conducted an on-site visit, inspected each item, conducted market
research and investigation, followed some asset evaluation policies and
regulations issued by the Chinese government, and provided an evaluation report.
The fair value of Jinchuan’s net assets pursuant to the independent appraisals
was $13,455,950, which exceeds the fair value of the consideration transferred
of $10,150,000 by $3,305,013 ($937 related effect of foreign currency
translation), thus resulting in a bargain purchase gain recognized by the
Company related to this acquisition. The gain is presented as bargain purchase
gain (a separate line item) in the consolidated statements of income and other
comprehensive income for the nine months ended September 30, 2010.





The
results of operations of the acquired company are included in the consolidated
statement of income since February 5, 2010 (the acquisition date) to the end of
the quarter. Jinchuan’s revenue amounted to $22,025,727 and net income amounted
to $3,034,133 which was included in the consolidated statements of income and
other comprehensive income for the nine months ended September 30, 2010.
Jinchuan’s revenue amounted to $8,631,211 and net income amounted to $1,348,311
which was included in the consolidated statements of income and other
comprehensive income for the three months ended September 30,
2010.


29


FUSHI
COPPERWELD, INC. AND SUBSIDIARIES


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


SEPTEMBER
30, 2010


(Unaudited)





Acquisition of
Hongtai





On May
27, 2010, the Company’s PRC subsidiary, Fushi International entered into an
agreement to purchase 100% of the equity interest of Hongtai, a bimetallic wire
manufacturer in Southeast China, for aggregate consideration of approximately
$3.9 million, comprised of $1.3 million in cash and $2.6 million in restricted
stock.  The Company also announced that it will relocate the assets
and key personnel of Hongtai to Yixing, China, and establish Fushi
International (JiangSu) Bimetallic Cable Co., Ltd (“Fushi JiangSu”) in
Yixing.





Hongtai
is a leading manufacturer of bimetallic wire in Southeast China, principally
copper-clad aluminum ("CCA") and copper-clad aluminum magnesium
("CCAM").  Hongtai produces a range of products for use in
telecommunication, utility and industrial applications in the Southeast China
market. The acquisition of Hongtai enhances Fushi's production capacity and
secondary processing capabilities for CCA and CCAM products, and extends its
sales network further into Eastern and Southeastern China.





The
Company also announced a strategic investment in Yixing, an industrial center
within the Shanghai economic zone, centrally located between Shanghai, Nanjing,
and Hangzhou in Eastern China.  The Company will relocate Hongtai
assets and key personnel to Yixing and establish Fushi International (JiangSu)
Bimetallic Cable Co., Ltd. (“Fushi JiangSu”).  By relocating to
Yixing, Fushi JiangSu will be able to leverage the center's extensive
transportation network to deliver its CCA and CCAM products to customers within
the Shanghai economic zone more quickly and cost effectively.





On May
31, 2010 (“the acquisition-date”), Fushi International completed the acquisition
of Hongtai by designating the Company’s Co-Chief Executive Officer (“Co-CEO”) Li
Fu to acquire Hongtai as the Company’s legal representative during this
transitional period of Fushi JiangSu as described above.  Mr. Li Fu is
currently appointed as the sole member of Hongtai’s board.  Such
duties carried out by the Company’s Co-CEO did not result in additional
compensation provided to the Co-CEO.  In addition, the Company funded
all such considerations as described below related to the acquisition of
Hongtai.





It is the
Company’s intention that Hongtai be dissolved at the conclusion of the
transitional period at which point Fushi JiangSu becomes fully
operational.





The
acquisition-date fair value of the total consideration transferred was
$3,900,000, which comprised of:





(1) Cash
payment in the amount of $1,300,000 paid on June 1, 2010; and





(2)
Issuance of 263,158 shares of restricted stock valued as $2,600,000 to HK Racvet
Trading Ltd (a third party as agreed in the acquisition agreement).





No
material acquisition-related costs were incurred and recognized in the Company’s
income statement for the nine months ended September 30, 2010.





On May
31, 2010 (the acquisition-date), the fair value of the assets acquired and
liabilities assumed of the transaction are listed below:





Book Value
                  
                  
                  Fair ValueCurrent
      assets
                  
                  $
                  848,382
                  
                  
                  $
                  848,382Property,
      plant and equipment, net
                  
                  
                  3,748,828
                  
                  
                  
                  6,934,051Patents
                  
                  
                  -
                  
                  
                  
                  908,114Total
      assets
                  
                  
                  4,597,210
                  
                  
                  
                  8,690,547Total
      liabilities
                  
                  
                  3,026,173
                  
                  
                  
                  3,026,173Net
      assets
                  
                  $
                  1,571,037
                  
                  
                  $
                  5,664,374





The fair
value of the acquired assets of Hongtai is based on independent appraisal
reports issued by Liaoning Hongxing Appraisal, LLC. and Liaoning Baoye
Appraisal, LLC Dalian, China.  The appraisers conducted an on-site
visit, inspected each item, conducted market research and investigation,
followed some asset evaluation policies and regulations issued by the Chinese
government, and provided an evaluation report. The fair value of Hongtai’s net
assets pursuant to the independent appraisals was $5,664,374, which exceeds the
fair value of the consideration transferred of $3,900,000 by $1,765,376 ($1,002
related effect of foreign currency translation), thus resulting in a bargain
purchase gain recognized by the Company related to this acquisition. The gain is
presented as bargain purchase gain (a separate line item) in the consolidated
statements of income and other comprehensive income for the three and nine
months ended September 30, 2010.


30


FUSHI
COPPERWELD, INC. AND SUBSIDIARIES


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


SEPTEMBER
30, 2010


(Unaudited)





The
results of operations of the acquired company are included in the consolidated
statement of income since May 31, 2010 (the acquisition date) to the end of the
quarter. Since acquisition of Hongtai, the Company has been working on
relocating the assets and key personnel of Hongtai to Yixing to establish Fushi
JiangSu. Thus, Hongtai has yet to begin operations since acquisition date. The
Company reflected a net loss amounting to $338,663 and $428,463 that was
included in the consolidated statements of income and other comprehensive income
for the three and nine months ended September 30, 2010.





Supplemental
Pro Forma





The
following unaudited pro forma consolidated condensed income statements for the
three months and nine months ended September 30, 2010 and 2009, were prepared
under generally accepted accounting principles as if the acquisition of Jinchuan
and Hongtai had occurred on January 1, 2009. The pro forma information may not
be indicative of the results that actually would have occurred if the
acquisition had been in effect from and on the dates indicated.





Proforma
                  
                  For the three
                    months ended
                    September30,
                  
                  
                  For the three
                    months ended
                    September30,
                  
                  
                  For thenine
                    months ended
                    September30,
                  
                  
                  For thenine
                    months ended
                    September30,2010
                  
                  
                  2009
                  
                  
                  2010
                  
                  
                  2009Sales
                  
                  $
                  66,507,433
                  
                  
                  $
                  57,775,081
                  
                  
                  $
                  200,427,323
                  
                  
                  $
                  157,287,111Cost
      of goods sold
                  
                  
                  46,842,955
                  
                  
                  
                  40,241,170
                  
                  
                  
                  141,777,460
                  
                  
                  
                  113,382,155Gross
      profit
                  
                  
                  19,664,478
                  
                  
                  
                  17,533,911
                  
                  
                  
                  58,649,863
                  
                  
                  
                  43,904,956Operating
      expenses
                  
                  
                  4,699,980
                  
                  
                  
                  4,835,746
                  
                  
                  
                  15,494,664
                  
                  
                  
                  13,879,172Income
      from operations
                  
                  
                  14,964,498
                  
                  
                  
                  12,698,165
                  
                  
                  
                  43,155,199
                  
                  
                  
                  30,025,784Other
      expense, net
                  
                  
                  (21,727)
                  
                  
                  
                  (466,259)
                  
                  
                  
                  (4,916,423)
                  
                  
                  
                  (9,744,840)Income
      before income tax
                  
                  
                  14,942,771
                  
                  
                  
                  12,231,906
                  
                  
                  
                  38,238,776
                  
                  
                  
                  20,280,944Income
      tax expense
                  
                  
                  2,072,009
                  
                  
                  
                  1,429,211
                  
                  
                  
                  3,589,359
                  
                  
                  
                  2,210,651Net
      income
                  
                  $
                  12,870,762
                  
                  
                  $
                  10,802,695
                  
                  
                  $
                  34,649,417
                  
                  
                  $
                  18,070,293





Note
20 - Segment Information





Pursuant
to the “Disclosures about Segments of an Enterprise and Related Information”
from GAAP, 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.





The
Company has two reportable segments: PRC, and US. We analyze our worldwide
operations based on two geographic reportable segments: 1) “PRC” which consists
of our facilities Located in the People’s Republic of China (PRC) and 2) "US”
which consists of our Fayetteville, Tennessee, (US), and Telford, England, (UK)
facilities.





The PRC
segment, through Dalian, Jinchuan, Hongtai and JiangSu manufacturing facility,
is engaged in developing, designing, manufacturing, marketing and distributing
copper-clad 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-clad bimetallic
engineered conductor products, principally CCA and copper-clad steel
(CCS) and primarily services the North and South American, European, Middle
Eastern and North African markets. Due to the size of the UK operations,
the Company combined it with the US operation as one segment.


31


FUSHI
COPPERWELD, INC. AND SUBSIDIARIES


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


SEPTEMBER
30, 2010


(Unaudited)





The below
table illustrates the composition of the UK operations:





For theninemonths
                    endedSeptember30,
                    2010
                  
                  
                  For theninemonths
                    endedSeptember30,
                    2009Revenue
                  
                  $
                  3,329,059
                  
                  
                  $
                  2,253,213Net
      income
                  
                  
                  30,915
                  
                  
                  
                  210,290





For the three months
                    ended September 30,
                    2010
                  
                  
                  For the three months
                    ended September 30,
                    2009Revenue
                  
                  $
                  1,043,741
                  
                  
                  $
                  855,283Net
      (loss) income
                  
                  
                  (29,118
                  )
                  
                  
                  24,058





September30,
                    2010
                  
                  
                  December 31,
                    2009Assets
                  
                  $
                  3,223,186
                  
                  
                  $
                  2,673,254





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.





Analysis
of reportable segments (management information):





For the nine months ended
                  September 30, 2010PRC
                
                
                US
                
                
                Corporate
                
                
                Eliminations
                
                
                TotalRevenues
                
                $
                158,093,089
                
                
                $
                40,519,519
                
                
                $
                -
                
                
                $
                (3,549,967
                )
                
                $
                195,062,641Gross
      profit
                
                
                51,588,236
                
                
                
                5,487,655
                
                
                
                -
                
                
                
                -
                
                
                
                57,075,891Selling,
      general and administrative expenses
                
                
                8,384,077
                
                
                
                3,618,800
                
                
                
                3,233,299
                
                
                
                -
                
                
                
                15,236,176Operating
      income (loss)
                
                
                43,204,159
                
                
                
                1,868,855
                
                
                
                (3,233,299
                )
                
                
                -
                
                
                
                41,839,715Capital
      expenditures
                
                
                1,682,179
                
                
                
                244,401
                
                
                
                -
                
                
                
                -
                
                
                
                1,926,580Depreciation
      expense (included in cost of goods sold and operating
    expense)
                
                $
                7,541,497
                
                
                $
                1,456,360
                
                
                $
                -
                
                
                $
                -
                
                
                $
                8,997,857





For the three months ended
                  September 30, 2010PRC
                
                
                US
                
                
                Corporate
                
                
                Eliminations
                
                
                TotalRevenues
                
                $
                54,995,104
                
                
                $
                13,093,644
                
                
                $
                -
                
                
                $
                (1,581,315
                )
                
                $
                66,507,433Gross
      profit
                
                
                18,031,526
                
                
                
                1,632,952
                
                
                
                -
                
                
                
                -
                
                
                
                19,664,478Selling,
      general and administrative expenses
                
                
                2,656,104
                
                
                
                962,070
                
                
                
                1,081,806
                
                
                
                -
                
                
                
                4,699,980Operating
      income (loss)
                
                
                15,375,422
                
                
                
                670,882
                
                
                
                (1,081,806
                )
                
                
                -
                
                
                
                14,964,498Capital
      expenditures
                
                
                88,030
                
                
                
                102,156
                
                
                
                -
                
                
                
                -
                
                
                
                190,186Depreciation
      expense (included in cost of goods sold and operating
    expense)
                
                $
                2,692,845
                
                
                $
                482,728
                
                
                $
                -
                
                
                $
                -
                
                
                $
                3,175,573


32


FUSHI
COPPERWELD, INC. AND SUBSIDIARIES


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


SEPTEMBER
30, 2010


(Unaudited)





For the nine months ended
                  September 30, 2009PRC
                
                
                US
                
                
                Corporate
                
                
                Eliminations
                
                
                TotalRevenues
                
                $
                105,226,285
                
                
                $
                26,506,874
                
                
                $
                -
                
                
                $
                (498,732
                )
                
                $
                131,234,427Gross
      profit
                
                
                34,361,859
                
                
                
                3,199,662
                
                
                
                -
                
                
                
                -
                
                
                
                37,561,521Selling,
      general and administrative expenses
                
                
                6,161,221
                
                
                
                4,251,538
                
                
                
                2,701,597
                
                
                
                -
                
                
                
                13,114,356Operating
      income (loss)
                
                
                28,200,638
                
                
                
                (1,051,876
                )
                
                
                (2,701,597
                )
                
                
                -
                
                
                
                24,447,165Capital
      expenditures
                
                
                5,770,109
                
                
                
                261,267
                
                
                
                -
                
                
                
                -
                
                
                
                6,031,376Depreciation
      expense (included in cost of goods sold and operating
    expense)
                
                $
                5,853,457
                
                
                $
                1,338,385
                
                
                $
                -
                
                
                $
                -
                
                
                $
                7,191,842





For the three months ended
                  September 30, 2009PRC
                
                
                US
                
                
                Corporate
                
                
                Eliminations
                
                
                TotalRevenues
                
                $
                39,408,804
                
                
                $
                8,857,027
                
                
                $
                
                
                
                $
                (589,485
                )
                
                $
                47,646,346Gross
      profit
                
                
                13,472,985
                
                
                
                1,696,482
                
                
                
                
                
                
                
                
                
                
                
                15,169,467Selling,
      general and administrative expenses
                
                
                2,667,761
                
                
                
                1,319,654
                
                
                
                600,777
                
                
                
                
                
                
                
                4,558,192Operating
      income (loss)
                
                
                10,805,224
                
                
                
                376,828
                
                
                
                (600,777
                )
                
                
                
                
                
                
                10,581,275Capital
      expenditures
                
                
                416,220
                
                
                
                5,622
                
                
                
                
                
                
                
                
                
                
                
                421,842Depreciation
      expense (included in cost of goods sold and operating
    expense)
                
                $
                2,073,116
                
                
                $
                506,321
                
                
                $
                
                
                
                $
                
                
                
                $
                2,579,437





PRC
                
                
                US
                
                
                Corporate
                
                
                TotalAs
      of September 30, 2010Property,
      plant and equipment, net
                
                $
                118,869,646
                
                
                $
                10,879,244
                
                
                $
                -
                
                
                $
                129,748,890Total
      assets
                
                $
                332,873,677
                
                
                $
                33,240,947
                
                
                $
                21,301,666
                
                
                $
                387,416,290As
      of December 31, 2009Property,
      plant and equipment, net
                
                $
                105,190,257
                
                
                $
                12,195,309
                
                
                $
                -
                
                
                $
                117,385,566Total
      assets
                
                $
                254,054,799
                
                
                $
                25,902,180
                
                
                $
                14,777,086
                
                
                $
                294,734,065





Note
21 – Supplemental information for cash flow statement





The
Company acquired Jinchuan on February 5, 2010 with first payment amounting to
$5,075,000 paid on the same date and a contingent liability that amounted to
$5,075,000 to former Jinchuan shareholders.





The
Company acquired Hongtai on May 31, 2010 with payment amounting to $1,300,000
paid on June 1, 2010 and issued an additional $2.6 million in restricted
stock.





See Note
19 – Business combination for detail.





Note
22 – Related party





In
September 2010, the Company’s Co-CEO and majority shareholder, Mr. Li Fu,
advanced to the Company $15,000,000 so that Fushi JiangSu could timely make
its registered capital payments as discussed in Note 18 – Commitments and
contingencies. The loan is non-interest bearing and is due on demand. Mr. Fu
also advanced the Company $8,000,000 in October 2010 for additional registered
capital payments for Fushi Jiangsu. In October 2010, the Company had fully
repaid all shareholder liabilities owed to Mr. Li Fu.





Note
23 – Subsequent events





The
Company has performed an evaluation of subsequent events through the date which
the consolidated financial statements were available to be issued.





On
November 3, 2010, the Company’s Board of Directors  received a
proposal from its Chairman and Chief Executive Officer, Mr. Li Fu ("Mr. Fu") and
Abax Global Capital (Hong Kong) Limited on behalf of funds managed by it and its
affiliates ("Abax") for Mr. Fu and Abax to acquire all of the outstanding
shares of Common Stock of Fushi not currently owned by Mr. Fu and his affiliates
in a going private transaction for $11.50 per share in cash, subject to certain
conditions. Mr. Fu and his affiliates own approximately 29.2% of Fushi's Common
Stock.  According to the proposal letter, Mr. Fu and Abax will form an
acquisition vehicle for the purpose of completing the acquisition and plan to
finance the acquisition with a combination of debt and equity capital. The
proposal letter states that the equity portion of the financing would be
provided by Mr. Fu, Abax and related sources. The proposal letter also states
that Mr. Fu and Abax are currently in discussion to engage a financial advisor
to the acquisition vehicle that will be formed by Mr. Fu and
Abax.  The Company’s Board of Directors has formed a special committee
of independent directors to evaluate and consider this proposal. No decisions
have been made by the Special Committee with respect to the Company’s response
to the proposal.




A shareholder class action complaint
has been filed against Fushi and certain officers and directors thereof in
connection with the November 3, 2010 proposal made by Mr. Li Fu and Abax for Mr.
Fu and Abax to acquire all of the outstanding shares of Common Stock of Fushi
not currently owned by Mr. Fu and his affiliates in a going private transaction
for $11.50 per share in cash, subject to certain conditions (the “Fu Proposal”).
In the complaint, the plaintiffs challenge the Fu Proposal and allege, among
other things, that the consideration to be paid in such proposal is grossly
inadequate. The complaint seeks, among other relief, to enjoin defendants from
consummating the Fu Proposal and to direct defendants to exercise their
fiduciary duties to obtain a transaction that is in the best interests of our
shareholders. The complaint was filed in Nevada. We have reviewed the
allegations contained in the complaint and believe they are without merit. We
intend to defend the litigation vigorously. As such, based on the information
known to us to date, we do not believe that it is probable that a material
judgment against us will result. In accordance with ASC Topic 450, no liability
has been accrued.


33


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 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., (ii) Fushi Holdings, Inc., (iii) Fushi International (Dalian)
Bimetallic Cable Co., Ltd. (formerly Dalian Diversified Product Inspections
Bimetallic Cable, Co., Ltd.) (“Fushi International (Dalian)”), (iv) Fushi
International (Jiangsu) Bimetallic Cable Co., (“Fushi International (Jiangsu)”),
(v) Dalian Jinchuan Power Cable Co., Ltd. (“Jinchuan”); (vi) Shanghai
Hongtai Industrial Co., Ltd.( “Hongtai”) (vii) Dalian Fushi Bimetallic Wire
Manufacturing, Co., Ltd. (“Dalian Fushi”), (viii) Copperweld Holdings, LLC, (ix)
Copperweld Bimetallic, LLC (“Copperweld”) and (x) 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.
 
 Overview
 
 We
believe we are one of the world’s largest producers, based on manufacturing
capacity, and a leading innovator of bimetallic copper-clad wire products,
principally copper-clad aluminum (CCA) and copper-clad steel (CCS) products. Our
products are primarily used in the telecommunications, electrical utility, and
transportation industries, and are sold as conductor components and
finished products in the wire and cable market.  Our products significantly
reduce the amount of copper required to manufacture a conductor, and since
copper is expensive; we significantly reduce conductor costs through the
addition of an aluminum or steel core.  CCA and CCS conductors are
generally used as substitutes for solid copper conductors where either cost
savings or specific electrical and/or physical attributes are
either required or desired.  In the first nine months of 2010, our
products were sold to over 400 customers in over 30 countries. We market our
products under the trademarked names of “Copperweld®” and “FushiTM,” and sell
either directly to cable manufacturers or through distributors or sales agents
to end-users.
 
 Although
we are engaged in one line of business, as a result of the differing markets
served by each of our manufacturing facilities and significant differences in
the operating results among each of our facilities, we analyze our worldwide
operations based on two geographic reportable segments: 1) “PRC” which consists
of our facilities located in the People’s Republic of China (PRC) and 2) “US”
which consists of our Fayetteville, Tennessee, US, and Telford, England, (UK)
facilities.
 
 We
believe we have a strong market position in all markets in which we compete due
to the quality of our products, superior customer service, 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 one of the
leading producers of copper-clad bimetallic wire products in the world and are
one of the market leaders in North America, Europe, Northern Africa, the Middle
East and the People’s Republic of China.  We continue to expand within
current and developing markets and 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 in 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, pricing, delivery, cost,
customer service 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 for the Company.
  34
 
 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 which is a considerable cost
savings for our customers - wire and cable manufactures - and end-users of their
products. For many applications, bimetallic conductors offer significant
advantages over copper wire. Manufacturers in the wire and cable 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.
 
 We
believe 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 or diameter of the wire, to fit many applications. The
physical and electrical attributes of our bimetallic products provide our
customers cost savings beyond their intrinsic pricing advantages.
 
 We
believe 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 clad 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 generally 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 to 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.
 
 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 three months ended September 30, 2010 include:
 
 ·
              Gross
      profit increased 29.6% to $19.7 million, or 29.6% of revenue, from $15.2
      million in the third quarter of
2009;
 ·
              Operating
      margin increased 30 basis points to 22.5% from 22.2% compared to the third
      quarter of 2009;
 ·
              Further
      strengthened presence in Southeastern China through investment in Fushi
      International (Jiangsu); and
 ·
              Metric
      tons shipped at US facility increased 32.2% compared to the third quarter
      of 2009.
 
 Current
Business Environment and Outlook for the Remainder of 2010:
 
 We
continue to see strengthening of demand for our products throughout the globe
despite a slower than expected economic recovery in certain regions and a
decrease in telecommunication infrastructure projects, specifically the 3G
build-out, in China. We continue to persistently and systematically pursue
potential organic and inorganic growth opportunities throughout the globe.
Although delays in large-scale infrastructure projects could impact certain
markets in the short-term, we think the following macro-level trends will
positively impact our business and offer us opportunities to enhance
profitability and capture new business in the context of improving global
economic conditions:
  35
 
 ·
              Government
      stimulus packages focused on infrastructure: high-speed railways,
      transmission and distribution and power grid build
  out;
 ·
              Worldwide
      underlying long-term growth trends in the electric utility and
      infrastructure markets;
 ·
              Population
      growth and urbanization in developing countries with growing middle
      classes which influence demand for wire and cable;
  and
 ·
              Continuing
      demand for cost effective, energy saving
  alternatives.
 
 In order
to capture the growth opportunities, we will focus on driving profitability by
continuing to streamline our organizational structure and business procedures,
increasing operational efficiency and optimizing operating processes, while
managing production costs and operating expenses.
 
 In
addition, we are seeking to continue to develop the high potential utility and
transportation markets, to enhance productivity and to expand our sales of
higher margin products.  We view the market for CCA and CCS wires and
cables within the utilities market to be worldwide. We continue to educate
the PRC market on the benefits of CCS for the utilities market. With our recent
announcement that 8,200 metric tons of CCS production is now online at our PRC
facility, we have begun to target this market more aggressively.
 
 We
continue to establish our presence in Southeastern China through continued
investment in Fushi International (Jiangsu). Although not currently fully
operational, we believe our new temporary facility, strategically located in
Yixing, Jiangsu, will provide additional opportunities for our CCA and CCS
products with respect to the over 100 telecom and power wire and cable
manufacturers in the region and will also allow us to better service Southeast
Asia.
 
 Meanwhile,
we are also working to strengthen sales management and customer relations. We
will seek to consolidate our relationships with our best customers, stop or
suspend selling to customers that pose significant credit risk, and develop new
customers cautiously.  In addition, as part of our ongoing efforts to
reduce total operating costs, we continuously improve our ability to efficiently
utilize existing and new manufacturing capacity to manage expansion and growth.
We believe that effectively utilized manufacturing assets and economy of scale
generated, will help offset high raw material prices and dilute overhead over
time, thus improving profitability.
 
 We
actively seek to identify and promptly respond to key economic and industry
trends in order to capitalize on expanding niche markets for our products and
possibly entering into new markets both down and up stream, in order to achieve
better returns.  We have the resources, technology, working capital and
capacity to meet growing market demands.  Over the long-term, we believe
that we are well positioned to benefit from the growth opportunities in China
and throughout the world.
 
 Results
of Operations
 
 The
following table sets forth, for the periods indicated, statement of operations
data in millions of dollars:
 
 (in millions, except percentages)
                    
                    Three Months Ended
                    
                    
                    
                    
                    
                    NineMonths EndedSeptember 30,
                    
                    
                    September 30,
                    
                    
                    
                    
                    
                    September 30,
                    
                    
                    September 30,2010
                      (Unaudited)
                    
                    
                    2009
                      (Unaudited)
                    
                    
                    % Change
                    
                    
                    2010(Unaudited)
                    
                    
                    2009
                      (Unaudited)
                    
                    
                    % ChangeRevenues
                    
                    $
                    66.5
                    
                    
                    $
                    47.7
                    
                    
                    
                    39.4
                    %
                    
                    $
                    195.1
                    
                    
                    $
                    131.2
                    
                    
                    
                    48.7
                    %Gross
      Profit
                    
                    
                    19.7
                    
                    
                    
                    15.2
                    
                    
                    
                    29.6
                    %
                    
                    
                    57.1
                    
                    
                    
                    37.6
                    
                    
                    
                    51.9
                    %Selling,
      general and administrative expenses
                    
                    
                    4.7
                    
                    
                    
                    4.6
                    
                    
                    
                    2.2
                    %
                    
                    
                    15.2
                    
                    
                    
                    13.1
                    
                    
                    
                    16.0
                    %Operating
      Income
                    
                    
                    15.0
                    
                    
                    
                    10.6
                    
                    
                    
                    41.5
                    %
                    
                    
                    41.8
                    
                    
                    
                    24.4
                    
                    
                    
                    71.3
                    %Income
      Before Taxes
                    
                    
                    14.9
                    
                    
                    
                    10.1
                    
                    
                    
                    47.5
                    %
                    
                    
                    36.9
                    
                    
                    
                    14.7
                    
                    
                    
                    151.0
                    %Net
      Income Tax Provision
                    
                    
                    2.1
                    
                    
                    
                    0.9
                    
                    
                    
                    133.3
                    %
                    
                    
                    3.3
                    
                    
                    
                    0.8
                    
                    
                    
                    312.5
                    %Net
      Income
                    
                    $
                    12.9
                    
                    
                    $
                    9.2
                    
                    
                    
                    40.2
                    %
                    
                    $
                    33.7
                    
                    
                    $
                    13.9
                    
                    
                    
                    142.4
                    %
 
 Comparison
of the Three Months Ended September 30, 2010 and September 30,
2009:
 
 Net
Sales by Segment
 
 The
following tables set forth revenues in millions and metric tons (MT) of
copper-clad products sold by each of our reporting segments on a combined
basis:
 
 Net Sales(in millions, exceptpercentage)
                  
                  Three Months EndedSeptember30,2010
                  
                  
                  2009Amount
                    (Unaudited)
                  
                  
                  % of Net
                    Sales
                  
                  
                  Amount
                    (Unaudited)
                  
                  
                  % of Net
                    Sales
                  
                  
                  Dollar
                    Change
                  
                  
                  % ChangePRC
                  
                  $
                  53.4
                  
                  
                  
                  80.3
                  %
                  
                  $
                  38.9
                  
                  
                  
                  81.6
                  %
                  
                  $
                  14.5
                  
                  
                  
                  37.3
                  %US
                  
                  
                  13.1
                  
                  
                  
                  19.7
                  %
                  
                  
                  8.8
                  
                  
                  
                  18.4
                  %
                  
                  
                  4.3
                  
                  
                  
                  48.9
                  %Total
      net sales
                  
                  $
                  66.5
                  
                  
                  
                  100.0
                  %
                  
                  $
                  47.7
                  
                  
                  
                  100.0
                  %
                  
                  $
                  18.8
                  
                  
                  
                  39.4
                  %
  36
 
 Metric Tons SoldThree Months EndedSeptember30,2010
                  
                  
                  2009MT
                  
                  
                  % of MT
                    Sales
                  
                  
                  MT
                  
                  
                  % of MT
                    Sales
                  
                  
                  Tonnage
                    Change
                  
                  
                  % ChangePRC *
                  
                  
                  7,388
                  
                  
                  
                  75.7
                  %
                  
                  
                  8,017
                  
                  
                  
                  81.6
                  %
                  
                  
                  -629
                  
                  
                  
                  -7.8
                  %US
                  
                  
                  2,372
                  
                  
                  
                  24.3
                  %
                  
                  
                  1,812
                  
                  
                  
                  18.4
                  %
                  
                  
                  560
                  
                  
                  
                  30.9
                  %Total
      sales volume*
                  
                  
                  9,760
                  
                  
                  
                  100.0
                  %
                  
                  
                  9,829
                  
                  
                  
                  100.0
                  %
                  
                  
                  -69
                  
                  
                  
                  -0.7
                  %
 
 *
Does not include volume contributed by the Jinchuan acquisition which is
measured by meters.
 
 Net sales
were $66.5 million in the third quarter of 2010, compared to $47.7 million in
the same period of last year. Organic growth excluding the impact of the
acquisitions of Jinchuan and Hongtai during the quarter was 21.2%. The $18.8
million increase in revenues was primarily driven by continued improvement in
global demand, higher average selling prices which was partially due to
increased copper prices, and incremental contributions from recent
acquisitions.
 
 The PRC
segment experienced an increase of 37.3% in net sales for the third quarter
ended September 30, 2010 compared to the similar period of 2009. The increase in
PRC net sales is due to a 24.9% increase in average selling prices as a
result of higher acquisition costs of raw materials and the inclusion of
Jinchuan, which contributed $8.6 million in net sales, partially offset by a
7.8% drop in volume primarily as a result of the slowdown in capital spending
related to China’s 3G build out.
 
 The US
segment experienced an increase of 48.9% in net sales for the third quarter of
2010 compared to the third quarter of 2009. The increase is primarily due to a
(i) 30.9% volume increase, (ii) 13.8% increase in average selling price
resulting from a higher acquisition cost of raw materials and (iii) the increase
in the utilization rate from 25.4% to 31.4%. We continued to see strengthening
of global demand in markets serviced from operations within our US segment
throughout the third quarter of 2010 and believe the demand from global
investment will continue.
 
 Net
Sales by Industry
 
 The
following table presents the breakdown of combined net sales in
millions by industry:
  Net SalesThree Months EndedSeptember30,(in millions, exceptpercentages)
                    
                    2010
                    
                    
                    2009Amount
                      (Unaudited)
                    
                    
                    % of Net
                      Sales
                    
                    
                    Amount
                      (Unaudited)
                    
                    
                    % of Net
                      Sales
                    
                    
                    Dollar
                      Change
                    
                    
                    % ChangeTelecommunication
                    
                    $
                    23.9
                    
                    
                    
                    35.9
                    %
                    
                    $
                    24.5
                    
                    
                    
                    51.4
                    %
                    
                    $
                    -0.6
                    
                    
                    
                    -2.4
                    %Utility
                    
                    
                    39.6
                    
                    
                    
                    59.5
                    %
                    
                    
                    20.3
                    
                    
                    
                    42.6
                    %
                    
                    
                    19.3
                    
                    
                    
                    95.1
                    %Transportation
                    
                    
                    1.1
                    
                    
                    
                    1.7
                    %
                    
                    
                    0.5
                    
                    
                    
                    1.0
                    %
                    
                    
                    0.6
                    
                    
                    
                    120.0
                    %Other
                    
                    
                    1.9
                    
                    
                    
                    2.9
                    %
                    
                    
                    2.4
                    
                    
                    
                    5.0
                    %
                    
                    
                    -0.5
                    
                    
                    
                    -20.8
                    %Total
      net sales
                    
                    $
                    66.5
                    
                    
                    
                    100.0
                    %
                    
                    $
                    47.7
                    
                    
                    
                    100.0
                    %
                    
                    $
                    18.8
                    
                    
                    
                    39.4
                    %
 
 The
following table presents the breakdown of metric tons (MT) of copper-clad
products shipped to customers by industry:
 
 Three Months EndedSeptember30,2010
                    
                    
                    2009MT
                    
                    
                    % of MT
                      Sales
                    
                    
                    MT
                    
                    
                    % of MT
                      Sales
                    
                    
                    Tonnage
                      Change
                    
                    
                    % ChangeTelecommunication
                    
                    
                    4,169
                    
                    
                    
                    42.7
                    %
                    
                    
                    4,999
                    
                    
                    
                    50.8
                    %
                    
                    
                    -830
                    
                    
                    
                    -16.6
                    %Utility *
                    
                    
                    4,941
                    
                    
                    
                    50.6
                    %
                    
                    
                    3,988
                    
                    
                    
                    40.6
                    %
                    
                    
                    953
                    
                    
                    
                    23.9
                    %Transportation
                    
                    
                    135
                    
                    
                    
                    1.4
                    %
                    
                    
                    67
                    
                    
                    
                    0.7
                    %
                    
                    
                    68
                    
                    
                    
                    101.5
                    %Other
                    
                    
                    515
                    
                    
                    
                    5.3
                    %
                    
                    
                    775
                    
                    
                    
                    7.9
                    %
                    
                    
                    -260
                    
                    
                    
                    -33.5
                    %Total
      sales volume *
                    
                    
                    9,760
                    
                    
                    
                    100.0
                    %
                    
                    
                    9,829
                    
                    
                    
                    100.0
                    %
                    
                    
                    -69
                    
                    
                    
                    -0.7
                    %
 
 *
Does not include volume contributed by the Jinchuan acquisition which is
measured by meters.
 
 During
the quarter ended September 30, 2010, our copper-clad wire sales to the
telecommunication markets decreased by 830 metric tons, or 16.6%, compared to
the same period in 2009 due to a slowing in the 3G build out in China and
was partially offset by increased demand within the domestic US, as well as
demand from other geographical areas.
  37




Utility
sales of copper-clad products in volume increased by 953 metric tons, or 23.9%,
in the third quarter 2010 compared to the similar period in 2009. The increase
in volume was broad-based across numerous geographical regions and applications
worldwide. The 95.1% increase in net sales in dollar amount to the utility
markets was primarily attributable to higher average selling prices, higher
volumes of copper-clad products sold, and the inclusion of the Jinchuan
acquisition which contributed $8.6 million in sales. The acquisition of Jinchuan
allows us to process our products further downstream and provides a strategic
expansion into the utility market sub-segment.
 
 Capacity
and Metric Tons Sold
 
 The
following table summarizes installed cladding capacities and output for the
three month period ended September 30, 2010:
 
 Three Months Ended September
      30, 2010PRC
                    
                    
                    USCapacity
                      (MT)
                    
                    
                    Sold
                      (MT)
                    
                    
                    Capacity
                      (MT)
                    
                    
                    Sold
                      (MT)CCA
                    
                    
                    10,000
                    
                    
                    
                    7,227
                    
                    
                    
                    3,062
                    
                    
                    
                    760CCS
                    
                    
                    2,050
                    
                    
                    
                    31
                    
                    
                    
                    4,274
                    
                    
                    
                    1,569Total
                    
                    
                    12,050
                    
                    
                    
                    7,258
                    
                    
                    
                    7,336
                    
                    
                    
                    2,329
  We
successfully installed 8,200 MT of CCS cladding capacity at our Dalian facility
within the PRC segment during the second quarter of 2010. This
additional capacity is targeted for the telecommunications, electric utilities
and transportation industries in Asia where we believe there is significant
demand for CCS. We are currently working with our customers to increase demand
for CCS at our Dalian facility to further accelerate our growth and believe we
will begin to realize increased revenue from CCS products within our PRC segment
in fiscal year 2011.
 
 Net
Sales by Product Mix
 
 The
following table summarizes the breakdown of metric tons (MT) of copper-clad
products shipped to customers by product mix:
  Metric Tons SoldThree Months EndedSeptember30,2010
                    
                    
                    2009MT
                    
                    
                    % of MT
                      Sales
                    
                    
                    MT
                    
                    
                    % of MT
                      Sales
                    
                    
                    Tonnage
                      Change
                    
                    
                    % ChangeCCA
                    
                    
                    7,987
                    
                    
                    
                    81.8
                    %
                    
                    
                    8,155
                    
                    
                    
                    83.0
                    %
                    
                    
                    -168
                    
                    
                    
                    -2.1
                    %CCS
                    
                    
                    1,600
                    
                    
                    
                    16.4
                    %
                    
                    
                    1,272
                    
                    
                    
                    12.9
                    %
                    
                    
                    328
                    
                    
                    
                    25.8
                    %Others
      *
                    
                    
                    173
                    
                    
                    
                    1.8
                    %
                    
                    
                    402
                    
                    
                    
                    4.1
                    %
                    
                    
                    -229
                    
                    
                    
                    -57.0
                    %Total
      net sales *
                    
                    
                    9,760
                    
                    
                    
                    100.0
                    %
                    
                    
                    9,829
                    
                    
                    
                    100.0
                    %
                    
                    
                    -69
                    
                    
                    
                    -0.7
                    %
 
 *
Does not include volume contributed by the Jinchuan acquisition which is
measured by meters.
 
 CCA sales
volume from our PRC segment decreased by 5.3%, or 403 metric tons in the third
quarter of 2010 compared to the same period in 2009 due to the slowdown of
China’s 3G build out and was partially offset by stronger sales for utility
related products. CCA sales volume from our Fayetteville facility increased by
44.8%, or 235 metric tons in the third quarter of 2010 compared to the same
period in 2009 due to strengthening global demand.
 
 CCS sales
volume from our US facility increased by 25.7%, or 301 metric tons in the third
quarter of 2010 compared to the same period in 2009, primarily due to increased
demand within the domestic US and other geographical areas.
 
 Gross
Profit and Gross Margin
 
 Three Months Ended September 30,
                          
                          
                          Change(in millions,
      except percentage)
                          
                          2010
                            (Unaudited)
                          
                          
                          2009
                            (Unaudited)
                          
                          
                          Dollar
                          
                          
                          %Gross
      Profit
                          
                          $
                          19.7
                          
                          
                          $
                          15.2
                          
                          
                          $
                          4.5
                          
                          
                          
                          29.6
                          %Gross
      Margin
                          
                          
                          29.6
                          %
                          
                          
                          31.8
                          %
                          
                          
                          
                          
                          
                          
                          -2.2
                          %
 
 Gross
profit was $19.7 million in the quarter ended September 30, 2010 compared to
$15.2 million in the same period of 2009, representing an increase of
29.6%. Gross margin as a percentage of net sales decreased to approximately
29.6% from 31.8% for the year ago period. The decrease in gross margin can be
primarily attributed to lower gross margins contributed from acquisitions
completed subsequent to the third quarter of 2009 and higher raw material prices
partially offset by improvements in product mix and pricing and benefits of cost
savings initiatives.
  38
 
 Selling
Expenses
 
 Three Months Ended September 30,
                              
                              
                              Change(in millions, except percentage)
                              
                              2010
                                (Unaudited)
                              
                              
                              2009
                                (Unaudited)
                              
                              
                              Dollar
                              
                              
                              %Selling
      Expenses
                              
                              $
                              1.5
                              
                              
                              $
                              1.1
                              
                              
                              $
                              0.4
                              
                              
                              
                              36.4
                              %as
      a percentage of net sales
                              
                              
                              2.3
                              %
                              
                              
                              2.3
                              %
                              
                              
                              
                              
                              
                              
                              0
                              %
 
 Selling
expenses were $1.5 million in the quarter ended September 30, 2010 compared
to $1.1 million in the similar period in 2009, representing an increase of
36.4%. This increase is primarily due to increased global sales efforts and
acquisitions completed subsequent to the third quarter of 2009, partially offset
by cost savings initiatives.
 
 General
and Administrative Expenses
 
 Three Months Ended September 30,
                        
                        
                        Change(in millions, except percentage)
                        
                        2010
                          (Unaudited)
                        
                        
                        2009
                          (Unaudited)
                        
                        
                        Dollar
                        
                        
                        %General
      and Administrative Expenses
                        
                        $
                        3.2
                        
                        
                        $
                        3.5
                        
                        
                        $
                        -0.3
                        
                        
                        
                        -8.6
                        %as
      a percentage of net sales
                        
                        
                        4.8
                        %
                        
                        
                        7.4
                        %
                        
                        
                        
                        
                        
                        
                        -2.6
                        %
 
 General
and administrative (G&A) expenses were $3.2 million in the quarter
ended September 30, 2010 compared to $3.5 million in the same period in 2009,
representing a decrease of 8.6%, or $0.3 million. This decrease is
primarily due to enhanced efficiencies and benefits of cost savings initiatives,
partially offset by acquisitions completed subsequent to the third quarter of
2009. As a percentage of net sales, G&A expenses decreased from 7.4% in the
third quarter of 2009 to 4.8% in the same period of 2010 primarily due to
increased revenues and benefits of operational leverage.
 
 Operating
Income
 
 The
following table sets forth operating income by segment, in millions of
dollars:
 
 Three Months EndedSeptember30,(in millions, exceptpercentage)
                    
                    2010
                    
                    
                    2009Amount
                      (Unaudited)
                    
                    
                    % of
                      Operating
                      income
                    
                    
                    Amount
                      (Unaudited)
                    
                    
                    % of
                      Operating
                      income
                    
                    
                    Dollar
                      Change
                    
                    
                    % ChangePRC
                    
                    $
                    15.4
                    
                    
                    
                    102.7
                    %
                    
                    $
                    10.8
                    
                    
                    
                    101.9
                    %
                    
                    $
                    4.6
                    
                    
                    
                    42.6
                    %US
                    
                    
                    0.7
                    
                    
                    
                    4.6
                    %
                    
                    
                    0.4
                    
                    
                    
                    3.8
                    %
                    
                    
                    0.3
                    
                    
                    
                    75.0
                    %Corporate
                    
                    
                    (1.1
                    )
                    
                    
                    -7.3
                    %
                    
                    
                    (0.6
                    )
                    
                    
                    -5.7
                    %
                    
                    
                    (0.5
                    )
                    
                    
                    83.3
                    %Total
      operating income
                    
                    $
                    15.0
                    
                    
                    
                    100.0
                    %
                    
                    $
                    10.6
                    
                    
                    
                    100.0
                    %
                    
                    $
                    4.4
                    
                    
                    
                    41.5
                    %
 
 Total
operating income was $15.0 million in the quarter ended September 30, 2010
compared to $10.6 million in the same period of 2009, representing
an increase of $4.4 million or 41.5%. This increase is primarily due to an
increase in net sales and an increase in operating profit contributed
by our PRC segment of $14.5 million and $4.6 million, respectively. The
operating income within our US segment was $0.7 million compared with that of
$0.4 million in the same period of last year primarily due to benefits of
operational leverage resulting from increased volumes and cost savings
initiatives implemented during the course of 2009.
 
 Other
Income (Expense)
 
 Interest
income (expenses)
 Three Months Ended September 30,
                          
                          
                          Change(in millions, except percentage)
                          
                          2010
                            (Unaudited)
                          
                          
                          2009
                            (Unaudited)
                          
                          
                          Dollar
                          
                          
                          %Interest
      Income
                          
                          $
                          0.2
                          
                          
                          $
                          0.1
                          
                          
                          $
                          0.1
                          
                          
                          
                          100.0
                          %Interest
      (Expense)
                          
                          
                          -
                          
                          
                          
                          (1.2
                          )
                          
                          
                          1.2
                          
                          
                          
                          -100.0
                          %Net
      Interest Income / (Expense)
                          
                          $
                          0.2
                          
                          
                          $
                          (1.1
                          )
                          
                          $
                          1.3
                          
                          
                          
                          -181.2
                          %as
      a percentage of net sales
                          
                          
                          0.3
                          %
                          
                          
                          -2.3
                          %
                          
                          
                          
                          
                          
                          
                          2.6
                          %
 
 Net
interest income was $0.2 million in the quarter ended September 30, 2010
compared to interest expenses of $1.1 million in the same period of 2009. The
change is primarily the result of the repayment of the retirement of the HY
notes (see Consolidated Financial Statements Footnotes 10- Notes
Payable).
 
 Tax
 
 Three Months Ended September 30, 2010
                          (Unaudited)(in
      millions)
                        
                        PRC
                        
                        
                        US
                        
                        
                        Parent Company
                        
                        
                        ConsolidatedProfit
      (Loss) before income tax
                        
                        $
                        15.4
                        
                        
                        $
                        0.6
                        
                        
                        $
                        (1.1
                        )
                        
                        $
                        14.9Income
      tax expense (credit)
                        
                        
                        2.2
                        
                        
                        
                        -
                        
                        
                        
                        (0.2
                        )
                        
                        
                        2.0Profit
      (loss) after income tax
                        
                        $
                        13.2
                        
                        
                        $
                        0.6
                        
                        
                        $
                        (0.9
                        )
                        
                        $
                        12.9
  39
 
 Profit
before tax for the PRC segment was $15.4 million in the three months ended
September 30, 2010 with profits from the US segment before tax of $0.6 million.
Loss at the parent company level was $1.1 million. On a consolidated basis,
profit before tax was $14.9 million in the three months ended September 30, 2010
and we recognized a net tax expense of $2.0 million. The effective tax rate on a
consolidation basis for the quarter was 13.9%.
 
 Net
Income
 
 Three Months Ended September 30,
                      
                      
                      Change(in millions, except percentage)
                      
                      2010
                        (Unaudited)
                      
                      
                      2009
                        (Unaudited)
                      
                      
                      Dollar
                      
                      
                      %Income
      Before Taxes
                      
                      $
                      14.9
                      
                      
                      $
                      10.1
                      
                      
                      $
                      4.8
                      
                      
                      
                      47.5
                      %Benefit
      for Income Taxes
                      
                      
                      2.0
                      
                      
                      
                      0.9
                      
                      
                      
                      1.1
                      
                      
                      
                      122.2
                      %Net
      Income After Taxes
                      
                      $
                      12.9
                      
                      
                      $
                      9.2
                      
                      
                      $
                      3.7
                      
                      
                      
                      40.2
                      %as
      a percentage of net sales
                      
                      
                      19.4
                      %
                      
                      
                      19.3
                      %
                      
                      
                      
                      
                      
                      
                      0.1
                      %
  Income
before tax was $14.9 million in the quarter ended September 30, 2010 compared to
$10.1 million in the same period of 2009, representing an increase of $4.8
million, or 47.5%. Net income after taxes increased to $12.9 million in the
third quarter of 2010 from $9.2 million in the third quarter of 2009,
representing an increase of $3.7 million, or 40.2%. As a percentage of net
sales, net income increased slightly to 19.4% in the third quarter of 2010,
compared to 19.3% in the same period of 2009.
 
 Earnings
per Share
 
 Three Months Ended September 30,2010
                    
                    
                    2009Unaudited
                    
                    
                    UnauditedNet
      Income for Basic Earnings Per Share
                    
                    $
                    12,870,762
                    
                    
                    $
                    9,194,933Basic
      Weighted Average Number of Shares
                    
                    
                    37,694,626
                    
                    
                    
                    28,084,416Net
      Income per Share – Basic
                    
                    $
                    0.34
                    
                    
                    $
                    0.33Net
      Income for Diluted Earnings Per Share
                    
                    $
                    12,870,762
                    
                    
                    $
                    9,194,933Diluted
      Weighted Average Number of Shares
                    
                    
                    38,077,845
                    
                    
                    
                    29,206,508Net
      Income per Share – Diluted
                    
                    $
                    0.34
                    
                    
                    $
                    0.31
  Basic and
diluted earnings per share (EPS) for the quarter ended September 30, 2010, were
$0.34 and $0.34, respectively, compared to $0.33 and $0.31, respectively, for
the comparable period in 2009.
 
 Comparison
of the Nine Months Ended September 30, 2010 and September
30, 2009:
 
 Net
Sales by Segment
 
 The
following tables set forth net sales in millions and metric tons (MT) of
copper-clad products sold by each of our reporting segments on a combined
basis:
 
 Net SalesNineMonths EndedSeptember30,2010
                  
                  
                  2009(In millions, except percentage)
                  
                  Amount
                    (Unaudited)
                  
                  
                  % of Net
                    Sales
                  
                  
                  Amount
                    (Unaudited)
                  
                  
                  % of Net
                    Sales
                  
                  
                  Dollar
                    Change
                  
                  
                  % ChangePRC
                  
                  $
                  154.6
                  
                  
                  
                  79.2
                  %
                  
                  $
                  104.7
                  
                  
                  
                  79.8
                  %
                  
                  $
                  49.9
                  
                  
                  
                  47.7
                  %US
                  
                  
                  40.5
                  
                  
                  
                  20.8
                  %
                  
                  
                  26.5
                  
                  
                  
                  20.2
                  %
                  
                  
                  14.0
                  
                  
                  
                  52.8
                  %Total
      net sales
                  
                  $
                  195.1
                  
                  
                  
                  100.0
                  %
                  
                  $
                  131.2
                  
                  
                  
                  100.0
                  %
                  
                  $
                  63.9
                  
                  
                  
                  48.7
                  %
  NineMonths EndedSeptember30,2010
                  
                  
                  2009Tonnage
                  
                  
                  % of Net
                    Sales
                  
                  
                  Tonnage
                  
                  
                  % of Net
                    Sales
                  
                  
                  Tonnage
                    Change
                  
                  % ChangePRC
      *
                  
                  
                  21,510
                  
                  
                  
                  74.6
                  %
                  
                  
                  22,964
                  
                  
                  
                  79.6
                  %
                  
                  
                  -1,454
                  
                  
                  
                  -6.3
                  %US
                  
                  
                  7,324
                  
                  
                  
                  25.4
                  %
                  
                  
                  5,868
                  
                  
                  
                  20.4
                  %
                  
                  
                  1,456
                  
                  
                  
                  24.8
                  %Total
      sales volume *
                  
                  
                  28,834
                  
                  
                  
                  100.0
                  %
                  
                  
                  28,832
                  
                  
                  
                  100.0
                  %
                  
                  
                  2
                  
                  
                  
                  0.0
                  %
 
 *Does not includevolume contributed by the
Jinchuan acquisition which is measured by meters.
 
 Net sales
increased 48.7% over the same period one year earlier due to higher average
selling prices which was partially due to increased copper prices, and
incremental contributions from recent acquisitions.
  40
 
 The PRC
segment experienced an increase of 47.7% in net sales for the nine months ended
September 30, 2010 relative to the comparable 2009 period. The increase in PRC
net sales for the nine months ended September 30, 2010, is primarily due to a
39.9% increase in the average selling price of our products as a result of
higher metal prices relative to the comparable 2009 period. We generally pass
the cost of price changes in raw materials to customers and set the base price
for our products. The increase of PRC segment sales was also due to the
inclusion of Jinchuan, which contributed $22.0 million of net sales in the
first nine month of 2010.
  The US
segment experienced a significant recovery in net sales, resulting in an
increase of 52.8% for the nine months ended September 30, 2010 relative to the
comparable 2009 period. The increase in US segment net sales for the nine
months ended September 30, 2010 compared to the prior year period
is primarily the result of a 24.8% increase in metric tons shipped and a 27.4%
increase in the average selling price. In line with the trend we began to see
during the first and second quarters of 2010, the increase was the result of
improving market conditions primarily in the Americas and
Europe.
 
 Net
Sales by Industry
 
 The
following table presents the breakdown of combined net sales in
millions by industry:
 
 Net SalesNineMonths EndedSeptember30,2010
                  
                  
                  2009(In millions, except percentage)
                  
                  Amount
                    (Unaudited)
                  
                  
                  % of Net
                    Sales
                  
                  
                  Amount
                    (Unaudited)
                  
                  
                  % of Net
                    Sales
                  
                  
                  Dollar
                    Change
                  
                  % ChangeTelecommunication
                  
                  $
                  76.7
                  
                  
                  
                  39.3
                  %
                  
                  $
                  62.2
                  
                  
                  
                  47.4
                  %
                  
                  $
                  14.5
                  
                  
                  
                  23.3
                  %Utility
                  
                  
                  107.4
                  
                  
                  
                  55.1
                  %
                  
                  
                  61.3
                  
                  
                  
                  46.7
                  %
                  
                  
                  46.1
                  
                  
                  
                  75.2
                  %Transportation
                  
                  
                  2.8
                  
                  
                  
                  1.4
                  %
                  
                  
                  1.3
                  
                  
                  
                  1.0
                  %
                  
                  
                  1.5
                  
                  
                  
                  115.4
                  %Other
                  
                  
                  8.2
                  
                  
                  
                  4.2
                  %
                  
                  
                  6.4
                  
                  
                  
                  4.9
                  %
                  
                  
                  1.8
                  
                  
                  
                  28.1
                  %Total
      net sales
                  
                  $
                  195.1
                  
                  
                  
                  100.0
                  %
                  
                  $
                  131.2
                  
                  
                  
                  100.0
                  %
                  
                  $
                  63.9
                  
                  
                  
                  48.7
                  %
 
 The
following table presents the breakdown of metric tons shipped to customers by
industry:
 
 Net SalesNineMonths EndedSeptember30,2010
                  
                  
                  2009Tonnage
                  
                  
                  % of Net
                    Sales
                  
                  
                  Tonnage
                  
                  
                  % of Net
                    Sales
                  
                  
                  Tonnage
                    Change
                  
                  % ChangeTelecommunication
                  
                  
                  13,404
                  
                  
                  
                  46.5
                  %
                  
                  
                  13,761
                  
                  
                  
                  47.7
                  %
                  
                  
                  (357
                  )
                  
                  
                  -2.6
                  %Utility*
                  
                  
                  13,162
                  
                  
                  
                  45.6
                  %
                  
                  
                  12,903
                  
                  
                  
                  44.7
                  %
                  
                  
                  259
                  
                  
                  
                  2.0
                  %Transportation
                  
                  
                  356
                  
                  
                  
                  1.2
                  %
                  
                  
                  192
                  
                  
                  
                  0.7
                  %
                  
                  
                  164
                  
                  
                  
                  85.4
                  %Other
                  
                  
                  1,912
                  
                  
                  
                  6.7
                  %
                  
                  
                  1,976
                  
                  
                  
                  6.9
                  %
                  
                  
                  (64
                  )
                  
                  
                  -3.2
                  %Total
      sales volume *
                  
                  
                  28,834
                  
                  
                  
                  100.0
                  %
                  
                  
                  28,832
                  
                  
                  
                  100.0
                  %
                  
                  
                  2
                  
                  
                  
                  0.0
                  %
  *
Does not include volume contributed by the Jinchuan acquisition which is
measured by meters.
 
 During
the nine months ended September 30, 2010, our copper-clad sales, in terms of
volume, to the telecommunication markets decreased by 357 metric tons,
or 2.6%, compared to the same period in 2009 primarily due to a slowdown in
3G build out in the PRC and partially offset by strengthened demand from markets
served by operations within our US segment.
 
 Utility
sales of copper-clad products, in terms of volume, increased by
259 metric tons, or 2.0%, in the third quarter 2010 compared to the similar
period in 2009. The 75.2% increase in net sales in dollar amount to the
utility markets was primarily attributable to higher average selling
prices, higher volumes and the inclusion of the Jinchuan acquisition which
contributed $22.0 million in sales.
 
 Transportation
sales of copper-clad products, in terms of volume, increased by 164 metric tons,
or 85.4%, due to continued strengthening of global demand.
 
 Capacity
and Metric Tons Sold
 
 The
following table summarizes installed cladding capacities and output for the nine
months ended September 30, 2010:
 
 Nine Months Ended September 30, 2010PRC
                                        
                                        
                                        US(MT)
                                        
                                        Capacity
                                        
                                        
                                        Sold
                                        
                                        
                                        Capacity
                                        
                                        
                                        SoldCCA
                                        
                                        
                                        30,000
                                        
                                        
                                        
                                        21,067
                                        
                                        
                                        
                                        9,186
                                        
                                        
                                        
                                        2,421CCS
                                        
                                        
                                        6,150
                                        
                                        
                                        
                                        63
                                        
                                        
                                        
                                        12,821
                                        
                                        
                                        
                                        4,794Total
                                        
                                        
                                        36,150
                                        
                                        
                                        
                                        21,130
                                        
                                        
                                        
                                        22,007
                                        
                                        
                                        
                                        7,215
  41
 
 Net
Sales by Product Mix
 
 Metric Tons SoldNineMonths EndedSeptember30,2010
                          
                          
                          2009(MT)
                          
                          Tonnage
                          
                          
                          % of Net
                            Sales
                          
                          
                          Tonnage
                          
                          
                          % of Net
                            Sales
                          
                          
                          Tonnage
                            Change
                          
                          % ChangeCCA
                          
                          
                          23,488
                          
                          
                          
                          81.5
                          %
                          
                          
                          23,787
                          
                          
                          
                          82.5
                          %
                          
                          
                          -299
                          
                          
                          
                          -1.3
                          %CCS
                          
                          
                          4,857
                          
                          
                          
                          16.8
                          %
                          
                          
                          4,337
                          
                          
                          
                          15.0
                          %
                          
                          
                          520
                          
                          
                          
                          12.0
                          %Others *
                          
                          
                          489
                          
                          
                          
                          1.7
                          %
                          
                          
                          708
                          
                          
                          
                          2.5
                          %
                          
                          
                          -219
                          
                          
                          
                          -30.9
                          %Total
      sales volume *
                          
                          
                          28,834
                          
                          
                          
                          100.0
                          %
                          
                          
                          28,832
                          
                          
                          
                          100.0
                          %
                          
                          
                          2
                          
                          
                          
                          0.0
      %
                          %
  * Does not include volume
contributed by the Jinchuan acquisition which is measured by
meters.
   The sales
of CCA in volume from our PRC segment decreased by 5.5%, or 1,220 metric tons in
the first nine months ended September 30, 2010 compared to the same period
in 2009 due primarily to a slowdown of China’s 3G build out. However the sales
of CCA and CCS in volume from our US segment increased by 61.6%, or 921 metric
tons, and 18.1%, or 736 metric tons, in the first nine months ended
September 30, 2010 compared to the same period in 2009, respectively. This
increase is primarily due to strengthening of global demand.
 
 Gross
Profit and Gross Margin
 
 Nine Months Ended September 30,
                        
                        
                        Change(in millions,
      except percentage)
                        
                        2010
                          (Unaudited)
                        
                        
                        2009
                          (Unaudited)
                        
                        
                        Dollar
                        
                        
                        %Gross
      Profit
                        
                        $
                        57.1
                        
                        
                        $
                        37.6
                        
                        
                        $
                        19.5
                        
                        
                        
                        51.9
                        %Gross
      margin
                        
                        
                        29.3
                        %
                        
                        
                        28.6
                        %
                        
                        
                        
                        
                        
                        
                        0.7
                        %
  Gross
profit increased $19.5 million or 51.9% for the nine months ended September
30, 2010 compared to the comparable period in 2009. As a percentage of net
sales, gross margin increased from 28.6% in the first nine months of 2009 to
29.3% in the same period of 2010, primarily due to a better product mix, higher
gross margins at our US facility, and improved pricing discipline within the
wire and cable industry.
 
 Selling
Expenses
 
 Nine Months Ended September 30,
                        
                        
                        Change(in millions, except percentage)
                        
                        2010
                          (Unaudited)
                        
                        
                        2009
                          (Unaudited)
                        
                        
                        Dollar
                        
                        
                        %Selling
      Expenses
                        
                        $
                        4.1
                        
                        
                        $
                        3.4
                        
                        
                        $
                        0.7
                        
                        
                        
                        20.6
                        %as
      a percentage of net sales
                        
                        
                        2.1
                        %
                        
                        
                        2.6
                        %
                        
                        
                        
                        
                        
                        
                        -0.5
                        %
  Selling
expenses increased $0.7 million or 20.6% for the nine months ended
September 30, 2010 compared to the comparable period in 2009. As a percentage of
net sales, selling expenses decreased from 2.6% in the first nine
months of 2009 to 2.1% in the same period of 2010, primarily due to higher
net sales.
 
 General
and Administrative Expenses
 
 Nine Months Ended September 30,
                        
                        
                        Change(in millions,
      except percentage)
                        
                        2010
                          (Unaudited)
                        
                        
                        2009
                          (Unaudited)
                        
                        
                        Dollar
                        
                        
                        %General
      and Administrative Costs
                        
                        $
                        11.2
                        
                        
                        $
                        9.8
                        
                        
                        $
                        1.4
                        
                        
                        
                        14.3
                        %as
      a percentage of net sales
                        
                        
                        5.7
                        %
                        
                        
                        7.4
                        %
                        
                        
                        
                        
                        
                        
                        -1.7
                        %
  General
and administrative expenses increased $1.4 million or 14.3% for the nine
months ended September 30, 2010 compared to the same period in 2009 primarily
resulting from acquisitions completed subsequent to the third quarter of 2009.
As a percentage of net sales, general and administrative expenses decreased from
7.4% the nine months ended September 30, 2009 to 5.7% in the same period of
2010, primarily due to higher net sales and partially offset by cost savings
initiatives.
  Operating
Income
 
 The
following table sets forth operating income by segment, in millions of
dollars:
 
 NineMonths EndedSeptember30,2010
                  
                  
                  2009(in millions, except percentage)
                  
                  Amount
                    (Unaudited)
                  
                  
                  % of
                    operating
                    income
                  
                  
                  Amount
                    (Unaudited)
                  
                  
                  % of
                    operating
                    income
                  
                  
                  Dollar
                    Change
                  
                  
                  % ChangePRC
                  
                  $
                  43.2
                  
                  
                  
                  103.3
                  %
                  
                  $
                  28.2
                  
                  
                  
                  115.1
                  %
                  
                  $
                  15.0
                  
                  
                  
                  53.2
                  %US
                  
                  
                  1.8
                  
                  
                  
                  4.3
                  %
                  
                  
                  (1.0
                  )
                  
                  
                  -4.1
                  %
                  
                  
                  2.8
                  
                  
                  
                  -280.0
                  %Corporate
                  
                  
                  (3.2
                  )
                  
                  
                  -7.6
                  %
                  
                  
                  (2.7
                  )
                  
                  
                  -11.0
                  %
                  
                  
                  -0.5
                  
                  
                  
                  -18.5
                  %Total
      operating income
                  
                  $
                  41.8
                  
                  
                  
                  100.0
                  %
                  
                  $
                  24.5
                  
                  
                  
                  100.0
                  %
                  
                  $
                  17.3
                  
                  
                  
                  70.6
                  %
  42
  Operating
income in the nine months ended September 30, 2010 increased approximately $17.3
million, or 70.6%, compared to the same period in 2009, which was primarily due
to higher gross profit, acquisitions completed subsequent to September 30, 2009,
and cost savings initiatives.
 
 The
operating income in the PRC segment increased approximately $15.0 million,
or 53.2%, in the nine months ended September 30, 2010, when compared to the same
period in 2009, primarily due to a higher sales growth and acquisitions
completed subsequent to the third quarter of 2009.
 
 The
operating income in the US segment increased approximately $2.8 million in the
nine months ended September 30, 2010, when compared to the same period in 2009,
primarily due to higher gross profit, operational leverage as a result of
higher volumes, and benefits from cost savings initiatives.
 
 Other
Income (Expense)
 
 Interest
Income (Expense)
 
 Nine
      Months Ended September 30,
                      
                      
                      Change(in millions,
      except percentage)
                      
                      2010
                        (Unaudited)
                      
                      
                      2009
                        (Unaudited)
                      
                      
                      Dollar
                      
                      
                      %Interest
      Income
                      
                      $
                      0.6
                      
                      
                      $
                      0.2
                      
                      
                      $
                      0.4
                      
                      
                      
                      200.0
                      %Interest
      Expense
                      
                      
                      (0.6
                      )
                      
                      
                      (4.2
                      )
                      
                      
                      3.6
                      
                      
                      
                      -85.7
                      %Net
      Interest Expense
                      
                      $
                      (0.0
                      )
                      
                      $
                      (4.0
                      )
                      
                      $
                      4.0
                      
                      
                      
                      -100.0
                      %as
      a percentage of net sales
                      
                      
                      0.0
                      %
                      
                      
                      -3.0
                      %
                      
                      
                      
                      
                      
                      
                      3.0
                      %
 
 Net
interest expense was $0.0 million in the nine months ended September 30, 2010
compared to a net interest expense of $4.0 million in the same period of 2009.
The change is primarily the result of the repurchase and retirement of the HY
notes in the first quarter of 2010.
  Tax
 
 Nine
      Months Ended September 30, 2010
                        (Unaudited)(in
      millions)
                      
                      PRC
                      
                      
                      US
                      
                      
                      Parent Company
                      
                      
                      ConsolidatedProfit
      (loss) before income tax
                      
                      $
                      48.5
                      
                      
                      $
                      1.6
                      
                      
                      $
                      (13.2
                      )
                      
                      $
                      36.9Income
      tax expense (credit)
                      
                      
                      6.9
                      
                      
                      
                      -
                      
                      
                      
                      (3.6
                      )
                      
                      
                      3.3Profit
      after income tax
                      
                      $
                      41.6
                      
                      
                      $
                      1.6
                      
                      
                      $
                      (9.6
                      )
                      
                      $
                      33.6
 
 Profit
before tax for the PRC segment was $48.5 million for the nine months ended
September 30, 2010, with profit from the US before tax of $1.6 million. Loss at
the Fushi Copperweld parent company level was $13.2 million primarily due to
interest expense and loss on extinguishment of HY notes, loss on the unwinding
of derivative instruments as well as professional fees and outside service
expenses. On a consolidated basis, profit after tax was $33.6 million and we
recognized a net tax expense of $3.3 million.
 
 The
amount of taxable income that the US companies must generate in order to recover
the $15,407,083 of deferred tax asset balance at September 30, 2010, is
approximately $45.3 million in the next 20 years.  As of September 30,
2010, the accumulated pretax loss was $51.1 million, of which $49.3 million
is incurred by the parent company, Fushi Copperweld, and only $1.8 million
incurred by our operations at our Fayetteville facility. The parent company does
not generate revenues and its expenses have historically primarily included
interest expenses on the HY 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.
 
 Net
Income
 
 Nine Months Ended September 30,
                          
                          
                          Change(in millions,
      except percentage)
                          
                          2010
                            (Unaudited)
                          
                          
                          2009
                            (Unaudited)
                          
                          
                          Dollar
                          
                          
                          %Income
      Before Taxes
                          
                          $
                          36.9
                          
                          
                          $
                          14.7
                          
                          
                          $
                          22.2
                          
                          
                          
                          151.0
                          %Provision
      for Income Taxes
                          
                          
                          3.3
                          
                          
                          
                          0.8
                          
                          
                          
                          2.5
                          
                          
                          
                          312.5
                          %Net
      Income After Taxes
                          
                          $
                          33.6
                          
                          
                          $
                          13.9
                          
                          
                          $
                          19.7
                          
                          
                          
                          141.7
                          %as
      a percentage of net sales
                          
                          
                          17.3
                          %
                          
                          
                          10.6
                          %
                          
                          
                          
                          
                          
                          
                          6.7
                          %
 
 Net
income was $33.6 million in the nine months ended September 30, 2010
compared to $13.9 million in the same period in 2009, representing
an increase of $19.7 million, or 141.7%. As a percentage of net sales, net
income increased from 10.6% in the first nine months of 2009 to 17.3% in
the same period of 2010. The increase can be attributed to higher net sales,
higher margins, acquisition gains, and fewer expenses tied to changes in
derivative liabilities.
  43
 
 Earnings
Per Share
 
 Nine Months Ended September 30,2010
                    
                    
                    2009Unaudited
                    
                    
                    UnauditedNet
      Income for Basic Earnings Per Share
                    
                    $
                    33,681,331
                    
                    
                    $
                    13,858,550Basic
      Weighted Average Number of Shares
                    
                    
                    36,553,784
                    
                    
                    
                    27,827,152Net
      Income per Share - Basic
                    
                    $
                    0.92
                    
                    
                    $
                    0.50Net
      Income for Diluted Earnings Per Share
                    
                    $
                    33,681,331
                    
                    
                    $
                    13,858,550Diluted
      Weighted Average Number of Shares
                    
                    
                    37,030,499
                    
                    
                    
                    28,676,832Net
      Income per Share - Diluted
                    
                    $
                    0.91
                    
                    
                    $
                    0.48
  Basic and diluted earnings per share
(EPS) for theninemonths endedSeptember30, 2010, were $0.92and $0.91, compared to $0.50and $0.48for the same period last
year.
 
 Selected
Balance Sheet Data at September 30, 2010 (unaudited) and the year ended December
31, 2009:
 
 Selected Balance Sheet DataSeptember30,
                      2010
                    
                    
                    December 31, 2009
                    
                    
                    Change(in millions,
      except percentage)
                    
                    Unaudited
                    
                    
                    
                    
                    
                    Dollar
                    
                    
                    %Cash
                    
                    $
                    117.9
                    
                    
                    $
                    60.6
                    
                    
                    $
                    57.3
                    
                    
                    
                    94.6
                    %Accounts
      Receivable, net
                    
                    $
                    64.5
                    
                    
                    $
                    67.3
                    
                    
                    $
                    (2.8
                    )
                    
                    
                    -4.2
                    %PP&E
      (a)
                    
                    $
                    129.7
                    
                    
                    $
                    117.4
                    
                    
                    $
                    12.3
                    
                    
                    
                    10.5
                    %Total
      Assets
                    
                    $
                    387.4
                    
                    
                    $
                    294.7
                    
                    
                    $
                    92.7
                    
                    
                    
                    31.5
                    %Short
      Term Debt
                    
                    $
                    -
                    
                    
                    $
                    14.0
                    
                    
                    $
                    (14.0
                    )
                    
                    
                    -100.0
                    %Long
      Term Debt
                    
                    $
                    5.9
                    
                    
                    $
                    32.7
                    
                    
                    $
                    (26.8
                    )
                    
                    
                    -82.0
                    %Shareholders'
      Equity
                    
                    $
                    345.2
                    
                    
                    $
                    237.0
                    
                    
                    $
                    108.2
                    
                    
                    
                    45.7
                    %
 
 For
breakdown of plant and equipment, please refer to footnote Note–5 for
details.
 
 Our
financial condition continues to improve as measured by an increase of 45.7% in
shareholders’ equity during the nine months of 2010 compared to December 31,
2009. Cash increased 94.6% during the period primarily due to the net proceeds
from our public offering consummated in February 2010, and the strong sales,
which were partially offset by repayment of $35.0 million of our HY notes.
Accounts receivable decreased 4.2% as a result of collection of long-time
outstanding receivables. We entered into a new term-loan facility resulting in a
long-term liability of $5.9 million as at September 30, 2010.
 
 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
September 30, 2010, 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, we used funds from our public offering in
the first quarter 2010 to recapitalize our non-PRC operations and have secured
new working capital lines for non-PRC operations as our sales increase
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.
  44
 
 In
summary, our cash flows were:
 
 NineMonths EndedSeptember30,(in millions)
                  
                  2010
                    (Unaudited)
                  
                  
                  2009
                    (Unaudited)Net
      cash provided by operating activities
                  
                  $
                  30.1
                  
                  
                  $
                  15.6Net
      cash used in investing activities
                  
                  $
                  (14.2
                  )
                  
                  $
                  (5.4
                  )Net
      cash provided by (used in) financing activities
                  
                  $
                  39.4
                  
                  
                  $
                  (15.8
                  )Effect
      of exchange rate on cash
                  
                  $
                  2.0
                  
                  
                  $
                  (0.0
                  )Cash
      and cash equivalents at beginning of period
                  
                  $
                  60.6
                  
                  
                  $
                  65.6Cash
      and cash equivalents at end of period
                  
                  $
                  117.9
                  
                  
                  $
                  60.0
  For the
nine months ended September 30, 2010, net cash provided by operating activities
was $30.1 million, an increase of $14.5 million compared to the same period in
2009, reflecting a significant improvement in operating cash flow year over
year.  The favorable changes is primarily attribute to an increase in
net income of $19.8 million and a $4.5 million decrease in accounts receivables,
partially offset by a $16.1 million increase in current advance to
suppliers.
 
 For the
nine months ended September 30, 2010, net cash used in investing activities was
$14.2 million, and was primarily attributable to a $5.1 million first
payment of the acquisition costs associated with Jinchuan, a $1.3 million cash
portion payment of the acquisition costs associated with Shanghai Hongtai, and
the $5.7 million payment for unwinding of a cross currency hedge.
 
 For the
nine months ended September 30, 2010, net cash provided by financing activities
was of $39.4 million, which was primarily attributable to the net proceeds of
$56.4 million from an issuance of our common stock during the first quarter of
2010 and a term facility provided by Regions Bank amounting to $6.5
million, it was also attributable to a $15 million advance from Mr. Li Fu,
as discussed in Note 22 Related Party partially offset by a $35.6
million payment to retire our HY notes.
 
 At
September 30, 2010, our cash balance was $117.9 million compared to $60.0
million at September 30, 2009 and $60.6 million at December 31,
2009.
 
 Days
sales outstanding (DSO) has decreased from 117 days at December 31, 2009, to
91 days at September 30, 2010, while days payable outstanding (DPO)
decreased to 10 days as of September 30, 2010, from 20 days at December 31,
2009.
 
 The
decrease in DSO is primarily attributable to our increased efforts for accounts
receivables collection, in addition to existing procedures established to
facilitate collection. Meanwhile, we continued our policy on extending credit
terms to certain credible customers that have long-standing business
relationships with us in order to capture additional market share. We believe
that our ability to extend credit terms puts pressure on our smaller competitors
whose limited capital resources have become further strained due to the global
economic crisis and who are unable to make such adjustments for
customers.  We write off receivables specifically based on the facts
we obtain about the customers’ ability to pay.
 
 Standard
Customer and Supplier Payment Terms (days) as below:
 
 Year ended December 31, 2009
                
                Nine months ended September 30, 2010Customer
      Payment Term
                
                Payment
      in advance up to 120 days
                
                Payment
      in advance up to 120 daysSupplier
      Payment Term
                
                Payment
      in advance up to 30 days
                
                Payment
      in advance up to 30 days
 
 Aging
Analysis of accounts receivable:
 
 September 30, 2010
                  
                  
                  December 31, 2009(Unaudited)1-30
      days
                  
                  $
                  24,698,033
                  
                  
                  $
                  19,055,52031-60
      days
                  
                  
                  20,353,886
                  
                  
                  
                  17,199,48561-90
      days
                  
                  
                  19,260,155
                  
                  
                  
                  15,029,89991-180
      days
                  
                  
                  726,699
                  
                  
                  
                  12,776,229180-365
      days
                  
                  
                  257
                  
                  
                  
                  4,027,988Over
      365 days
                  
                  
                  4,526
                  
                  
                  
                  220,163Bad
      debts allowance
                  
                  
                  (522,729
                  )
                  
                  
                  (1,024,684
                  )Total
                  
                  $
                  64,520,827
                  
                  
                  $
                  67,284,600
 
 Inventory
turnover days increased from 25 days at December 31, 2009 to 33 days at
September 30, 2010. Advance to supplier’s turnover days has increased from 24
days at December 31, 2009, to 29 days at September 30, 2010. The Company’s
principal raw materials consist of aluminum, steel rods and copper strips.
Changes in the price of copper, which has an established history of volatility,
directly affects 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 increased investment in both
inventory and advance to suppliers during third quarter of 2010 was primarily
due to the projected increased demand of our products.
  45
 
 COMMITMENTS
AND CONTINGENCIES
 
 Please
refer to Footnote Note 19 – Business combinations for contingent consideration
related to the acquisition of Jinchuan.
 
 Please
refer to below Contractual Obligations table item Registered capital of Fushi
International (Jiangsu) *2 for commitment to invest to Fushi International
(JiangSu).
 
 Contractual
Obligations
 
 Set out
below are our contractual obligations at September 30, 2010:
 
 Contractual obligations
                      
                      Total
                      
                      
                      Payment due by
                        less than 1 year
                      
                      
                      2–3 years
                      
                      
                      4-5 years
                      
                      
                      More than 5
                        YearsContingent
      second installment payment for Jinchuan acquisition *1
                      
                      $
                      5,075,000
                      
                      
                      $
                      5,075,000
                      
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      -Long-term
      debt
                      
                      
                      6,500,000
                      
                      
                      
                      650,000
                      
                      
                      
                      1,300,000
                      
                      
                      
                      1,300,000
                      
                      
                      
                      3,250,000Registered
      capital of Fushi International (Jiangsu) *2
                      
                      
                      34,980,000
                      
                      
                      
                      10,000,000
                      
                      
                      
                      24,980,000Capital-lease
      obligation
                      
                      
                      167,316
                      
                      
                      
                      79,084
                      
                      
                      
                      88,232
                      
                      
                      
                      -
                      
                      
                      
                      -Total
                      
                      $
                      46,722,316
                      
                      
                      $
                      15,804,084
                      
                      
                      $
                      26,368,232
                      
                      
                      $
                      1,300,000
                      
                      
                      $
                      3,250,000
 
 *
1           On January
21, 2010, the Company’s PRC subsidiary, Fushi International (Dalian) Bimetallic
Cable Co., Ltd. entered into an agreement to purchase 100% of the equity
interest of Dalian Jinchuan Electric Cable Co., Ltd. (“Jinchuan”), a Chinese
manufacturer of electric wire and electric cables, from Jinchuan’s shareholders.
The total purchase price for the acquisition will be $10.15 million in cash. The
purchase price shall be paid in two equal installments of $5,075,000. The
initial installment was paid upon the closing of the acquisition, February 5,
2010. If certain net income targets are achieved by Jinchuan for the fiscal year
ended 2010, as confirmed by an audit to be performed by the Company’s auditors,
the balance of the purchase price shall be paid to the Jinchuan shareholders. If
Jinchuan fails to achieve the net income targets for 2010, the balance of the
purchase price payable shall be reduced proportionally at the rate of 2.91 times
the P/E ratio of the audited net income for 2010. The potential undiscounted
amount of all future payments that Fushi International could be required to pay
under the contingent consideration arrangement is between $0 to $5,075,000. The
fair value of the contingent consideration arrangement of $5,075,000 was
estimated by applying the income approach. That measure is based on significant
inputs determined by management that are not observable in the market, which ASC
Topic 820 refers to as Level 3 inputs. Key assumptions include (a) the combined
impact of upgrading plans of national power grid systems in PRC and the
synergies from acquisition of Jinchuan will enhance Jinchuan’s revenue by 21%
compared with 2009 and (b) the synergies from acquisition of Jinchuan will
further reduce Jinchuan’s cost by 2% compared with 2009. As of September 30,
2010, and through the issuance of these consolidated financial statements,
management believed that Jinchuan was able to meet such net income targets for
2010 to recognize the full amount of the contingent consideration.
 
 *
2           Fushi JiangSu
was established on June 18, 2010 with a registered capital of $49,980,000. Fushi
JiangSu had received $15,000,000 investment as of September 30, 2010, and is in
the process of obtaining the capital verification. Of the remaining registered
capital, $10,000,000 and $24,980,000 are required to be invested by June 17,
2011 and June 17, 2012, respectively.
 
 Legal
Proceedings
 
 During
the quarter ended September 30,2010, we were no aware of any material,
existing or pending legal proceedings against us, nor are we involved in any
material proceeding or pending litigation. There are no proceedings in which any
of our directors, officers or affiliates, or any registered or beneficial
stockholder, is an adverse party or has a material interest adverse to our
company. Please refer to Part II, Item 1 of the Quarterly Report on Form 10-Q
for information on legal proceedings after the end of the quarter.
 
 Off-Balance
Sheet Arrangements
 
 We have
not engaged in any off-balance sheet transactions.
  Critical
Accounting Policies
 
 Please
refer to footnote Note 2 – Summary of Significant Accounting
Policies.
 
 Recent
Accounting Pronouncements
 
 Please
refer to footnote, Recently issued accounting pronouncements under Note 2 –
Summary of Significant Accounting Policies.
  46
 
 Subsequent
Events
 
 On November 3, 2010, the Company announced that its Board of
Directors received a proposal letter from its Chairman and Chief Executive
Officer, Mr. Li Fu ("Mr. Fu") and Abax Global Capital (Hong Kong) Limited on
behalf of funds managed by it and its affiliates ("Abax") for Mr. Fu and Abax to
acquire all of the outstanding shares of common stock of Fushi not currently
owned by Mr. Fu and his affiliates in a going private transaction for $11.50 per
share in cash, subject to certain conditions. Mr. Fu and his affiliates own
approximately 29.2% of Fushi's common stock.  According to the
proposal letter, Mr. Fu and Abax will form an acquisition vehicle for the
purpose of completing the acquisition and plan to finance the acquisition with a
combination of debt and equity capital. The proposal letter states that the
equity portion of the financing would be provided by Mr. Fu, Abax and related
sources. The proposal letter also states that Mr. Fu and Abax are currently in
discussion to engage a financial advisor to the acquisition vehicle that will be
formed by Mr. Fu and Abax.
 
 The
Company’s Board of Directors has formed a special committee of independent
directors consisting of John F. “Jack” Perkowski, Barry Raeburn and Feng Bai
(the "Special Committee") to consider this proposal. The Special Committee
intends to retain independent advisors, including an independent financial
advisor, to assist it in its work. No decisions have been made by the Special
Committee with respect to Fushi's response to the proposal. There can be no
assurance that any definitive offer will be made, that any agreement will be
executed or that this or any other transaction will be approved or
consummated.
 
 Item 3. Quantitative and Qualitative Disclosures about Market
Risks
 
 Commodity
Price Risk
 
 Certain
raw materials used by us are subject to price volatility caused by supply
conditions, political and economic variables and other unpredictable factors.
The primary purpose of our commodity price management activities is to manage
the volatility associated with purchases of commodities in the normal course of
business. We do not speculate on commodity prices.
 
 We are
primarily exposed to price risk related to our purchase of copper used in the
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 September 30, 2010, and did not employ any
commodity price derivatives during the three months ended September 30,
2010.
  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 US dollar in the
inter-bank spot foreign exchange market from 0.3% to 0.5%. On June 19, 2010, the
People’s Bank of China restated to increase the flexibility of the RMB exchange
rate, since then the RMB has appreciated over 2%. 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 US 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 $6,198,740 and
$112,093 for the nine months ended September 30, 2010 and 2009,
respectively. For the three months ended September 30, 2010 and 2009, we
recognized a foreign currency translation gain adjustment of $4,433,165 and
$72,136, respectively.
 
 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. Up to now, we have not experienced any material write off of
any major customer’s account receivable.
 
 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 4.7%, 5.9% and -0.7% in 2007, 2008 and
2009, 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.
  47
 
 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.
 
 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 September 30, 2010,
our disclosure controls and procedures were effective.
 
 (b)
Changes in internal controls.
 
 There
were no changes in our internal controls over financial reporting (as defined in
Rule 13a-15(f) and 15d-15(f) under the Exchange Act of 1934) during the three
months ended September 30, 2010 that have materially affected, or are reasonably
likely to materially affect, the Company’s internal control over financial
reporting.
 
 PART
II.  OTHER INFORMATION
 
 Item
1.  Legal Proceedings
  On November 4, 2010 a shareholder
class action complaint was filed against the Company and certain
officers and directors thereof in connection with the November 3, 2010 proposal
made by Mr. Li Fu and Abax for Mr. Fu and Abax to acquire all of the outstanding
shares of Common Stock of Fushi not currently owned by Mr. Fu and his affiliates
in a going private transaction for $11.50 per share in cash, subject to certain
conditions (the “Fu Proposal”). In the complaint, the plaintiffs challenge the
Fu Proposal and allege, among other things, that the consideration to be paid in
such proposal is grossly inadequate. The complaint seeks, among other relief, to
enjoin defendants from consummating the Fu Proposal and to direct defendants to
exercise their fiduciary duties to obtain a transaction that is in the best
interests of our shareholders. The complaint was filed in Nevada state court. We
have reviewed the allegations contained in the complaint and believe they are
without merit. We intend to defend the litigation vigorously. As such, based on
the information known to us to date, we do not believe that it is probable that
a material judgment against us will result. In accordance with ASC Topic 450, no
liability has been accrued.
  Item
1A. Risk Factors
  The
following are an additional risk factors relating to our business
operations since the filing of our Annual Report on Form 10-K for the year ended
December 31, 2009.
 
 There
may be unknown risks inherent in our acquisition of Jinchuan, which could have a
significant impact on our financial results.
 
 There may
be risks associated with the acquisition of Jinchuan, though not expected or
anticipated, that may not yet be apparent.  For the nine months ended
September 30, 2010, Jinchuan contributed approximately 13.0% to net sales of our
consolidation revenue.  Any discovery of adverse information concerning
Jinchuan since the acquisition, depending upon the nature of such information,
could have an adverse impact on the growth opportunities in the
utilities market, which we believe are presented to us by Jinchuan’s
business,  and the results of operations for our PRC segment. While we are
entitled to seek indemnification in certain circumstances, successfully
asserting indemnification or enforcing such indemnification could be costly and
time consuming or may not be successful at all.
 
 There
may be unknown risks inherent in our acquisition of Shanghai Hongtai, which
could have a significant impact on our financial
results.
  There may
be risks associated with the acquisition of Shanghai Hongtai, though not
expected or anticipated, that may not yet be apparent. Any discovery of
adverse information concerning Shanghai Hongtai since the acquisition, depending
upon the nature of such information, could have an adverse impact on growth
opportunities, which we believe are presented to us by Shanghai Hongtai’s
business and assets,  and the results of operations for our PRC segment.
While we are entitled to seek indemnification in certain circumstances,
successfully asserting indemnification or enforcing such indemnification could
be costly and time consuming or may not be successful at all.
 
 An
inability to access our credit facilities could result in a reduction in our
liquidity
 
 We have
entered into a secured credit agreement (the “Regions Bank credit facility) with
Regions Bank (the “Lender”) which provides for a $2.5 million revolving credit
facility and a term facility of up to $6.5 million. See Note 9 of the Notes
to the Consolidated Financial Statements.
  We rely
on the Regions Bank credit facility as a potential source of liquidity. The
availability of this credit facility could be critical to our ability to meet
our obligations as they come due in a market when alternative sources of credit
are tight. The credit facility contains certain administrative, reporting, legal
and financial covenants. We must comply with covenants under the Regions Bank
credit facility including a requirement to maintain a specified minimum tangible
net worth.
  48
 
 Our right
to make borrowings under the Regions Bank credit facility is subject to the
fulfillment of certain important conditions, including our compliance with all
covenants, and our ability to borrow under the Regions Bank credit facility is
also subject to the continued willingness and ability of the Lender to provide
funds. Our failure to comply with the covenants in the Regions Bank credit
facility or fulfill the conditions to borrowings, or the failure of the Lender
to fund their lending commitments (whether due to insolvency, illiquidity or
other reasons) in the amounts provided for under the terms of the facility,
would restrict our ability to access the credit facility when needed and,
consequently, could have a material adverse effect on our financial condition
and results of operations.
  There
can be no assurance that any definitive offer will be made with respect to the
proposal made by our Chairman and Chief Executive Officer, Mr. Li Fu ("Mr.
Fu") and Abax Global Capital (Hong Kong) Limited on behalf of funds managed by
it and its affiliates ("Abax") to acquire all of our outstanding common stock,
that any agreement will be executed or that this or any other transaction will
be approved or consummated. The absence of a proposal to acquire our common
stock would likely have an adverse effect on the market price of our common
stock.
 On
November 3, 2010, our Board of Directors, or the Board, received the proposal
from Mr. Fu and Abax described as a Subsequent Event in Part I, Item 2.
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations” of this Quarterly Report on Form 10-Q. We have cautioned our
shareholders and others considering trading in our securities that our Board has
only received the proposal and that no decisions have been made by the Board or
the special committee of the Board with respect to our response to this
proposal. The proposal submitted was not a definitive offer, and there can be no
assurance that any definitive offer will be made, that any agreement will be
executed or that a definitive offer, if made, with respect to the proposal or
any other transaction will be approved or consummated. On the last trading day
prior to the announcement of the proposal, our Common Stock closed at $9.10 per
share. After the announcement, the trading price of our Common Stock has risen
to trade closer to the $11.50 per share proposal price. If this proposal were
rejected or withdrawn, and if no similar transaction presented itself, the stock
price would likely fall below its current trading range.
  Item
2.  Unregistered Sales of Equity Securities and Use of
Proceeds
  None.
  Item
3.  Defaults Upon Senior Securities
  None.
 
 Item
5.  Other Information
 
 None.
 
 Item
6.  Exhibits
 
 Exhibit
                  No.
                
                Document Description10.1
                
                Credit
      and Security Agreement dated as of August 31, 2010 between Copperweld
      Bimetallics LLC and Regions Bank31.1
                
                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.
 
  49
 
 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:
      November   8 , 2010
                By:
                /s/
      Li FuName:  Li
      FuTitle:
      Chairman and Co-Chief Executive
Officer
  50
 
 Exhibit
Index
 
 Exhibit
                      No.
                    
                    Document Description10.1
                    
                    Credit
      and Security Agreement dated as of August 31, 2010 between Copperweld
      Bimetallics LLC and Regions Bank31.1
                    
                    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.
  51