**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





**FORM
      10-Q**





**(** Mark
      One)





x **QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
      for** the
      quarterly period ended June 30, 2008.





 ̈ **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** .





**Nevada**
            
            **13-3140715**(State
                or other jurisdiction of
              incorporation
                or organization)
            
            (I.R.S.
                Employer
              Identification
                No.)





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


(Address
      of principal executive offices) (Zip Code)





**011-86-411-8770-333
      (PRC); 931-433-0460 (US)**


(Registrant’s
      telephone number, including area code)





Indicate
      by check mark whether the registrant (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the 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 þ 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
      filer  ̈ Non-accelerated
      filer þ


(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 þ





APPLICABLE
      ONLY TO CORPORATE ISSUERS:




Indicate
      the number of shares outstanding of each of the issuer’s classes of common
      stock, as of the latest practicable date. The total shares outstanding at June
      30, 2008 was 27,459,012.








**FUSHI
      COPPERWELD, INC.**





**INDEX
      TO June 30, 2008 FORM 10-Q**





PagePart
                I - Financial InformationItem
                1 - Financial StatementsConsolidated
                Balance Sheets as of June 30, 2008 (unaudited) and December 31, 2007
            1Consolidated
                Statements of Income and Other Comprehensive Income for the six months
                ended June 30, 2008 and 2007 (unaudited)
            2Consolidated
                Statements of Cash Flows for the six months ended June 30, 2008 and
                2007
                (unaudited)
            3Notes
                to the Consolidated Financial Statements (unaudited)
            4Item
                2 Management's Discussion and Analysis of Results of Operations and
                Financial Condition
            31Item
                3 Quantitative and Qualitative Disclosure about Market
                Risk
            54Item
                4 Controls and Procedures
            58Part
                IIItem
                1 Litigation
            58Item
                4 Submission of Matters fo a Vote of Security Holders
            58Item
                6 Exhibits
            59Signature
                Page
            60







FUSHI
        COPPERWELD, INC. AND SUBSIDIARIES
 
 CONSOLIDATED
        BALANCE SHEET
 AS
        OF
        JUNE 30, 2008 AND DECEMBER 31, 2007




June
                30,
            
            December
                31,2008
            
            2007UnauditedA
                S
                S E T SCURRENT
                ASSETS:Cash
            
            $
            66,861,079
            
            $
            79,914,758Marketable
                Securities
            
            
            -
            
            
            2,977,699Restricted
                cash
            
            
            1,000,000
            
            
            1,000,000Accounts
                receivable, trade, net of allowance of bad debt $517,453 and $135,418
                as
                of June 30, 2008 and December 31, 2007
            
            
            43,896,897
            
            
            23,611,186Inventories
            
            
            25,846,519
            
            
            12,308,295Notes
                receivables
            
            
            533,220
            
            
            816,905Other
                receivables and prepaid expenses
            
            
            592,207
            
            
            997,979Advances
                to suppliers
            
            
            5,489,653
            
            
            2,341,839Cross
                currency hedge receivable
            
            
            322,983
            
            
            706,170Total
                current assets
            
            
            144,542,558
            
            
            124,674,831PLANT
                AND EQUIPMENT, net
            
            
            105,470,718
            
            
            87,228,600OTHER
                ASSETS:Advances
                to suppliers, noncurrent
            
            
            19,016,466
            
            
            18,204,775Prepaid
                land use right
            
            
            -
            
            
            4,559,760Intangible
                asset, net of accumulated amortization
            
            
            12,589,160
            
            
            5,832,721Deferred
                loan expense, net
            
            
            3,862,624
            
            
            3,115,930Deferred
                tax assets
            
            
            4,040,895
            
            
            2,852,000Total
                other assets
            
            
            39,509,145
            
            
            34,565,186Total
                assets
            
            $
            289,522,421
            
            $
            246,468,617L
                I A B I L I T I E S A N D S H A R E H O L D E R S' E Q U I T
                YCURRENT
                LIABILITIES:Accounts
                payable, trade
            
            $
            10,465,124
            
            $
            3,028,823Notes
                payable, current
            
            
            60,022
            
            
            -Revolver
                line
            
            
            8,894,855
            
            
            7,168,524Short
                term bank loans
            
            
            17,494,800
            
            
            5,703,360Current
                portion of long term debts
            
            
            -
            
            
            10,968,000Other
                payables and accrued liabilities
            
            
            4,612,821
            
            
            5,791,597Customer
                deposits
            
            
            658,517
            
            
            -Taxes
                payable
            
            
            2,871,605
            
            
            1,005,259Total
                current liabilities
            
            
            45,057,744
            
            
            33,665,563LONG
                TERM LIABILITIES:Notes
                payable, noncurrent
            
            
            45,000,000
            
            
            60,000,000Fair
                value of derivative instrument
            
            
            9,246,901
            
            
            8,515,396Total
                liabilities
            
            
            99,304,645
            
            
            102,180,959COMMITMENTS
                AND CONTINGENCIES
            
            
            7,197,794
            
            
            -SHAREHOLDERS'
                EQUITY:Preferred
                stock,$0.001 par value, 5,000,000 shares authorized, none issued
                or
                outstanding
            
            
            -
            
            
            -Common
                    stock,$0.006 par value, 100,000,000 shares authorized, June 30,
                    2008:
                    27,459,012 shares issued and 27,359,012 outstanding December 31,
                    2007: 25,311,304 shares issued and 25,211,304
                    outstanding
            
            
            164,154
            
            
            151,268Restricted
                common stock in escrow
            
            
            600
            
            
            600Additional
                paid in capital
            
            
            90,079,011
            
            
            77,665,064Statutory
                reserves
            
            
            8,321,726
            
            
            8,321,726Retained
                earnings
            
            
            68,984,413
            
            
            54,133,070Accumulated
                other comprehensive income
            
            
            15,470,078
            
            
            4,015,930Total
                shareholders' equity
            
            
            183,019,982
            
            
            144,287,658Total
                liabilities and shareholders' equity
            
            $
            289,522,421
            
            $
            246,468,617


The
        accompany notes are an integral part of this statement.


-
          1
          -


FUSHI
        COPPERWELD, INC. AND SUBSIDIARIES
 
 CONSOLIDATED
        STATEMENTS OF INCOME AND
 OTHER
        COMPREHENSIVE INCOME
 FOR
        THE
        THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2008 AND 2007
 (UNAUDITED)


Three months ended June 30,
              
              Six months ended June 30,2008
              
              2007
              
              2008
              
              2007REVENUES
              
              $
              62,536,129
              
              $
              26,085,908
              
              $
              116,545,156
              
              $
              47,223,825COST
                  OF GOODS SOLD
              
              
              45,789,522
              
              
              16,433,794
              
              
              85,064,862
              
              
              29,886,532GROSS
                  PROFIT
              
              
              16,746,607
              
              
              9,652,114
              
              
              31,480,294
              
              
              17,337,293OPERATING
                  EXPENSESelling
                  expenses
              
              
              1,258,050
              
              
              193,916
              
              
              2,050,961
              
              
              369,110General
                  and administrative expenses
              
              
              3,521,466
              
              
              1,849,067
              
              
              7,917,245
              
              
              3,140,480Total
                  operating expense
              
              
              4,779,516
              
              
              2,042,983
              
              
              9,968,206
              
              
              3,509,590INCOME
                  FROM OPERATIONS
              
              
              11,967,091
              
              
              7,609,131
              
              
              21,512,088
              
              
              13,827,703OTHER
                  INCOME (EXPENSE)Interest
                  income
              
              
              192,458
              
              
              318,244
              
              
              352,821
              
              
              509,454Interest
                  expense
              
              
              (3,805,067
              )
              
              (1,845,550
              )
              
              (5,585,536
              )
              
              (3,277,211
              )Gain
                  on derivative instrument
              
              
              186,022
              
              
              802,523
              
              
              355,190
              
              
              802,523Other
                  income
              
              
              (6,868
              )
              
              112,506
              
              
              34,705
              
              
              174,616Other
                  expense
              
              
              (46,007
              )
              
              (14,195
              )
              
              (142,707
              )
              
              (79,694
              )Total
                  other expense, net
              
              
              (3,479,462
              )
              
              (626,472
              )
              
              (4,985,527
              )
              
              (1,870,312
              )INCOME
                  BEFORE INCOME TAXES
              
              
              8,487,629
              
              
              6,982,659
              
              
              16,526,561
              
              
              11,957,391PROVISION
                  OF INCOME TAXES
              
              
              1,206,783
              
              
              -
              
              
              1,675,218
              
              
              -NET
                  INCOME
              
              
              7,280,846
              
              
              6,982,659
              
              
              14,851,343
              
              
              11,957,391OTHER
                  COMPREHENSIVE INCOMEUnrealized
                  gain on marketable securities
              
              
              -
              
              
              -
              
              
              22,301
              
              
              -Foreign
                  currency translation adjustment
              
              
              4,308,352
              
              
              2,113,689
              
              
              12,163,352
              
              
              3,016,550Change
                  in fair value of derivative instrument
              
              
              4,377,975
              
              
              (872,519
              )
              
              (731,505
              )
              
              (871,519
              )COMPREHENSIVE
                  INCOME
              
              $
              15,967,173
              
              $
              8,223,829
              
              $
              26,305,491
              
              $
              14,102,422EARNINGS
                  PER SHARE:Basic
              
              $
              0.27
              
              $
              0.32
              
              $
              0.55
              
              $
              0.57Diluted
              
              $
              0.25
              
              $
              0.28
              
              $
              0.51
              
              $
              0.49WEIGHTED
                  AVERAGE NUMBER OF SHARESBasic
              
              
              27,354,215
              
              
              21,487,056
              
              
              27,201,127
              
              
              21,116,447Diluted
              
              
              28,732,109
              
              
              25,192,643
              
              
              28,690,851
              
              
              24,667,346




The
      accompany notes are an integral part of this statement.




-
          2
          -


FUSHI
        COPPERWELD, INC. AND SUBSIDIARIES
 
 CONSOLIDATED
        STATEMENTS OF CASH FLOWS
 FOR
        THE
        SIX MONTHS ENDED JUNE 30, 2008 AND 2007
 (UNAUDITED)


2008
              
              2007CASH
                  FLOWS FROM OPERATING ACTIVITIES:Net
                  income
              
              $
              14,851,343
              
              $
              11,957,391Adjustments
                      to reconcile net income to cash provided by (used in) operating
                      activities:Depreciation
              
              
              3,026,421
              
              
              936,956Amortization
                  of intangibles
              
              
              158,651
              
              
              115,590Amortization
                  of loan commission
              
              
              2,253,306
              
              
              329,096Amortization
                  of stock option compensation
              
              
              914,083
              
              
              645,158Interest
                  penalty
              
              
              710,544Gain
                  on derivative instrument
              
              
              (355,189
              )
              
              (802,523
              )Investment
                  loss on marketable securities
              
              
              16,158
              
              
              -Bad
                  debt expense
              
              
              379,581
              
              
              -Reserve
                  for obsolete inventory
              
              
              185,749
              
              
              -Change
                  in operating assets and liabilities:Accounts
                  receivable
              
              
              (19,191,506
              )
              
              (2,242,709
              )Inventories
              
              
              (13,000,865
              )
              
              (2,082,422
              )Other
                  receivables and prepayments
              
              
              549,790
              
              
              (907,670
              )Notes
                  receivables
              
              
              320,603
              
              
              (173,811
              )Advance
                  to suppliers
              
              
              (2,697,002
              )
              
              (2,002,283
              )Deferred
                  tax assets
              
              
              (1,188,895
              )
              
              -Accounts
                  payable
              
              
              7,347,146
              
              
              (335,966
              )Other
                  payables and accrued liabilities
              
              
              (1,260,185
              )
              
              2,246,676Customer
                  deposits
              
              
              621,290
              
              
              (537,320
              )Taxes
                  payable
              
              
              1,779,587
              
              
              (814,918
              )Net
                  cash (used in) provided by operating activities
              
              
              (4,579,390
              )
              
              6,331,245CASH
                  FLOWS FROM INVESTING ACTIVITIES:Marketable
                  securities
              
              
              2,983,842
              
              
              -Proceeds
                  from derivative instrument
              
              
              738,376
              
              
              -Purchase
                  of land use right
              
              
              (1,687,468
              )
              
              -Purchase
                  of property and equipment
              
              
              (13,600,999
              )
              
              (6,453,915
              )Advances
                  for equipment purchases
              
              
              (3,148,802
              )
              
              (5,698,131
              )Net
                  cash used in investing activities
              
              
              (14,715,051
              )
              
              (12,152,046
              )CASH
                  FLOWS FROM FINANCING ACTIVITIES:Loan
                  from shareholder
              
              
              -
              
              
              557,520Payments
                  to shareholders
              
              
              -
              
              
              (4,004,253
              )Borrowings
                  for revolver line
              
              
              1,763,772
              
              
              -Proceeds
                  from bank loans
              
              
              16,908,000
              
              
              11,546,600Payments
                  on bank loans
              
              
              (17,268,032
              )
              
              (12,628,669
              )Net
                  proceeds from convertible notes
              
              
              -
              
              
              56,400,000Proceeds
                  from exercise of stock warrants
              
              
              -
              
              
              6,793,969Net
                  cash provided by financing activities
              
              
              1,403,740
              
              
              58,665,167EFFECT
                  OF EXCHANGE RATE ON CASH
              
              
              4,837,022
              
              
              1,867,519(DECREASE)
                  INCREASE IN CASH
              
              
              (13,053,679
              )
              
              54,711,885CASH,
                  beginning of period
              
              
              79,914,758
              
              
              20,493,551CASH,
                  end of period
              
              $
              66,861,079
              
              $
              75,205,436


The
        accompany notes are an integral part of this statement.
  -
            3
            -


**Note
      1 - Organization**





Fushi
      Copperweld, Inc. (formerly Fushi International, Inc.) was incorporated under
      the
      name of M, Inc. in the state of Nevada on October 6, 1982. The name was changed
      to Parallel Technologies, Inc. (“Parallel”) on June 3, 1991 and changed to Fushi
      International, Inc. (“Fushi International”) on January 30, 2006. Effective
      January 15, 2008, Fushi International changed its name to Fushi Copperweld,
      Inc.
      (“Fushi”).





On
      October 29, 2007, Fushi International acquired Copperweld Bimetallics Holdings,
      LLC, a North Carolina limited liability company and the holder of the
      partnership interest in Copperweld Bimetallics, LLC, (“Copperweld”) a limited
      liability company registered in the state of Delaware and the parent of
      Copperweld Bimetallics UK, Ltd., a private **** company
      registered in the United Kingdom and Copperweld International Holdings, LLC
      a
      North Carolina limited liability company. Copperweld is a bimetallic
      administrative, sales and manufacturing operation headquartered in Fayetteville,
      Tennessee. Copperweld Bimetallics UK, Ltd. (Copperweld UK) is a manufacturing,
      distribution and customer service facility located in Telford, England.
      Copperweld International Holdings, LLC is a non-operating company that held
      partnership interests in a company located in Tongling, PRC at December 31,
      2007. Those interests were liquidated in an agreement entered into by Copperweld
      and its subsidiaries, affiliates and International Manufacturing Equipment
      Sales, Inc. on January 16, 2008. Additionally, Fushi acquired International
      Manufacturing Equipment Sales, LLC, a shell company that was, at the time of
      purchase, a non-affiliated but commonly owned Limited Liability Company.





Fushi,
      Fushi Holdings, Fushi International (Dalian), Dalian Fushi, Copperweld and
      Copperweld UK are hereinafter referred to as “the Company”.





**Note
      2 - Summary of Significant Accounting Policies**





Principles
      of consolidation





The
      accompanying consolidated financial statements include the financial statements
      of Fushi and it’s wholly owned subsidiaries, Fushi Holdings, Fushi International
      (Dalian), Copperweld, Copperweld UK and its 100% variable interest entity Dalian
      Fushi. All significant inter-company transactions and balances have been
      eliminated in consolidation.





Consolidation
      of variable interest entity





In
      accordance with FASB Interpretation No. 46R, Consolidation of Variable Interest
      Entities ("FIN 46R"), variable interest entities (VIEs) are generally entities
      that lack sufficient equity to finance their activities without additional
      financial support from other parties or whose equity holders lack adequate
      decision making ability. All VIEs with which the Company is involved must be
      evaluated to determine the primary beneficiary of the risks and rewards of
      the
      VIE. The primary beneficiary is required to consolidate the VIE for financial
      reporting purposes.





The
      Company has concluded that Dalian Fushi is a VIE and that the Company is the
      primary beneficiary. Under the requirements of FIN 46R, the Company consolidated
      the financial statements of Dalian Fushi. As both companies are under common
      control, the financial statements have been prepared as if the transaction
      had
      occurred retroactively.





-
          4
          -




Use
      of
      estimates




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





Management
      has included all 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 2007 annual report filed on Form 10-K.





Revenue
      recognition




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





Shipping
      and handling costs





Shipping
      and handling costs related to costs of goods sold are included in selling,
      general and administrative costs which totaled $1,054,515 and $272,019 for
      the
      six months ended June 30, 2008 and June 30, 2007, respectively, and $600,664
      and
      $128,592 for the three months ended June 30, 2008 and June 30, 2007,
      respectively.





Foreign
      currency translation and other comprehensive income





The
      reporting currency of the Company is the US dollar. The functional currency
      of
      Fushi Copperweld and its US subsidiary is the US dollar. The functional currency
      of Fushi International (Dalian) and Dalian Fushi is Renminbi (RMB). The
      functional currency of Copperweld UK is the British Pound.





For
      the
      subsidiaries whose functional currencies are other than the US dollar, all
      assets and liabilities accounts were translated at the exchange rate on the
      balance sheet date; stockholder's equity is translated at the historical rates
      and items in the statement of operations items and cash flow statements are
      translated at the average rate in each applicable period. Translation
      adjustments resulting from this process are included in accumulated other
      comprehensive income in the statement of shareholders’ equity. The resulting
      translation gains and losses that arise from exchange rate fluctuations on
      transactions denominated in a currency other than the functional currency are
      included in the results of operations as incurred.





Accumulated
      other comprehensive income in the consolidated statement of shareholders’ equity
      amounted to $15,470,078 and $4,015,930 as of June 30, 2008 and December 31,
      2007, respectively. The balance sheet amounts with the exception of equity
      at
      June 30, 2008 were translated at 6.859 RMB and 0.502 GBP to $1.00 USD. The
      average translation rates applied to income and cash flow statement amounts
      for
      the three months ended June 30, 2008 and March 31, 2008 were 6.958 RMB and
      0.507
      GBP to $1.00 USD and 7.155 RMB and 0.506 GBP to $1.00 USD respectively.





-
          5
          -




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 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 Federal Deposit Insurance Corporation
      insured limits for the banks located in the Unites States. Balances at financial
      institutions or state owned banks within the PRC and in banks located in the
      United Kingdom are not covered by insurance. As of June 30, 2008 and December
      31, 2007, the Company had deposits in excess of federally insured limits
      totaling $66,601,492 and $83,871,892, 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.





Part
      of
      the Company's operations are carried out in the PRC and UK. Accordingly, the
      Company's business, financial condition and results of operations may be
      influenced by the political, economic and legal environments in the two
      countries, and by the general state of the two countries' economy. The Company's
      operations in the two countries are subject to specific considerations and
      significant risks not typically associated with companies in the North America.
      These include risks associated with, among others, the political, economic
      and
      legal environments and foreign currency exchange. The Company's results may
      be
      adversely affected by changes in governmental policies with respect to laws
      and
      regulations, anti-inflationary measures, currency conversion and remittance
      abroad, and rates and methods of taxation, among other things.





Additional
      product sales information




The
      Company has expanded its geographic sales area from the Chinese domestic market
      to the international market. The following chart shows that the PRC market
      remains the largest single market for the Company while approximately 31.5%
      sales were spread across international markets during the first two quarters
      of
      2008 and 2.7% during the first two quarters of 2007, respectively.





June 30, 2008
            
            June 30, 2007Country
            
            (Unaudited)
            
            (Unaudited)China
            
            $
            79,859,350
            
            $
            45,938,181USA
            
            
            25,944,828
            
            
            -Europe
            
            
            5,871,508
            
            
            -Other
                countries
            
            
            4,869,470
            
            
            1,285,644Total
                sales
            
            $
            116,545,156
            
            $
            47,223,825




-
          6
          -




Major
      customers and suppliers





Five
      major customers accounted for 21% and 31% of the net sales for the six months
      ended June 30, 2008 and 2007, respectively. Total receivable balance due from
      these customers at June 30, 2008 and June 30, 2007 amounted to $6,821,812 and
      $3,159,065, respectively.





Five
      major suppliers provided approximately 64% and 93% of the Company’s purchases of
      raw materials for the six months ended June 30, 2008 and 2007, respectively.
      As
      of June 30, 2008, our accounts payable to these suppliers were $4,761,747,
      all
      of which was current. As of June 30, 2007, we owed the top five suppliers
      $2,821,935.





Accounts
      receivables and allowance for doubtful accounts





Management
      regularly reviews aging of receivables and changes in payment trends by its
      customers, and records a reserve when they believe collection of amounts due
      are
      at risk. Accounts considered uncollectible are written off. As of June 30,
      2008
      and December 31, 2007, management concluded its allowance for bad debts in
      the
      amount of $517,453 and $135,418, respectively was sufficient.





Inventories




Inventories
      are stated at the lower of cost or market using a weighted average method.
      Inventories consist of raw materials, work in process, finished goods and
      packing materials. Raw materials consist of copper, aluminum and steel used
      in
      production. The cost of finished goods included direct costs of raw materials
      as
      well as direct labor used in production. Indirect production costs such as
      utilities and indirect labor related to production such as assembling, shipping
      and handling costs are also included in the cost of inventory.





The
      Company reviews its inventory regularly for possible obsolete goods or to
      determine if any reserves are necessary for potential obsolescence. As of June
      30, 2008, the Company determined its allowance for obsolete inventory in the
      amount of $249,343 was sufficient.





Derivative
      Instrument





The
      Company uses a cross currency hedge, a derivative financial instrument, to
      hedge
      the risk of rising interest rates on their variable interest rate debt. This
      type of derivative financial instrument is known as a cash flow hedge. The
      Company accounts for this interest rate swap in accordance with FAS No. 133,
      “Accounting for Derivatives Instruments and Hedging Activity,” which requires
      the derivative to be carried on the balance sheet at fair value and to meet
      certain documentary and analytical requirements to qualify for hedge accounting
      treatment. The above derivative qualifies for hedge accounting under FAS 133
      and, accordingly, changes in the fair value effective portion is reported in
      accumulated other comprehensive income, net of related income tax effects.
      Amounts included in accumulated other comprehensive income are reclassified
      into
      earnings when the hedged transaction affects earnings.





-
          7
          -




At
      the
      inception of the transaction, the Company documented the relationship between
      hedging instruments and hedged items, as well as its risk management objective
      and the strategy for undertaking various hedge transactions. This process
      includes linking all derivatives designated to specific firm commitments of
      forecast transactions. The Company also documents its assessment, both at
      inception and on an ongoing basis, of whether the derivative financial
      instruments that are used in hedging transactions are highly effective in
      offsetting changes in fair values or cash flows of hedged items. Any portion
      deemed ineffective is recorded in earnings with the effective portion reflected
      in accumulated other comprehensive. Changes in the fair values of derivative
      financial instruments accounted for as cash flow hedges, to the extent they
      qualify for hedge accounting, are recorded in accumulated other comprehensive
      income. As of June 30, 2008, the fair value of the derivative instrument
      amounted to $9,246,901.





Financial
      instruments





The
      Company analyzes all financial instruments with features of both liabilities
      and
      equity under SFAS 150, “Accounting for Certain Financial Instruments with
      Characteristics of Both Liabilities and Equity,” SFAS No 133, “Accounting for
      Derivative Instruments and Hedging Activities” and EITF 00-19, “Accounting for
      Derivative Financial Instruments Indexed to, and Potentially Settled in, a
      Company’s Own Stock.” The convertible preferred shares issued in 2005 and the
      convertible note issued in 2007 did not require bifurcation or result in
      liability accounting. Additionally, the Company analyzes registration rights
      agreements associated with any equity instruments issued to determine if
      penalties triggered for late filing should be accrued under FSP EITF 00-19-2,
      “Accounting for Registration Payment Arrangements.”





Fair
      value of financial instruments





On
      January 1, 2008, the Company adopted SFAS No. 157. SFAS No. 157, Fair Value
      Measurements, defines fair value, establishes a three-level valuation hierarchy
      for disclosures of fair value measurement and enhances disclosures requirements
      for fair value measures. The carrying amounts reported in the balance sheets
      for
      current assets and current liabilities qualify as financial instruments are
      a
      reasonable estimate of fair value because of the short period of time between
      the origination of such instruments and their expected realization and their
      current market rate of interest. The three levels are defined as
      follow:





·
            Level
                1 inputs to the valuation methodology are quoted prices (unadjusted)
                for
                identical assets or liabilities in active
                markets.


·
            Level
                2 inputs to the valuation methodology include quoted prices for similar
                assets and liabilities in active markets, and inputs that are observable
                for the assets or liability, either directly or indirectly, for
                substantially the full term of the financial
                instruments.


·
            Level
                3 inputs to the valuation methodology are unobservable and significant
                to
                the fair value.





The
      Company did not identify any assets and liabilities that are required to be
      presented on the balance sheet at fair value in accordance with SFAS No. 157.





During
      2007, the Company issued 3% secured convertible debentures in a face amount
      of
      $20,000,000 which are due in 2012 from issuance of common stock. The notes
      qualify as conventional convertible debt and thus the embedded conversion
      feature was not separated from the host instrument. Also during 2007, the
      Company borrowed $40,000,000 in the form of a debenture note with floating
      rate.





-
          8
          -




As
      of
      June 30, 2008, the outstanding principal amounted to $45,000,000. The Company
      used Level 2 inputs for its valuation methodology for the notes payable, and
      their fair values are determined using cash flows discounted at relevant market
      interest rates in effect at the period close.





As
      of
      June 30, 2008, the Company had a $9.2 million derivative instrument. Management
      obtains fair value of the derivative instrument from a financial institution
      using Level 3 inputs since there is no observable market price. For the six
      months ended June 30, 2008, the Company recorded a $731,505 change in the fair
      value of the derivative instrument as other comprehensive loss, for the three
      months ended June 30, 2008, the Company recorded a $4,377,975 change in the
      fair
      value of the derivative instrument as other comprehensive gain.





Carrying As of
              June 30 2008
            
            Fair Value Measurements at June 30, 2008
              Using Fair Value HierarchyLiabilities
            
            
            
            Level
                1
            
            Level
                2
            
            Level
                3Notes
                payable
            
            $
            45,000,000
            
            
            
            
            $
            39,643,633Derivative
                Instrument
            
            $
            9,246,901
            
            
            
            
            
            
            
            $
            9,246,901




Stock-Based
      Compensation





The
      Company records and reports stock-based compensation under Statement of
      Financial Accounting Standards No. 123R, “Share-Based Payments”. This
      Statement requires a public entity to measure the cost of services received
      in
      exchange for an award of equity instruments based on the grant-date fair value
      of the award. That cost is recognized over the period during which services
      are
      received. Stock compensation for stock granted to non-employees is determined
      in
      accordance with SFAS 123R and the Emerging Issues Task Force consensus Issue
      No.
      96-18, "Accounting for Equity Instruments that are issued to Other than
      Employees for Acquiring, or in Conjunction with Selling Goods or Services"
      ("EITF 96-18"), as the fair value of the consideration received or the fair
      value of equity instruments issued, whichever is more reliably measured.





Plant
      and equipment, net




Plant
      and
      equipment are stated at cost. Expenditures for maintenance and repairs are
      charged to earnings as incurred; additions, renewals and betterments are
      capitalized. When the asset property and equipment is retired or otherwise
      disposed of, the related cost and accumulated depreciation are removed from
      the
      respective accounts, and any gain or loss is included in operations.
      Depreciation of property and equipment is provided using the straight-line
      method for substantially all assets with estimated lives as follows:





Estimated Useful LifeBuildings
            
            
            20-39.5
                yearsMachinery
                and equipment
            
            
            7-15
                yearsOther
                equipment
            
            
            3-5
                yearsTransportation
                equipment
            
            
            3-5
                years





-
          9
          -




Construction
      in progress represents the costs incurred in connection with the construction
      of
      buildings or new additions to the Company’s plant facilities. No depreciation is
      provided for construction in progress until such time as the assets are
      completed and are placed into service. The Company added production equipment
      during the first two quarters of 2008 and the interest capitalized for the
      six
      months ended June 30, 2008 and 2007 amounted to $62,812 and $157,528,
      respectively.





The
      Company evaluates the carrying value of long-lived assets in accordance with
      SFAS 144 each reporting period. When estimated cash flows generated by those
      assets are less than the carrying amounts of the asset, the Company recognizes
      an impairment loss. Based on its review, the Company believes that, as of June
      30, 2008, there were no impairments of its long-lived assets.





Intangible
      assets





Intangible
      assets consist of land use rights and patents. Land in the People’s Republic of
      China is government owned and cannot be sold. However, the government grants
      “land use rights”. The Company amortizes land use rights on a straight line
      basis over the 50 year life and patents over 7-15 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 June 30, 2008, there was no impairment of
      intangible assets.





Research
      and development





Research
      and development expenses include salaries, consultant fees, supplies and
      materials, as well as costs related to other overhead such as facilities,
      utilities and other departmental expenses. The costs we incur with respect
      to
      internally developed technology and engineering services are included in
      research and development expenses as incurred as they do not directly relate
      to
      any particular licensee, license agreement or licenses fee.





Research
      and development costs are recorded in general and administrative expenses.
      Research and development costs were $155,040 and $57,271 for the six months
      ended June 30, 2008 and 2007, respectively and $73,707 and $22,306 for the
      three
      months ended June 30, 2008 and 2007, respectively.





-
          10
          -




Earning
      per share





The
      Company reports earnings per share in accordance with the provisions of SFAS
      No.
      128, "Earnings Per Share." SFAS No. 128 requires presentation of basic and
      diluted earnings per share in conjunction with the disclosure of the methodology
      used in computing such earnings per share. Basic earnings per share excludes
      dilution and is computed by dividing income available to common stockholders
      by
      the weighted average common shares outstanding during the period. Diluted
      earnings per share takes into account the potential dilution that could occur
      if
      securities or other contracts to issue common stock were exercised and converted
      into common stock using the treasury method.





Income
      taxes





The
      Company records and reports income taxes pursuant to Statement of Financial
      Accounting Standards No. 109, “Accounting for Income Taxes” (SFAS 109). SFAS 109
      requires the recognition of deferred income tax liabilities and assets for
      the
      expected future tax consequences of temporary differences between income tax
      basis and financial reporting basis of assets and liabilities. Provision for
      income taxes consist of taxes currently due plus deferred taxes.





The
      Company adopted FASB Interpretation 48, “Accounting for Uncertainty in Income
      Taxes” (“FIN 48”), on January 1, 2007. A tax position is recognized as a benefit
      only if it is “more likely than not” that the tax position would be sustained in
      a tax examination, with a tax examination being presumed to occur. The amount
      recognized is the largest amount of tax benefit that is greater than 50% likely
      of being realized on examination. For tax positions not meeting the “more likely
      than not” test, no tax benefit is recorded. The adoption had no effect on the
      Company’s financial statements.





Deferred
      tax is accounted for using the balance sheet liability method in respect of
      temporary differences arising from differences between the carrying amount
      of
      assets and liabilities in the financial statements and the corresponding tax
      basis used in the computation of assessable tax profit. In principle, deferred
      tax liabilities are recognized for all taxable temporary differences, and
      deferred tax assets are recognized to the extent that it is probably that
      taxable profit will be available against which deductible temporary differences
      can be utilized. Deferred tax 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
      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. As of June 30, 2008, the deferred tax assets
      amounted to $4,040,895 generated from the accumulated net operating loss of
      US
      operations.





Value
      Added Tax





Sales
      revenue represents the invoiced value of goods, net of a value-added tax
      (“VAT”). All of the Company’s products that are produced and sold in the PRC are
      subject to a Chinese value-added tax at a rate of 17% of the gross sales price.
      All of the Company’s products that are manufactured and sold in the UK are
      subject to a UK value-added tax at a rate of 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 financial
      statements. The VAT tax return is filed offsetting the payables against the
      receivables.





-
          11
          -




Recently
      issued accounting pronouncements





In
      February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
      Assets and Financial Liabilities—including an amendment of FASB Statement No.
      115 (“FAS 159”). FAS 159 permits companies to choose to measure many financial
      instruments and certain other items at fair value that are not currently
      required to be measured at fair value. The objective of FAS 159 is to provide
      opportunities to mitigate volatility in reported earnings caused by measuring
      related assets and liabilities differently without having to apply hedge
      accounting provisions. FAS 159 also establishes presentation and disclosure
      requirements designed to facilitate comparisons between companies that choose
      different measurement attributes for similar types of assets and liabilities.
      The Company adopted SFAS No. 159 on January 1, 2008. The Company chose not
      to
      elect the option to measure the fair value of eligible financial assets and
      liabilities.




In
      June
      2007, the FASB issued FASB Staff Position No. EITF 07-3, “Accounting for
      Nonrefundable Advance Payments for Goods or Services Received for use in Future
      Research and Development Activities” (“FSP EITF 07-3”), which addresses whether
      nonrefundable advance payments for goods or services that used or rendered
      for
      research and development activities should be expensed when the advance payment
      is made or when the research and development activity has been performed. The
      Company adopted FSP EITF 07-3 and expensed the research and development as
      incurred.





In
      December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
      Consolidated Financial Statements - an amendment of Accounting Research Bulletin
      No. 51” (“SFAS 160”), which establishes accounting and reporting standards for
      ownership interests in subsidiaries held by parties other than the parent,
      the
      amount of consolidated net income attributable to the parent and to the
      noncontrolling interest, changes in a parent’s ownership interest and the
      valuation of retained non-controlling equity investments when a subsidiary
      is
      deconsolidated. The Statement also establishes reporting requirements that
      provide sufficient disclosures that clearly identify and distinguish between
      the
      interests of the parent and the interests of the non-controlling owners. SFAS
      160 is effective for fiscal years beginning after December 15, 2008. The Company
      has not determined the effect that the application of SFAS 160 will have on
      its
      consolidated financial statements.





In
      December 2007, Statement of Financial Accounting Standards No. 141(R), *Business
      Combinations* ,
      was
      issued. SFAS No. 141R replaces SFAS No. 141, *Business
      Combinations.* SFAS
      141R
      retains the fundamental requirements in SFAS 141 that the acquisition method
      of
      accounting (which SFAS 141 called the *purchase
      method* )
      be used
      for all business combinations and for an acquirer to be identified for each
      business combination. SFAS 141R requires an acquirer to recognize the assets
      acquired, the liabilities assumed, and any noncontrolling interest in the
      acquiree at the acquisition date, measured at their fair values as of that
      date,
      with limited exceptions. This replaces SFAS 141’s cost-allocation process, which
      required the cost of an acquisition to be allocated to the individual assets
      acquired and liabilities assumed based on their estimated fair values. SFAS
      141R
      also requires the acquirer in a business combination achieved in stages
      (sometimes referred to as a step acquisition) to recognize the identifiable
      assets and liabilities, as well as the noncontrolling interest in the acquiree,
      at the full amounts of their fair values (or other amounts determined in
      accordance with SFAS 141R). SFAS 141R applies prospectively to business
      combinations for which the acquisition date is on or after the beginning of
      the
      first annual reporting period beginning on or after December 15, 2008. An entity
      may not apply it before that date. The Company is currently evaluating the
      impact that adopting SFAS No. 141R will have on its financial
      statements.




-
          12
          -




In
      May
      2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
      Accounting Principles.” This Statement identifies the sources of accounting
      principles and the framework for selecting the principles to be used in the
      preparation of financial statements of nongovernmental entities that are
      presented in conformity with generally accepted accounting principles (GAAP)
      in
      the United States (the GAAP hierarchy). This Statement will not have an impact
      on the Company’s financial statements.




In
      May
      2008, the FASB issued SFAS No. 163, “Accounting for Financial Guarantee
      Insurance Contracts, an interpretation of FASB Statement No. 60.” The scope of
      this Statement is limited to financial guarantee insurance (and reinsurance)
      contracts, as described in this Statement, issued by enterprises included within
      the scope of Statement 60. Accordingly, this Statement does not apply to
      financial guarantee contracts issued by enterprises excluded from the scope
      of
      Statement 60 or to some insurance contracts that seem similar to financial
      guarantee insurance contracts issued by insurance enterprises (such as mortgage
      guaranty insurance or credit insurance on trade receivables). This Statement
      also does not apply to financial guarantee insurance contracts that are
      derivative instruments included within the scope of FASB Statement No. 133,
      “Accounting for Derivative Instruments and Hedging Activities.” This Statement
      will not have an impact on the Company’s financial statements.





In
      June
      2008, the FASB issued Emerging Issues Task Force Issue 07-5 “Determining whether
      an Instrument (or Embedded Feature) is indexed to an Entity’s Own Stock” (“EITF
      No. 07-5”). This Issue is effective for financial statements issued for fiscal
      years beginning after December 15, 2008, and interim periods within those fiscal
      years. Early application is not permitted. Paragraph 11(a) of Statement of
      Financial Accounting Standard No 133 “Accounting for Derivatives and Hedging
      Activities” (“SFAS 133”) specifies that a contract that would otherwise meet the
      definition of a derivative but is both (a) indexed to the Company’s own
      stock and (b) classified in stockholders’ equity in the statement of
      financial position would not be considered a derivative financial instrument.
      EITF No.07-5 provides a new two-step model to be applied in determining whether
      a financial instrument or an embedded feature is indexed to an issuer’s own
      stock and thus able to qualify for the SFAS 133 paragraph 11(a) scope exception.
      Management is currently evaluating the impact of adoption of EITF No. 07-5
      on
      the accounting for the convertible notes and related warrants transactions.





In
      June
      2008, FASB issued EITF Issue No. 08-4, “Transition Guidance for Conforming
      Changes to Issue No. 98-5 (“EITF No. 08-4”)”. The objective of EITF No.08-4
      is to provide transition guidance for conforming changes made to EITF No. 98-5,
      “Accounting for Convertible Securities with Beneficial Conversion Features or
      Contingently Adjustable Conversion Ratios”, that result from EITF No. 00-27
“Application of Issue No. 98-5 to Certain Convertible Instruments”, and SFAS No.
      150, “Accounting for Certain Financial Instruments with Characteristics of both
      Liabilities and Equity”. This Issue is effective for financial statements issued
      for fiscal years ending after December 15, 2008. Early application is
      permitted. Management is currently evaluating the impact of adoption of
      EITF No. 07-5 on the accounting for the convertible notes and related warrants
      transactions.





-
          13
          -




Reclassifications





Certain
      prior period amounts have been reclassified to conform to the current period
      presentation. These reclassifications have no effect on net income or cash
      flows.




**Note
      3 - Accounts receivable**





Accounts
      receivable at June 30, 2008 and December 31, 2007 consisted of the following:





June
                30, 2008
            
            December 31, 2007(Unaudited)Trade
                Accounts Receivable
            
            $
            44,414,350
            
            $
            23,746,604Allowance
                for bad debts
            
            
            (517,453
            )
            
            (135,418
            )Trade
                Accounts Receivable, Net
            
            $
            43,896,897
            
            $
            23,611,186





The
      following table consists of allowance for doubtful accounts at June 30, 2008
      and
      December 31, 2007.





Allowance
                for doubtful accounts at December 31, 2007
            
            $
            135,418Additional
                reserves
            
            
            379,581Accounts
                receivable write off
            
            
            (9,426
            )Effect
                of foreign currency translation
            
            
            11,880Allowance
                for doubtful accounts at June 30, 2008
            
            $
            517,453





**Note
      4 - Inventories**





Inventories
      at June 30, 2008 and December 31, 2007 consisted of the following:





June 30, 2008
            
            December 31, 2007(Unaudited)Raw
                materials
            
            $
            18,036,274
            
            $
            5,965,306Work
                in process
            
            
            3,154,471
            
            
            2,260,015Finished
                goods
            
            
            4,892,075
            
            
            4,120,559Packaging
                materials
            
            
            13,042
            
            
            7,984Low
                cost consumables
            
            
            -
            
            
            18,025Totals
            
            
            26,095,862
            
            
            12,371,889Less
                allowance for obsolete inventory
            
            
            (249,343
            )
            
            (63,594
            )Totals
            
            $
            25,846,519
            
            $
            12,308,295





The
      following table consists of allowance for obsolete inventory at June 30, 2008
      and December 31, 2007.





-
          14
          -


Allowance
                for obsolete inventory at December 31, 2007
            
            $
            63,594Additional
                reserves
            
            
            185,749Allowance
                for obsolete inventory at June 30, 2008
            
            $
            249,343





**Note
      5 - Plant and equipment**





Plant
      and
      equipment at June 30, 2008 and December 31, 2007 consisted of the
      following:





June 30, 2008
            
            December 31, 2007(Unaudited)Land
            
            $
            100,726
            
            $
            100,726Buildings
                and improvements
            
            
            34,778,064
            
            
            32,846,156Transportation
                equipment
            
            
            4,116,956
            
            
            3,193,995Machinery
                and equipment
            
            
            36,973,783
            
            
            24,111,971Office
                Furniture
            
            
            1,033,050
            
            
            833,474Construction
                in progress
            
            
            42,787,396
            
            
            36,880,809Totals
            
            
            119,789,975
            
            
            97,967,131Less
                accumulated depreciation
            
            
            (14,319,257
            )
            
            (10,738,531
            )Totals
            
            $
            105,470,718
            
            $
            87,228,600





Depreciation
      expense for the six months ended June 30, 2008 and 2007 amounted to $3,026,421
      and $936,956, respectively. and for the three months ended June 30, 2008 and
      2007 amounted to $1,622,379 and $635,360, respectively.





Capitalized
      interest for construction projects was $62,812 for the six months ended June
      30,
      2008 and $285,689 for the year ended December 31, 2007,
      respectively.





**Note
      6 - Advances to suppliers**





Advances
      on purchases are monies deposited or advanced to outside vendors for future
      inventory and equipment purchases. Most of Company’s vendors require a certain
      amount of money to be deposited with them as a guarantee that the Company will
      receive their purchase on a timely basis.





Advances
      to suppliers as of June 30, 2008 and December 31, 2007 consisted of the
      following:





June 30, 2008
            
            December 31, 2007(Unaudited)Advances
                for inventories - current
            
            $
            5,489,653
            
            $
            2,341,839Advances
                for equipment - non current
            
            
            19,016,466
            
            
            18,204,775Total
                advances to suppliers
            
            $
            24,506,119
            
            $
            20,546,614




-
          15
          -




**Note
      7 - Intangible assets**





Intangible
      assets consist of loan closing cost, land use rights and patents. Intangible
      assets at June 30, 2008 and December 31, 2007 consisted of the
      following:





June 30, 2008
            
            December 31, 2007(Unaudited)Patents
            
            $
            1,746,616
            
            $
            1,652,938Land
                use rights
            
            
            12,400,752
            
            
            5,492,089Total:
            
            
            14,147,368
            
            
            7,145,027Less:
                accumulated amortization
            
            
            (1,558,208
            )
            
            (1,312,306
            )Intangible
                assets, net
            
            $
            12,589,160
            
            $
            5,832,721





Amortization
      expense for the six months ended June 30, 2008 and 2007 amounted to $158,651
      and
      $115,590, and for the three months ended June 30, 2008 and 2007 amounted to
      $96,374 and $58,107, respectively.





**Note
      8 - Taxes Payable and Deferred Tax Asset**





Taxes
      payable at June 30, 2008 and December 31, 2007 consisted of the
      following:





June 30, 2008
            
            December 31, 2007(Unaudited)Income
                Tax
            
            $
            1,610,617
            
            $
            -VAT
                Benefit or Payable
            
            
            1,054,110
            
            
            856,482Others
            
            
            206,878
            
            
            148,777Total
                taxes payable
            
            $
            2,871,605
            
            $
            1,005,259





Income
      Tax





Under
      the
      former Income Tax Laws of PRC, the Company is generally subject to an income
      tax
      at an effective rate of 33% (30% state income taxes plus 3% local income taxes)
      on income reported in the statutory financial statements after appropriate
      tax
      adjustments. For an enterprise that qualifies as a "new or high-technology
      enterprise" or a “Foreign Invested Enterprise (“FIE”) located in the old town of
      an inshore open city, it is subject to an income tax rate of 24%. In addition,
      if the enterprise is located in a specially designated region that allows
      foreign enterprises the enterprise is entitled to a two-year income tax
      exemption and a 50% income tax reduction for the following three years.





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.





The
      Company’s wholly owned subsidiary, Fushi International (Dalian), is a foreign
      limited liability company and is located in the old town of an inshore open
      city. Under the former Income Tax Laws of PRC, the Company qualified to use
      24%
      income tax rate and has a full income tax exemption for the years ended December
      2006 and 2007 and a 50% income tax reduction for the years ending December
      31,
      2008, 2009 and 2010. Under the new EIT law effected in 2008, the company
      continues to enjoy the former preferential tax rate until it expires in December
      2010. So, the applicable corporate income tax rate in 2008 is 12%. The provision
      for income tax for the six months ended June 30, 2008 and 2007 was $2,844,180
      and $0, respectively.





-
          16
          -




Dalian
      Fushi was incorporated in the PRC and is subject to PRC income tax. Dalian
      Fushi
      located its factory in a special economic region in Dalian, PRC and qualified
      as
      a "new or high-technology enterprise" that is allowed a two year income tax
      exemption beginning in 2002, the first year after it became profitable, and
      a
      50% income tax reduction for the following three years, 2004 through 2006.
      Dalian Fushi had a loss from operations in the first quarter of 2008, so no
      provision for income taxes was made during this period.





Copperweld
      UK is organized as a United Kingdom private company and subject to 20% to 28%
      statutory taxes on its taxable income. The provision for income tax for the
      six
      months ended June 30, 2008 and 2007 was $19,933 and 0,
      respectively.





June 30, 2008
            
            June 30, 2007(Unaudited)
            
            (Unaudited)Provision
                for China Income Taxes
            
            $
            2,844,180
            
            $
            -Provision
                for UK Income Taxes
            
            
            19,933
            
            
            -Benefit
                for US Income Taxes
            
            
            (1,188,895
            )
            
            -Provision
                for Income Taxes
            
            $
            1,675,218
            
            $
            -





The
      following table reconciles the U.S. statutory rates to the Company’s effective
      tax rate for the six months ended June 30, 2008:





June
                30, 2008
            
            June
                30, 2007(Unaudited)
            
            (Unaudited)U.S.
                Statutory rates
            
            
            34.0
            %
            
            34.0
            %Foreign
                income not recognized in USA
            
            
            (34.0
            )
            
            (34.0
            )China
                income taxes
            
            
            25.0
            
            
            33.0China
                income tax exemption
            
            
            (13.0
            )
            
            (33.0
            )Total
                provision for income taxes
            
            
            12.0
            %
            
            -
            %





The
      estimated tax savings from the tax exemptions for the six months ended June
      30,
      2008, amounted to $3,081,195. The net effect on earnings per share had the
      income tax been applied would decrease basic earnings per share from $0.55
      to
      $0.43 and diluted earnings per share from $0.51 to $0.41.





The
      estimated tax savings from the tax exemptions for the three months ended June
      30, 2008, amounted to $1,708,138. The net effect on earnings per share had
      the
      income tax been applied would decrease basic earnings per share from $0.27
      to
      $0.20 and diluted earnings per share from $0.25 to $0.19.




The
      estimated tax savings from the tax exemptions for the six months ended June
      30,
      2007, amounted to $5,487,380. The net effect on earnings per share had the
      income tax been applied would decrease basic earnings per share from $0.57
      to
      $0.31 and diluted earning per share from $0.49 to $0.27.





-
          17
          -




The
      estimated tax savings from the tax exemptions for the three months ended June
      30, 2007, amounted to $3,094,230. The net effect on earnings per share had
      the
      income tax been applied would decrease basic earnings per share from $0.32
      to
      $0.18 and diluted earning per share from $0.28 to $0.16.





Deferred
      Tax Asset





Fushi,
      Fushi Holdings, Copperweld Bimetallics Holdings, LLC and Copperweld Bimetallics,
      LLC were incorporated in the United States and have incurred net operating
      losses for income tax purposes for the six months ended June 30, 2008 and
      previous years. The net operating loss carry forwards for United States income
      taxes may be available to reduce future years’ taxable income. These carry
      forwards will expire, if not utilized, through 2025 and 2027. The deferred
      tax
      asset amounted to $4,040,895 as of June 30, 2008. Management believes that
      the
      realization of the benefits can be used by our US operating subsidiary in future
      periods because expectations are that Copperweld will have taxable income in
      future periods.





The
      deferred tax asset consisted of the following:




Deferred
                tax asset at December 31,2007
            
            $
            2,852,000Additions
                to deferred tax asset
            
            
            1,188,895Deferred
                tax asset at June 30,2008
            
            $
            4,040,895





Value
      Added Tax





VAT
      on
      sales and VAT on purchases in Dalian China amounted to $14,005,473 and
      $10,434,463 for the six months ended June 30, 2008 and $7,841,691 and $5,297,848
      for the six months ended June 30, 2007, respectively.





VAT
      on
      sales and VAT on purchases in Copperweld UK amounted to $133,722 and $225,936
      for the six months ended June 30, 2008.





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.





-
          18
          -




**Note
      9 - Short term bank loans and revolving credit lines**





Short
      term bank loans represent amounts due to various banks and are due on demand
      or
      normally within one year. These loans generally can be renewed with the banks.
      Short term bank loans at June 30, 2008 and December 31, 2007, consisted of
      the
      following:


Name
                    of lender
                
                June
                    30, 2008
                
                December
                    31,
                  2007(Unaudited)Bank
                      of China, Xinghaiwan Branch, due March 28, 2008, annual interest
                      at 7.227%
                      secured by theCompany’s
                      land use right and building.
                
                $
                -
                
                $
                2,687,160Bank
                    of China, Xinghaiwan Branch, due February 15, 2008,and was renewed
                    to May
                    15, 2008 annual interest at 7.029%, secured by the Company’s land use
                    right and building.
                
                
                -
                
                
                3,016,200Guangdong
                    Development bank, Dalian Stadium branch, due February 25, 2009,
                    annual
                    interest at 8.96%,secured by the Company’s land use right and
                    building.
                
                
                8,747,400
                
                
                -Guangdong
                    Development bank, Dalian Stadium branch, due March 9, 2009, annual
                    interest at 8.96%, secured by the Company’s land use right and
                    building.
                
                
                2,915,800
                
                
                -Guangdong
                    Development bank, Dalian Stadium branch, due March 19, 2009,
                    annual
                    interest at 8.96%, secured by the Company’s land use right and
                    building.
                
                
                1,457,900
                
                
                -Guangdong
                    Development bank, Dalian Stadium branch, due March 26, 2009,
                    annual
                    interest at 8.96%, secured by the Company’s land use right and
                    building.
                
                
                4,373,700
                
                
                -Total
                    Short Term Bank Loan
                
                
                17,494,800
                
                
                5,703,360CIT
                    revolving credit line, annual interest at 6.25%, mature in 2010,
                    secured
                    by all present and future account receivables, equipment, inventory
                    and
                    other goods, documents of title, general intangibles, investment
                    property,
                    and real estate.
                
                
                8,894,855
                
                
                7,168,524Total
                
                $
                26,389,655
                
                $
                12,871,884





The
      Company paid off its two short term loans with outstanding balances of
      $5,703,360, in the first quarter of 2008 and obtained four new short term loans
      with balances of $17,494,800 at June 30 2008 at annual interest rate of 8.96%
      which are due in February and March 2009.





Copperweld
      maintains a revolving line of credit through CIT with a limit of $12.8 million
      and an outstanding balance of $8,894,855 at June 30, 2008, the Company deposits
      the proceeds from customers to the line of credit outstanding account on a
      daily
      basis. Copperweld UK maintains a revolving line of credit with a limit of
      approximately $1,539,600 (or ₤750,000) but had no balance outstanding at June
      30, 2008. Both lines of credit expire in 2010.





Current
      portion of long term debt, which represents the loan that was originated May
      2003 and due on April 10, 2008 at an annual rate of 5.58%, secured by the
      Company’s land use right and building, were all paid off on April 29, 2008,
      total outstanding as of June 30, 2008 and December 31, 2007 amounted to $0
      and
      $10,968,000.





-
          19
          -


Name
                of Lender
            
            June 30, 2008
            
            December
              31, 2007(Unaudited)ICBC,
                Dalian JinZhou BranchDue
                April 10, 2008, annual interest at 5.58%,secured
                by the Company’s land use right and building
            
            $
            -
            
            $
            5,484,000ICBC,
                Dalian JinZhou BranchDue
                April 10, 2008, annual interest at 5.58%,secured
                by the Company’s land use right and building
            
            
            -
            
            
            5,484,000Total
                current portion of long term debts
            
            
            -
            
            $
            10,968,000





Total
      interest expense on revolving credit line, short term and long term loans for
      the six months ended June 30, 2008 and 2007 amounted to $1,059,628 and $693,097,
      of which capitalized interest for construction projects amounted to $62,812
      and
      $157,528, respectively. Interest for the three months ended June 30, 2008 and
      2007 was $565,295 and $352,070, of which $17,364 and $82,010 respectively was
      capitalized.





**Note
      10 – Notes payable**





Notes
      payable as of June 30, 2008 and December 31, 2007 consisted of the
      following:





June 30, 2008
            
            December 31, 2007(Unaudited)Senior
                secured convertible notes (“Convertible Notes”) , bearing interest at 3%
                per annum, maturing on January 24, 2012, convertible to common stock
                at an
                initial conversion price of $7.00 per share
            
            $
            5,000,000
            
            $
            20,000,000Guaranteed
                senior secured floating rate notes (“HY Notes”) maturing on January 24,
                2012
            
            
            40,000,000
            
            
            40,000,000Notes
                payable total
            
            $
            45,000,000
            
            $
            60,000,000





On
      January 24, 2007, the Company and Citadel Equity Fund Ltd. ("Citadel") entered
      a
      Notes Purchase Agreement. On January 29, 2007, the Company closed a $60
      million financing with Citadel.  In this transaction, Citadel purchased





(i)  floating
      rate $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 2012 and





(ii)  $20
      million principal amount (less 4% commission for proceeds of $19,200,000) of
      the
      Company’s 3% senior secured convertible notes (“Convertible Notes”) due 2012,
      which are convertible into shares of the Company's common stock at an initial
      conversion price of $7.00 per share.





-
          20
          -




The
      HY
      notes bear interest at LIBOR (approximately 3.11% at June 30, 2008) + 7% and
      changes to LIBOR + 5.6% permanently upon successful completion of Qualifying
      IPO
      within eighteen months from January 24, 2007. The interest on the HY Notes
      and
      Convertible notes are payable semi-annually in arrears in January and July.
      See
      below for discussion of swap agreement changing variable interest to 8.3% fixed.





Management
      completed its review of the accounting for the transactions and has concluded
      that the conversion option does not qualify as an embedded derivative under
      FAS
      133 nor does it qualify for fair value treatment under EITF 00-19 or beneficial
      conversion treatment under EITF 98-5 and 00-27.





On
      November 15, 2007, the Company filed Form S-3 with the Securities and Exchange
      Commission (SEC) with a proposed prospectus to register up to 5,743,143 shares
      including 2,857,143 shares underlying the 3% Senior Convertible Notes, On
      November 21, 2007, the registration statement was declared effective by SEC.
      On
      January 8, 2008, $15.0 million of the Convertible Notes were exchanged for
      2,142,857 shares of common stock.





As
      security for the Notes, the Company and the Bank of New York, as collateral
      agent, entered into a share pledge agreement, dated January 25, 2007 (the "Share
      Pledge Agreement"), to guarantee the Notes with all of the shares of common
      stock of Fushi Holdings, the Company’s wholly-owned subsidiary, as
      collateral.





In
      connection with the transaction, Citadel was also granted certain rights over
      the Company and its subsidiaries. On January 25, 2007, Fushi, Fushi Holdings,
      Fushi International (Dalian), Dalian Fushi, Li Fu, our Chairman and Chief
      Executive Officer, Mathus Yue Yang, our then President, Chris Wenbing Wang,
      our
      current President and Chief Financial Officer and Citadel entered into an
      Investor Rights Agreement dated January 25, 2007. Pursuant to the Investor
      Rights Agreement, Citadel was granted, among other things and subject to certain
      conditions, the right to designate up to certain number of the Company's board
      of directors, a right of first refusal with respect to any debt or equity
      financing sought by the Company and the right to approve the Company's annual
      business plan and budget. In addition, pursuant to the Investor Rights
      Agreement, Messrs. Fu, Yang and Wang agreed to a non-competition covenant
      relating to their employment and ability to engage in a business that is
      competitive with the Company's business for five years.





The
      HY
      Notes and the Convertible Notes were issued pursuant to indentures, each dated
      January 25, 2007 (the “HY Indenture” and “CB Indenture”, respectively, and
      together, the "Indentures") among the Company, Fushi Holdings, as guarantor,
      and
      the Bank of New York, as trustee for the Notes. Pursuant to the Indentures,
      Fushi Holdings has agreed, and all of the Company's other existing and future
      domestic subsidiaries are obligated, to guarantee, on a senior secured basis,
      to
      the holders of the Notes and the trustee the payment and performance of the
      Company's obligations there under.





Additionally,
      if there is no NASDAQ listing by the eighteenth month from the issue date of
      the
      HY Notes and Convertible Notes, the Company must pay liquidated damage in the
      amount of 3.3% of the principal amount of the Notes. The Company’s shares of
      common stock commenced trading on the NASDAQ Global Market on August 31, 2007.





-
          21
          -




Cash
      coupon rate on the HY Notes will step down permanently by 140 basis points
      upon
      successful completion of Qualifying IPO within eighteen months from January
      24,
      2007. A “Qualifying IPO” is defined as an initial public offering and/or
      secondary offering of Shares that satisfies all of the following criteria
      (except that either 1 or 2 need to be met):




1.
            a
                minimum public float representing at least 25% of the Shares of the
                Company after the Qualifying lPO and a minimum market capitalization
                of
                the Company of $200 million after the Qualifying
                IPO;




2.
            with
                respect to (1) above, such other offering size or market capitalization
                as
                may be agreed by Convertible Note holders holding more than 50% of
                the
                outstanding principal amount of Convertible
                Notes;




3.
            the
                minimum number of investors purchasing Shares in such offering prescribed
                by a stock exchange or the relevant regulatory authorities, and resulting
                in the listing and commencement of trading of the Shares on such
                exchange;
                and




4.
            the
                listing is on the NASDAQ Stock Market or another international exchange
                to
                be approved by Citadel.




Upon
      the
      aforementioned S-3 registration statement being declared effective, Management
      concluded that the Company had met all the requirements for a Qualifying IPO
      and
      therefore notified the HY Notes holders of the 140 basis points step-down and
      subsequently paid interest per the stepped down rate in January
      2008.





The
      indenture, notes purchase agreement and investor rights agreement related to
      the
      HY Notes and Convertible Notes contain various covenants that may limit the
      Company’s discretion in operating its business. In particular, the Company is
      limited in its ability to merge, consolidate or transfer substantially all
      of
      its assets, issue stock of its subsidiaries, incur additional debt and create
      liens on assets to secure debt. In addition, the Company is required to comply
      with certain financial covenants, including maintenance of a fixed charge
      coverage ratio of at least 2.0 and maintenance of a leverage ratio not exceeding
      5.5. Management believes the Company was in compliance with all of these
      covenants as of June 30, 2008.





Unless
      previously redeemed, converted, purchased or cancelled, the Company must repay
      the Convertible Notes on January 24, 2012. The Convertible Notes may not be
      prepaid at any time prior to maturity. At maturity, the Company must repay
      all
      of the outstanding Convertible Notes plus a premium of 15.00% per annum on
      the
      principal amount calculated on a semi-annual basis, plus accrued and unpaid
      interest on late payment, if any, to reflect a additional 5% per annum interest
      in excess of the rate of interest then in effect.





As
      of
      December 31, 2007, the Company had $20 million Convertible Notes and $40 million
      HY notes, a total of $60 million long term notes payable outstanding. On January
      8, 2008, Citadel converted $15.0 million of the Convertible Notes into 2,142,857
      shares of common stock. As of June 30, 2008, the Company had $5 million
      Convertible Notes and $40 million HY notes, a total of $45,000,000 long term
      notes payable and outstanding. Deferred commissions on long term notes amounted
      to $3,713,339 and $2,946,740 as of June 30, 2008 and December 31, 2007.
      Amortized commission for the six months ended June 30, 2008 and 2007 amounted
      to
      $2,233,401 and $ 329,096, respectively. Amortized commission for the three
      months ended June 30, 2008 and 2007 amounted to $1,574,997 and $ 179,507,
      respectively. Interest on long term notes for the six months ended June 30,
      2008
      and 2007 amounted to $1,509,588 and $2,195,907 respectively. Interest for the
      three months ended June 30, 2008 and 2007 was $917,541 and $1,179,507,
      respectively. Both amortized commission and interest on long term notes are
      recorded as interest expense.





-
          22
          -




The
      Company cannot estimate the possibility of the conversion of the $5 million
      Convertible Notes outstanding as of June 30, 2008. If the $5 million Convertible
      Notes outstanding are not converted at maturity, January 24, 2012, the Company
      will have to repay the principal of $5 million and an additional redemption
      cost
      of $5,305,158.





**Note
      11 – Derivative instrument**





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





On
      April
      10, 2007, effective January 24, 2007, the Company entered a cross currency
      swap
      transaction (the Swap) with Merrill Lynch Capital Services, Inc. (“MLCS”) on the
      $40 million HY notes which converts the LIBOR + 7% per annum USD variable
      interest rate to an 8.3% per annum RMB fixed interest rate. The agreement was
      deemed effective January 24, 2007. The Swap requires semi-annual payment in
      arrears on July 24 and January 24 and matures on the earlier of (1) cash
      settlement defined as early termination; or (2) January 24, 2012, at which
      point
      the Swap requires an exchange of RMB and USD based principals. Under the terms
      of the cross currency swap, the Company receives variable interest rate payments
      in USD and makes fixed interest rate payments in RMB with settlement netted
      in
      USD, thereby creating the equivalent of fixed-rate debt. MLCS requires the
      Company to deposit $1,000,000 with them to secure the agreement. The deposit
      may
      be increased to $3,000,000 if the exchange rate for RMB to USD falls below
      6.5
      and to $5,000,000 if the exchange rate falls below 5.5. This swap is designated
      and qualified as a cash flow hedge. As of June 30, 2008, the Company has not
      placed the $1,000,000 deposit with MLCS. However, as discussed in Note 19 and
      20, the Company made the deposit of $1,000,000 with MLCS to secure the agreement
      in July, 2008.





Since
      its
      effective date, the fair value of this Swap agreement changed to a payable
      of
      $9,246,901 on June 30, 2008, and a payable of $8,515,396 on December 31, 2007,
      respectively. For
      the
      six months ended June 30, 2008 and 2007, changes in fair value of the Swap
      resulted in an increase in the liability and a loss to other comprehensive
      income of $731,505 and $871,519, respectively, net of taxes,.





The
      Company had cross currency hedge receivable amounting to $322,983 as of June
      30,
      2008 and $706,170 as of December 31, 2007, The total gain from derivative
      transactions for the six months of year 2008 and 2007 was $355,189 and $802,523,
      respectively. For the six months ended June 30, 2008, there were no amounts
      recorded in the consolidated statement of income in relation to this interest
      rate swap related to ineffectiveness of the swap transaction.





-
          23
          -




**Note
      12 – Supplemental disclosure of cash flow information**





Total
      interest paid for the six months ended June 30, 2008 and June 30, 2007 amounted
      to $ 3,438,440 and $ 536,539, respectively.





Total
      income tax paid for the six months ended June 30, 2008 and June 30, 2007
      amounted to $1,303,257 and $0, respectively.





Convertible
      notes totaling $15,000,000 were converted into 2,142,857 shares of common stock
      at $7.00 per share, on January 8, 2008.





**Note
      13 – Accumulated other comprehensive income**





The
      components of accumulated other comprehensive income are as
      follows.





Accumulated
                other comprehensive income:
            
            AmountBalance,
                December 31, 2007
            
            $
            4,015,930Unrealized
                loss on marketable securities
            
            
            22,301Foreign
                currency translation gain
            
            
            12,163,352Change
                in fair value of derivative instrument
            
            
            (731,505
            )Balance,
                June 30, 2008
            
            $
            15,470,078





**Note
      14 - Earnings per share**





The
      following is information of net income per share:





Three
                months ended June 30,
            
            Six
                months ended June 30,2008
            
            2007
            
            2008
            
            2007(Unaudited)
            
            (Unaudited)
            
            (Unaudited)
            
            (Unaudited)Net
                income for basic earnings per share
            
            $
            7,280,846
            
            $
            6,982,659
            
            $
            14,851,343
            
            $
            11,957,391Add:
                Interest expense for convertible note
            
            
            24,887
            
            
            150,000
            
            
            52,649
            
            
            250,000Deduct:
                Loan issuance cost
            
            
            (209,590
            )
            
            -
            
            
            (209,590
            )
            
            -Net
                income for diluted earnings per share
            
            $
            7,096,143
            
            $
            7,132,659
            
            $
            14,694,402
            
            $
            12,207,391Weighted
                average shares used in basic computation
            
            
            27,354,215
            
            
            21,487,056
            
            
            27,201,127
            
            
            21,116,447Diluted
                effect of warrants, option and convertible note
            
            
            1,377,894
            
            
            3,705,587
            
            
            1,489,725
            
            
            3,550,899Weighted
                average shares used in diluted computation
            
            
            28,732,109
            
            
            25,192,643
            
            
            28,690,852
            
            
            24,667,346Earnings
                per shareBasic
            
            $
            0.27
            
            $
            0.32
            
            $
            0.55
            
            $
            0.57Diluted
            
            $
            0.25
            
            $
            0.28
            
            $
            0.51
            
            $
            0.49





-
          24
          -




100,000
      shares of common stock held in escrow were excluded from both the basic and
      diluted earnings per share calculation, since the shares were issued under
      the
      Company’s name.





33,750
      options granted on October 29, 2007 at an excise price of $20.94 were excluded
      from the diluted earnings per share calculation due to the anti-diluted effect
      for the six months ended June 30, 2008.





84,000
      options granted on June 25, 2008 at an excise price of $23.25 were excluded
      from
      the diluted earnings per share calculation due to the anti-diluted effect for
      the six months and three months ended June 30, 2008.





50,000
      options granted on May 21, 2008 at an excise price of $20.04 were excluded
      from
      the diluted earnings per share calculation due to the anti-diluted effect for
      the six months ended June 30, 2008.




**Note
      15 - Stockholders' Equity**


(A)
              Series
                  A and Series B Convertible Preferred
                  Stocks
 
 The
        Series A and Series B Convertible Preferred Stocks (“Series A and B Stocks”)
        were automatically converted into common stock upon the effectiveness of
        the
        reverse split on January 30, 2006 under the certificates of designation for
        Series A and B Stocks. Specifically, 784,575 shares of Series A preferred
        stock
        and 216,000 shares of Series B preferred stock were converted into 19,818,718
        shares of common stock. In connection with the $12 million financing closed
        in
        December 2005, we granted 2,125,000 warrants exercisable at $3.67 to the
        investors, 424,929 warrants exercisable at $3.11 to Kuhns Brothers, Inc.
        and its
        certain affiliates and 80,000 warrants exercisable at $0.01 to Glenn Little,
        then President of Parallel Technology. During 2006, a total of 148,985 warrants
        were exercised.
  (B)
              As
                  of June 30, 2008, the Company had
                  outstanding:
  (1)
              27,459,012
                  shares of common stock, including 100,000 shares in escrow, par
                  value
                  $0.006.
 (2)
              Warrants
                  purchasing 376,997 shares of common stock with exercise prices
                  of $3.11
                  per share, expiring December 2011.
 (3)
              Warrants
                  purchasing 100,000 shares of common stock with exercise prices
                  of $16.80
                  per share, expiring November 2011.
  (C)
              During
                  the first two quarters of 2008, the following activities were
                  recorded:
 
 (1)  On
        January 8, 2008, Citadel Equity Fund Ltd. exercised its rights under the
        “Convertible Notes” indenture and received 2,142,857 in exchange for $15.0
        million in debt with an exchange factor of $7.00 in debt for each share of
        stock.
 
 -
            25
            -
  The
        Company has 376,997 warrants exercisable at $3.11 and 100,000 warrants
        exercisable at $16.80 outstanding as of June 30, 2008.


Outstanding
                    Warrants
                
                Exercisable
                    WarrantsExercise
                  Price
                
                Number
                
                Average
                  Remaining
                    Life
                  (years)
                
                Average
                  Exercise
                  Price
                
                Number
                
                Average
                  Remaining
                  Life
                  (years)$
                3.11
                
                
                376,997
                
                
                3.50
                
                $
                3.11
                
                
                376,997
                
                
                3.50$
                16.80
                
                
                100,000
                
                
                3.42
                
                $
                16.80
                
                
                100,000
                
                
                3.42





The
      following is a summary of the warrant activities:





Number
                of
              Warrants
              Outstanding
            
            Number
                of
              Warrants
              Exercisable
            
            Weighted-
              Average
              Exercise
              Price
            
            Average
              Remaining
              Contractual
              LifeBalance,
                January 1, 2007
            
            
            2,480,944
            
            
            2,480,944
            
            $
            3.57
            
            
            5.00
                yearsGranted
            
            
            -
            
            
            -Forfeited
            
            
            -
            
            
            -Exercised
            
            
            (304,389
            )
            
            (304,389
            )
            $
            3.67Balance,
                at June 30, 2007
            
            
            2,176,555
            
            
            2,176,555
            
            $
            3.56
            
            
            4.50
                yearsGranted
            
            
            100,000
            
            
            100,000
            
            $
            16.80
            
            
            4.00
                yearsForfeited
            
            
            -
            
            
            -
            
            
            -Exercised
            
            
            (1,799,503
            )
            
            (1,799,503
            )
            $
            3.66Balance,
                at December 31, 2007
            
            
            477,052
            
            
            477,052
            
            $
            5.98
            
            
            4.00
                yearsRounding
                adjustments
            
            
            (55
            )
            
            (55
            )Granted
            
            
            -
            
            
            -
            
            
            -Forfeited
            
            
            -
            
            
            -
            
            
            -Exercised
            
            
            -
            
            
            -
            
            
            -Balance,
                at June 30, 2008
            
            
            476,997
            
            
            476,997
            
            $
            5.98
            
            
            3.50
                years





**Note
      16 – Stock based compensation**





On
      May 21
      and June 7, 2007, the Company issued 500,000 and 150,000 options to four
      executives and three independent directors, respectively, both for a service
      period of two years starting from the grant date. The vesting period is two
      years for both grants. These options were not awarded pursuant to the 2007
      Stock
      Incentive Plan.





On
      September 27, 2007, the Company granted to Mr. Chris Wenbing Wang a
      non-qualified stock option to purchase 125,000 shares of its Common Stock
      vesting immediately at an exercise price of $13.70 and terminating in five
      (5)
      years from the grant date. The option grant was approved by the Compensation
      Committee of the Board of Directors of the Company in consideration of Mr.
      Wang’s efforts on behalf of the Company. Mr. Wang may exercise his option after
      the effective date of the Schedule 14 C that will be filed with the Securities
      and Exchange Commission in connection with the approval of the grant by the
      majority stockholder of the Company.





-
          26
          -




On
      October 29, 2007, in connection with Mr. John Christopher Finley’s employment as
      Chief Operating Officer and Mr. James A. Todd’s employment as Financial
      Controller, the Board of Directors approved a non-qualified stock option grant
      to Mr. Finley and Mr. Todd in the amounts of 190,000 shares and 135,000 shares
      of common stock of the Company, respectively, for a service period of two years,
      vesting over a two (2) year period with 12.5% of the options vesting each
      quarter for eight (8) quarters. The grants to Mr. Finley and Mr. Todd were
      pursuant to the Fushi International, Inc. 2007 Stock Incentive
      Plan.





On
      November 13, 2007, the Company issued 10,000 options to Mr. Nathan J. Anderson,
      the Director of Investor Relations. The vesting period is one year.





On
      January 24, 2008, Mr. Yue Yang resigned as our president and member of the
      board. As a result, 50,000 options unvested options were forfeited.





On
      April
      10, 2008, the Company issued 17,000 options to Mr. Nathan J. Anderson, the
      Director of Investor Relations. The vesting period is one year.





On
      May
      21, 2008, the Company issued 50,000 options to Mr. Jack Perkowski, the Director
      of Board. The vesting period is two years.





On
      May
      29, 2008, we executed a Separation Agreement accepting the resignation of Mr.
      John Christopher Finey as our chief operating officer. Under the terms of the
      Separation Agreement, Mr. Finley’s options will continue to vest for six months
      following the execution fo the agreement. Further, Mr. Finley will have 15
      months from the date of execution to exercise his vested options. As a result,
      total of 95,000 unvested options were forfeited.




In
      the second quarter of 2008, one other executive
      resigned, resulting in 41,667 unvested options forfeited.





On
      June
      25, 2008, the Company issued 84,000 options to Copperweld employees. The vesting
      period is half year.





As
      of
      June 30, 2008, options held by executives, directors and employees representing
      1,074,333 shares were outstanding, of which, 667,108 were vested.





The
      fair
      values of stock options granted to the executives and the independent directors
      were estimated at the date of grant using the Black-Scholes option-pricing
      model
      with the following assumptions:





Expected
            
            Expected
            
            Dividend
            
            Risk
                Free
            
            Grant
                DateLife
            
            Volatility
            
            Yield
            
            Interest Rate
            
            Fair
                ValueExecutives
            
            
            2.0
                yrs
            
            
            50
            %
            
            0
            %
            
            1.84% - 4.57
            %
            $
            2.59 - $5.93Independent
                Directors
            
            
            2.0
                yrs
            
            
            50
            %
            
            0
            %
            
            2.41% - 4.57
            %
            $
            3.64 - $5.89Employees
            
            
            0.5
                yrs
            
            
            50
            %
            
            0
            %
            
            2.82
            %
            $
            3.40




-
          27
          -




-
            Volatility:
                One year historical volatility of our stock is 58%. Adjustment is
                made
                based on volatility of industry peers average which is 31%, to arrive
                at
                50% as expected volatility.





-
            Dividend
                Yield: The expected dividend yield is zero. The Company has not paid
                a
                dividend and does not anticipate paying dividends in the foreseeable
                future.





-
            Risk
                Free Rate: Risk-free interest rate of 1.84% to 4.57% was used. The
                risk-free interest rate was based on U.S. Treasury yields with a
                remaining
                term that corresponded to the expected term of the option calculated
                on
                the granted date.





-
            Expected
                Life:  Because the Company has no historical share option exercise
                experience to estimate future exercise patterns, the expected life
                was
                determined using the simplified method as these awards meet the definition
                of "plain-vanilla" options under the rules prescribed by Staff Accounting
                Bulletin No. 107.





The
      fair
      value of the stock option granted to the executives was $2.59- $5.93 per share
      on the date of grant.  The fair value of the stock option granted to the
      independent directors was $3.64- $5.89 per share on the date of grant. The
      fair value of the stock option granted to the employees was $3.40 per share
      on
      the date of grant.





Stock
      compensation expense is recognized based on awards expected to vest. There
      were
      no estimated forfeitures as the Company has a short history of issuing options.
      SFAS No. 123R requires forfeitures to be estimated at the time of grant and
      revised in subsequent periods, if necessary, if actual forfeitures differ from
      those estimates.





As
      of
      June 30, 2008, the 790,333 executive options, 200,000 director options and
      84,000 employee options issued had fair values of approximately $3,327,738,
      $838,729 and $345,151 respectively. The Company recognized $914,083 of
      compensation expenses in general and administrative expenses for the six months
      ended June 30, 2008.





As
      of
      June 30, 2008, the total compensation cost related to stock options not yet
      recognized was $1,641,746 and will be recognized over the weighted average
      life
      of 2 years.





The
      following is a summary of the stock option activity:





Number
                of
              Options
              Outstanding
            
            Weighted-
              Average
              Exercise
              Price
            
            Aggregate
              Intrinsic
              ValueBalance,
                January 1, 2007
            
            
            -
            
            
            -
            
            
            -Granted
            
            
            -
            
            
            -
            
            
            -Forfeited
            
            
            -
            
            
            -
            
            
            -Exercised
            
            
            -
            
            
            -
            
            
            -Balance,
                at June 30, 2007
            
            
            -
            
            
            -
            
            
            -Granted
            
            
            1,110,000
            
            $
            14.3
            
            
            -Forfeited
            
            
            -
            
            
            -
            
            
            -Exercised
            
            
            -
            
            
            -
            
            
            -Balance,
                December 31, 2007
            
            
            1,110,000
            
            $
            14.3
            
            $
            12,075,850Granted
            
            
            151,000
            
            
            21.2
            
            
            -Forfeited
            
            
            (186,667
            )
            $
            16.3
            
            
            -Exercised
            
            
            -
            
            
            -
            
            
            -Balance,
                June 30, 2008
            
            
            1,074,333
            
            $
            15.1
            
            $
            9,271,494





-
          28
          -




Following
      is a summary of the status of options outstanding at June 30, 2008:


Outstanding
                  Option
              
              Exercisable
                  OptionsExercise
                  Price
              
              Number
              
              Average
                Remaining
                Contractual
                Life
              
              Average
                Exercise
                Price
              
              Number
              
              Weighted
                Average
                Exercise
                Price$12.30
              
              
              408,333
              
              
              1.18
                  years
              
              $
              12.30
              
              
              308,333
              
              $
              12.30$11.75
              
              
              150,000
              
              
              1.14years
              
              $
              11.75
              
              
              93,744
              
              $
              11.75$13.70
              
              
              125,000
              
              
              1.45
                  years
              
              $
              13.70
              
              
              125,000
              
              $
              13.70$16.44
                  - $20.94
              
              
              230,000
              
              
              1.58
                  years
              
              $
              18.69
              
              
              108,628
              
              $
              16.40$16.36
              
              
              10,000
              
              
              0.62
                  years
              
              $
              16.36
              
              
              8,115
              
              $
              16.36$23.25
              
              
              84,000
              
              
              0.50
                  years
              
              $
              23.25
              
              
              2,222
              
              $
              23.25$15.04
              
              
              17,000
              
              
              0.78
                  years
              
              $
              15.04
              
              
              3,879
              
              $
              15.04$20.04
              
              
              50,000
              
              
              0.96
                  years
              
              $
              20.04
              
              
              17,187
              
              $
              20.04Total
              
              
              1,074,333
              
              
              
              
              
              
              
              
              667,108





**Note
      17 - Statutory reserves**





The
      laws
      and regulations of the People’s Republic of China require that before a
      Sino-foreign cooperative joint venture enterprise distributes profits to its
      partners, it must first satisfy all tax liabilities, provide for losses in
      previous years, and make allocations, in proportions determined at the
      discretion of the board of directors, after the statutory reserve.





Surplus
      reserve fund





The
      Company is required to transfer 10% of its net income, as determined in
      accordance with the PRC accounting rules and regulations, to a statutory surplus
      reserve fund until such reserve balance reaches 50% of the Company’s registered
      capital.





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





The
      surplus reserve fund is non-distributable other than during liquidation and
      can
      be used to fund previous years’ losses, if any, and may be utilized for business
      expansion or converted into share capital by issuing new shares to existing
      shareholders in proportion to their shareholding or by increasing the par value
      of the shares currently held by them, provided that the remaining reserve
      balance after such issue is not less than 25% of the registered
      capital.





-
          29
          -




**Note
      18 – 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 $66,706 and $11,392 in contributions of employment benefits
      in
      the six months period ended June 30, 2008 and June 30, 2007, respectively.





US
      employees are provided a 401(k) plan where in the six months period ended June
      30, 2008, employer contributions totaled $70,568.





Copperweld
      UK operates a defined contribution pension scheme for employees. The assets
      of
      the scheme are held separately from those of the company. The annual
      contributions payable are charged to expense. The company made $19,656 in
      contributions of employment benefits.





**Note
      19 - Commitments and contingencies**





As
      discussed in Note 11, the Company entered into a swap agreement that required
      a
      $1,000,000 deposit to secure the transaction. If the exchange rate for RMB
      to US
      Dollars drops below certain levels, the Company will be required to deposit
      up
      to $5,000,000. As of June 30, 2008, the Company had not deposited the $1,000,000
      with MLCS to secure the agreement. However,
      as discussed in Note 20, the Company made the deposit of $1,000,000 with MLCS
      to
      secure the agreement in July, 2008.





On
      December 11, 2007, Fushi Copperweld, Inc. (the “Company”) received service of an
      action filed by Kuhns Brothers, Inc., Kuhns Brothers Securities Corp., and
      Kuhns
      Brothers & Co., Inc. against the Company in the United States District
      Court, District of Connecticut on November 27, 2006.  The Action seeks
      declaratory judgment concerning the interpretation and enforceability of
      specific terms of the engagement letter agreement, dated May 27, 2005, by and
      between Kuhns Brothers, Inc. and the Company, which the Company terminated
      in
      September 2006.  The Company believes that the plaintiffs’ claims are
      without merit and intends to vigorously defend the Action. On October 4, 2007,
      the Company had signed an escrow agreement with Kuhns Brothers & Co., Inc.,
      the Company had put $1,000,000 restricted cash and 100,000 shares of common
      stock in escrow. On August 5, 2008, the Company received verdict from the United
      States District Court that Kuhns is entitled to recover of the Company,
      $6,487,250 plus $710,543.97, for a total of $7,197,793.97. The Company recorded
      the court ruling to contingent liability and allocated the amount between equity
      and expenses accordingly. The Company is in the process of appealing the case.





**Note
      20 - Subsequent events**





As
      discussed in Note 11, the Company entered into a swap agreement that required
      a
      $1,000,000 deposit to secure the transaction. The Company made the deposit
      of
      $1,000,000 with MLCS to secure the swap agreement in July, 2008.




30




ITEM
        2
        MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS AND FINANCIAL
        CONDITIONS.
 
 *The
        following discussion of our financial condition and results of operations
        should
        be read in conjunction with our audited consolidated financial statements
        and
        the notes to those financial statements appearing elsewhere in this Form
        10-Q.*
 
 *Certain
        statements in this Report, and the documents incorporated by reference herein,
        constitute "forward-looking statements" within the meaning of Section 27A
        of the
        Securities Act of 1933, Section 21E of the Securities Exchange Act of 1934
        and
        the Private Securities Litigation Reform Act of 1995. Such forward-looking
        statements include statements, which involve risks and uncertainties, regarding,
        among other things, (a) our projected sales, profitability, and cash flows,
        (b)
        our growth strategies, (c) anticipated trends in our industries, (d) our
        future
        financing plans, and (e) our anticipated needs for, and use of, working capital.
        They are generally identifiable by use of the words “may,” “will,” “should,”
“anticipate,” “estimate,” “plan,” “potential,” “project,” “continuing,”
“ongoing,” “expects,” “management believes,” “we believe,” “we intend,” or the
        negative of these words or other variations on these words or comparable
        terminology. Actual events or results may differ materially from those discussed
        in forward-looking statements as a result of various factors, including,
        without
        limitation, the risks outlined under “Risk Factors” in our Annual Report on Form
        10-K and matters described in this report generally. In light of these risks
        and
        uncertainties, there can be no assurance that the forward-looking statements
        contained in this filing will in fact occur. You should not place undue reliance
        on these forward-looking statements.*
 
 *The
        forward-looking statements speak only as of the date on which they are made,
        and, except to the extent required by federal securities laws, we undertake
        no
        obligation to update any forward-looking statement to reflect events or
        circumstances after the date on which the statement is made or to reflect
        the
        occurrence of unanticipated events.*
  *The
        "Company", "we," "us," "our," and the "Registrant" refer to (i) Fushi
        Copperweld, Inc. (formerly Fushi International, Inc.), (ii) Fushi Holdings,
        Inc.(formerly Diversified Product Inspections, Inc.) (“Fushi Holdings”), (iii)
        Fushi International (Dalian) Bimetallic Cable Co., Ltd. (formerly Dalian
        Diversified Product Inspections Bimetallic Cable, Co., Ltd.) (“Fushi
        International (Dalian)”), (iv) Dalian Fushi Bimetallic Wire Manufacturing, Co.,
        Ltd. (“Dalian Fushi”), (v) Copperweld Holdings, LLC, (vi) Copperweld Bimetallic,
        LLC (“Copperweld”), (vii) Copperweld Bimetallics UK, LLC, and (viii) Copperweld
        International Holdings, LLC.*
  31
  **Overview**
  Since
        our
        founding in 2002, we have grown to be the leading manufacturer of bimetallic
        products in the world. We serve approximately 300 customers in 30 countries
        from
        our facilities in Dalian, PRC, Fayetteville, Tennessee and Telford, U.K.
        Historically, our principal product produced in Dalian has been Copper-Clad
        Aluminum, or CCA, which combines the conductivity and corrosion resistance
        of
        copper with the light weight and relatively low cost of aluminum. On October
        29,
        2007, we acquired Copperweld with manufacturing operations in Fayetteville,
        Tennessee and Telford, U.K. During the second quarter of 2008, Fayetteville
        shipped our products to 108 customers in 14 countries on four continents,
        Telford shipped to 47 customers in 12 countries and Dalian shipped to 252
        customers in seven countries. The Fayetteville facility produces both CCA
        and
        Copper-Clad Steel, or CCS which combines the conductivity of copper with
        the
        strength of steel. The Telford facility further processes material produced
        in
        Fayetteville. We now produce both CCA and CCS and have a worldwide presence
        that
        combines Fushi’s recognition in China with the worldwide recognition of the
        Copperweld brand.
 
 During
        the second quarter 2008, in Dalian, we continued development of our bimetallic
        projects and continued to grow sales of bimetallic wire products to further
        expand our sales in the utility industry.  CCA flat wire is one of our
        projects that continues under development and offers greater value than copper
        wire because of its reduced cost and weight while it maintains conductivity
        standards required by utility companies.  We believe that the successful
        installation of equipment (KM line) using Copperweld’s cladding technology to
        make copper-clad aluminum, which was completed at the onset of second quarter
        of
        2008 will allow us to improve the quality of our bimetallic flat wire and
        enable
        us to produce larger diameter flat wire products for the PRC
        markets.
 
 During
        second quarter 2008, we further increased sales into the utility market at
        our
        Dalian facility through the sales of CCA wire for use in low and medium voltage
        power cable applications.  CCA wire for use in low and medium voltage power
        cable is still in the early stages of its development; however, we are working
        closely with customers and regulatory bodies to gain nationwide approval
        in the
        PRC.  We believe that as we further develop and improve this product
        application, CCA wire for use in power distribution applications will prove
        to
        be a viable substitute to copper wire.
 
 We
        believe that the utility market for bimetallics in the PRC is underdeveloped
        relative to other markets worldwide and could serve as an area of significant
        growth for our Dalian facility. Our expectation is based on the response
        by the
        two largest power grid operators, State Grid Corporation (SGCC) and China
        Southern Grid (SGC), to widespread blackouts and power shortages experienced
        in
        the PRC between 2002 and 2005. According to strategy laid out by SGCC and
        SGC
        for the Eleventh Five Year Plan, they plan to spend RMB 1,200 billion in
        total
        transmission and distribution (“T&D”) capital expenditures over a five year
        time period beginning in 2007.Our
        CCA
        products are currently being installed in certain rural areas for low and
        medium
        voltage applications and are currently under testing and review by several
        industry organizations within the PRC.
 
 In
        Fayetteville, we should have added capacity to deliver stranded ground wire
        utility products by the end of the third quarter. The sales focus has been
        directed towards increasing our penetration of the utility market with grounding
        products that have superior tensile strength, greater resistance to impulses
        created by lightening strikes and offers reduced costs to the utility companies.
        Our sales initiatives include joint sales with the agents of major utility
        suppliers where for the first time, our sales staff will interface directly
        with
        the end user utilities providing both a more directed sales opportunity and
        sales training with the agents.
  32
  Normally
        using 70% less copper than conventional copper wire, but offering materially
        the
        same utility and functionality, our CCA products provide a superior value
        compared to solid copper wire in a wide variety of applications such as
        distribution lines for telecommunication networks, cables for the wireless
        industry, automotive and consumer products, video and data applications,
        electrical power cables, wire components for electronic devices, building
        wire,
        as well as other industrial wires. CCS combines the functionality of copper
        with
        the strength of steel to provide a higher value, stronger alternative to
        solid
        copper for use in coaxial drop cables for cable television, utility applications
        including ground cables and tracer wire, automotive wiring harnesses and
        other
        applications requiring specific levels of conductivity and higher levels
        of
        tensile strength. Copperweld CCS is synonymous with copper-clad steel and
        is
        registered as Copperweld®. Traditionally the telecom industry has been the
        primary user of bimetallic products for the combined companies; however,
        the
        utility, automotive and consumer goods market sectors are providing strong
        demand for copper-clad products. Both CCA and CCS products are available
        in a
        large variety of sizes, conductivities and strengths for the different
        applications specified by our customers. CCA and Copperweld® deliver outstanding
        reliability, performance and value compared to solid copper.
  Our
        products are effectively “engineered composite conductors”. We do not produce
        commodity products and are not subject to the same pricing effects of pure
        commodity metals. Our customers purchase and use our products for their physical
        and/or conductive qualities, which have their respective application advantages,
        with cost savings being an added incentive. However, the high price of copper
        over recent years has shifted demand to higher value products such as CCA
        and
        CCS. While the pricing volatility of copper is a primary cause of cost
        variations in our products, changes in raw material costs do not materially
        affect our earnings per share. Although an increase in the price of copper
        may
        serve to reduce our gross margins as a percentage of net sales, a decline
        in
        copper prices will increase our gross margin as a percentage of net sales.
        As is
        typical in the industry, we pass the cost of price changes in our raw materials
        to our customers rather than the percentage changes; therefore, the impact
        on
        earnings per share from volatile raw material prices is minimal.
 
 The
        price
        of copper impacts our operations in two significant ways. First, copper is
        one
        of the principal raw materials used in manufacturing our products. Beginning
        in
        mid-2005, copper prices began trending upward. The upward trend continued
        during
        the first quarter of 2006 until a slight downturn during November and December.
        The trend for 2007 was similar to the previous year although with an average
        Comex price of $7,103 per metric ton compared to $6,811 during 2006. During
        the
        second quarter of 2008, Comex copper prices averaged $8,380 per ton and remained
        at high levels compared to the same quarter last year when the average Comex
        copper price was $7,626 per ton. When the prices of raw materials increase,
        we
        pass those increases through to our customers. Conversely, when raw material
        prices decline, we pass those savings through to our customers as well. The
        practice of passing changes in raw material costs to our customers is not
        a
        perfect hedge against fluctuating prices, but it allows us to protect our
        net
        margin as measured by net income or by earnings per share since our sales
        prices
        are determined at the time the sales order is received. In Dalian we regularly
        make advance payments to our suppliers to lock in copper supplies with the
        side
        benefit of locking in prices when copper prices are increasing. At June 30,
        2008, we had outstanding advances to raw material suppliers of $5.5 million.
        In
        Fayetteville, some suppliers of copper cathode require us to pay for the
        shipments at the cathode stage even though the copper must be further processed
        which locks in the cost of our future supply. In neither location are we
        attempting to forecast the cost of copper or other raw materials, nor are
        we
        attempting to hedge the changing costs of raw materials.
  33
  The
        second way that the price of copper influences our operations is that our
        products are used as a viable substitute for solid copper. Historically,
        when
        there is a large differential between the price of copper and aluminum, demand
        for our product increases. When the differential narrows, demand for our
        product
        may moderate. However, cost is not the only factor affecting the demand for
        our
        copper-clad products. Our expanding markets such as the automotive and utility
        industries have factors driving their demand for bimetallic products other
        than
        cost. Our products have advantages over copper including lower weight, greater
        strength and lower susceptibility to theft, among other factors. So, while
        price
        is a factor, price alone does not drive our business.
 
 
 
 The
        preceding chart reflects the trend in copper based on the Comex Monthly Average
        Spot Price. The chart shows the general trend to higher copper prices over
        the
        prior three years and during the first half of 2008. The 2008 year began
        at the
        highest level of the four comparative years and trended higher through April
        when the average price moved lower. Even though the monthly average spot
        price
        declined during May and June, the price of copper remained at historically
        high
        levels. For the quarter ended June 30, 2008, the average Comex spot price
        for
        copper increased over the same quarter in 2007 by $753 per ton. As a measure
        of
        the increasing trend in the price of copper over time, the Comex average
price
        per ton for the second quarter of 2008 increased over the second quarter
        of 2005
        Comex average by $4,559 per ton, an increase of 127.5%. The average price
        per
        ton paid for copper including processing costs during the second quarter
        of 2008
        was $8,877 in Dalian and $9,577 in Fayetteville compared to $8,241 and $8,492
        for the same quarter in 2007. As discussed previously, we do not attempt
        to
        hedge the costs of copper, but rather pass the changes in price through to
        our
        customers.
  34
  The
        two
        other major components in our products are aluminum and steel. The monthly
        average cost of aluminum for the second quarter of 2008 increased over second
        quarter 2007 levels by approximately $214.07 per ton but compared to copper,
        aluminum has been stable. The following chart, based on Comex aluminum spot
        price, monthly average, shows that the average Comex price for aluminum remained
        above levels for previous periods included in the chart. During the quarter
        ended June 30, 2008, the average cost for aluminum purchased by the Dalian
        facility was $2,350 per ton and $3,725 per ton by Fayetteville. As with copper,
        we do not attempt to predict future prices for aluminum, but rather cover
        our
        risk by passing changes in the costs of aluminum to our customers.
  
 
 The
        cost
        of steel varies by the type steel that is used for the various applications.
        The
        average price of Benchmarker Hot Rolled, East US index remained relatively
        stable over the three years prior to 2008 as shown in the following chart.
        Steel
        continues to be the lowest price raw material by weight of our principal
        metals;
        however, during 2008 and especially during the second quarter, the average
        price
        of steel has increased significantly. Steel used by the Fayetteville facility
        over the past three years was less than one-half the cost of aluminum and
        was
        between one-eighth and one-fifth the cost of copper. The average price paid
        by
        Fayetteville for steel increased $369 per ton, from $3,444 per ton paid during
        the second quarter of 2007 to $3,725 per ton during the second quarter of
        2008,
        a 38.5% increase. We do not project the cost of raw materials but our suppliers
        believe that steel will remain at higher levels throughout 2008. Our Dalian
        facility purchased an insignificant amount of steel because we primarily
        produce
        CCA in Dalian.
  35
  
 
 *Outlook
        for the remainder of 2008*
 
 With
        respect to the overall business trend for the remainder of 2008 and forward,
        we
        anticipate sales growth to continue to be aggressive and broadly based,
        principally due to consolidating our marketing and sales operations, the
        continuing demand for our products in the PRC and the influence of the
        Copperweld name throughout the world. Demand for our products is affected
        by
        both local and global economic conditions. The explosive sales growth in
        the PRC
        has slowed as has the housing market in the US. To compensate for changes
        in
        demand in market segments our sales and marketing focus is on broadening
        our
        customer base. Our research and development and production divisions are
        improving and developing our products beyond telecom enabling our sales group
        to
        broaden its focus to more sectors. We have the resources, technology, working
        capital and capacity to meet growing market demands. We are now strategically
        located so that we can serve the world’s demand for bimetallic products.
 
 **Results
        of Operations**
 
 ***Quarter
        Ended June 30, 2008***
  The
        following table shows, for the periods indicated, information derived from
        our
        consolidated statement of income.
  36
 
 Three
                  Months Ended
              
              Six
                  Months EndedJune
                  30,
              
              June
                  30,2008
              
              2007
              
              2008
              
              2007Sales
              
              
              100.0
              %
              
              100.0
              %
              
              100.0
              %
              
              100.0
              %Cost
                  of Sales
              
              
              73.2
              %
              
              63.0
              %
              
              73.0
              %
              
              63.3
              %Gross
                  Profit
              
              
              26.8
              %
              
              37.0
              %
              
              27.0
              %
              
              36.7
              %Operating
                  Expenses:Selling
                  expenses
              
              
              2.0
              %
              
              0.7
              %
              
              1.8
              %
              
              0.8
              %General
                  and administrative expenses
              
              
              5.6
              %
              
              7.1
              %
              
              6.8
              %
              
              6.7
              %Total
                  operating expense
              
              
              7.6
              %
              
              7.8
              %
              
              8.6
              %
              
              7.4
              %Operating
                  Income
              
              
              19.1
              %
              
              29.2
              %
              
              18.5
              %
              
              29.3
              %Interest
                  income
              
              
              0.3
              %
              
              1.2
              %
              
              0.3
              %
              
              1.1
              %Interest
                  expense
              
              
              (6.1
              %)
              
              (7.1
              %)
              
              (4.8
              %)
              
              (6.9
              %)Gain
                  on derivative instrument
              
              
              0.3
              %
              
              3.1
              %
              
              0.3
              %
              
              1.7
              %Other
                  income
              
              
              0.0
              %
              
              0.4
              %
              
              0.0
              %
              
              0.4
              %Other
                  expense
              
              
              (0.1
              %)
              
              (0.1
              %)
              
              (0.1
              %)
              
              (0.2
              %)Total
                  other expense, net
              
              
              (5.6
              %)
              
              (2.4
              %)
              
              (4.3
              %)
              
              (4.0
              %)0.0
              %
              
              0.0
              %
              
              0.0
              %
              
              0.0
              %Income
                  before taxes
              
              
              13.6
              %
              
              26.8
              %
              
              14.2
              %
              
              25.3
              %Provision
                  for income taxes
              
              
              1.9
              %
              
              0.0
              %
              
              1.4
              %
              
              0.0
              %Net
                  Income
              
              
              11.6
              %
              
              26.8
              %
              
              12.7
              %
              
              25.3
              %Other
                  comprehensive income:Foreign
                  currency translation adjustment
              
              
              6.9
              %
              
              8.1
              %
              
              10.4
              %
              
              6.4
              %Change
                  in fair value of derivative instrument
              
              
              7.0
              %
              
              (3.3
              %)
              
              (0.6
              %)
              
              (1.8
              %)Comprehensive
                  Income
              
              
              25.5
              %
              
              31.5
              %
              
              22.6
              %
              
              29.9
              %
 
 **Comparison
        of the Three Months Ended June 30, 2008 and 2007**
 
 **Three
                  Months Ended****June
                  30,**000s
                  omitted
              
              2008
              
              2007
              
              ChangeSales
              
              $
              62.5
              
              $
              26.1
              
              $
              36.5
              
              
              139.7
              %
  37
 
 Sales
        increased 139.7% over the same quarter one year earlier because of an increase
        in volume of 2,350 tons sold during the second quarter of 2008 compared to
        the
        second quarter of 2007. The increase in volume was driven by internal growth
        and
        from the addition of Copperweld during the fourth quarter of 2007. Additionally,
        the average sales price for CCA increased by $433 per ton and CCS increased
        by
        $941 per ton during the second quarter 2008 compared the second quarter 2007.
 
 **Gross
        Margin**
 
 **Three
                  Months Ended****June
                  30,****2008**
              
              **2007**
              
              **Change**Gross
                  Margin (in millions)
              
              $
              16.7
              
              $
              9.7
              
              $
              7.0
              
              
              73.5
              %As
                  a percent of sales
              
              
              26.8
              %
              
              37.0
              %
              
              (10.2
              %)
              
              (27.6
              %)
 
 Gross
        margin increased $7.0 million or 73.5% quarter over quarter. The gross margin
        for the second quarter 2008, as a percentage of net sales declined from 37.0%
        to
        26.8% compared to the second quarter of 2007 due primarily to lower margins
        contributed by the Fayetteville and Telford facilities as well as a decline
        in
        gross margin in Dalian. When the cost of raw materials is passed to the
        customer, gross margin as a percentage of net sales declines.
 
 **Selling
        Expenses**
 
 **Three
                  Months Ended****2008**
              
              **2007**
              
              **Change**Selling
                  Expenses (in Millions)
              
              $
              1.3
              
              $
              0.2
              
              $
              1.1
              
              
              548.8
              %Selling
                  Expenses as a % of Net Sales
              
              
              2.0
              %
              
              0.7
              %
              
              1.3
              %
 
 Selling
        expense increased by $1.1 million or 548.8% for the quarter ended June 30,
        2008
        compared to the same quarter of 2007 because of the addition of Copperweld
        and
        due to substantially increased shipping costs. Selling expenses increased
        from
        0.7% of net sales for the 2007 quarter to 2.0% of net sales during the second
        quarter of 2008. During the second quarter of 2008, Dalian accounted for
        54.2%
        of selling costs.
 
 **General
        and Administrative Expenses**
 
 **Three
                  Months Ended****2008**
              
              **2007**
              
              **Change**General
                  & Administrative Expense (in millions)
              
              $
              3.5
              
              $
              1.8
              
              $
              1.7
              
              
              90.4
              %G&A
                  as a percentage of Net Sales
              
              
              5.6
              %
              
              7.1
              %
              
              (1.5
              %)
 
 General
        and administrative expenses increased by approximately $1.7 million or 90.4%
        during the second quarter of 2008 compared to the second quarter 2007. As
        a
        percentage of net sales, general and administrative expenses declined form
        7.1%
        to 5.6%. The addition of Copperweld and an increase in general and
        administrative expenses in Dalian to accommodate increased sales account
        for the
        increase in the amount of general and administrative expenses. During the
        quarter, included in general and administrative expenses were non-factory
        depreciation and amortization of $440,028 and amortization of intangible
        assets
        was $158,651.
  38
  **Interest
        Expense**
 
 **Three
                  Months Ended****2008**
              
              **2007**
              
              **Change**Other
                  income and expense (in millions)Interest
                  income
              
              $
              0.19
              
              $
              0.32
              
              $
              (0.13
              )
              
              (39.5
              %)Interest
                  expense
              
              $
              (3.81
              )
              $
              (1.85
              )
              $
              1.96
              
              
              106.2
              %Net
                  interest expense
              
              $
              (3.62
              )
              $
              (1.53
              )
              $
              2.09
              
              
              136.5
              %Net
                  Interest expense as a % of Net Sales
              
              
              5.8
              %
              
              5.9
              %
 
 Net
        interest expense increased substantially during the second quarter of 2008
        compared to the second quarter of 2007 largely the result of interest accrued
        and amortization of costs relating to commission on debt issues resulting
        from
        the Kuhns’ verdict (See Part II, Item 1) in the amount of $2.1 million. Net
        interest expense increased $2.09 million or 136.5% over the same three month
        period in the previous year. As a percentage of net sales, net interest expense
        decreased from 5.9% for the second quarter of 2007 to 5.8% during the second
        quarter of 2008. The Kuhns charges allocated to interest expense amounted
        to
        3.4% of net sales for the second quarter of 2008. In future periods, the
        quarterly amortization of costs relating to commissions on debt issues awarded
        to Kuhns will be $112,500 until maturity of the debt.
 
 **Net
        Income**
 
 Three
                  months ended June 30,2008
              
              2007
              
              Change(in
                  millions)
              
              
              Unaudited
              
              
              Unaudited
              
              
              Amount
              
              
              PercentageNet
                  income before taxes
              
              $
              8.49
              
              $
              6.98
              
              $
              1.50
              
              
              21.6
              %Provision
                  for income taxes
              
              $
              1.21
              
              $
              -
              
              $
              1.21
              
              
              100.0
              %Net
                  income
              
              $
              7.28
              
              $
              6.98
              
              $
              0.30
              
              
              4.3
              %Net
                  Income as a % of Net Sales
              
              
              11.6
              %
              
              26.8
              %
 
 Net
        income for the three month period ending June 30, 2008 was $7.28 million
        compared to $7.0 million for the comparable period in 2007, an increase of
        approximately $300,000 or 4.3%. Net income as a percentage of net sales declined
        from 26.8% for the prior period to 11.6% because of interest and amortization
        expenses of approximately $2.1 million related to the Kuhns’ verdict and, as in
        more fully described in the section “Taxation” below, we became liable for PRC
        income taxes on our Dalian operation during 2008 and because of the lower
        gross
        margins from Fayetteville, Telford and Dalian operations during the
        period.
  39
 
 Three
                  months ended June 30,2008
              
              2007Unaudited
              
              UnauditedNet
                  Income
              
              $
              7.28
              
              $
              6.98Basic
                  Weighted Average Number of Shares
              
              
              27,354,215
              
              
              21,487,056Net
                  Income per Share–Basic
              
              $
              0.27
              
              $
              0.32Diluted
                  Weigheted Average Number
              
              
              28,732,109
              
              
              25,192,643Net
                  Income per Share–Diluted
              
              $
              0.25
              
              $
              0.28Pro
                  Forma without Kuhns Verdict:Net
                  Income per Share–Basic
              
              $
              0.34Net
                  Income per Share–Diluted
              
              $
              0.33
  Basic
        and
        diluted earnings per share (EPS) for the quarter ended June 30, 2008 were
        $0.27
        and $0.25, compared to $0.32 and $0.28 for the second quarter last year. On
        a pro
        forma basis, excluding the Kuhns verdict, net income would amount to $9.4
        million and the diluted EPS would increase to $0.33.
 
 **Six
        Months Ended June 30, 2008 and 2007**
 
 **Net
        Sales**
 
 **Six
                  Months Ended****June
                  30,**(in
                  millions)
              
              **2008**
              
              **2007**
              
              **Change**Sales
              
              $
              116.5
              
              $
              47.2
              
              $
              69.3
              
              
              146.8
              %
  Net
        sales
        increased for the first six months of 2008 by $69.3 million or 146.8% over
        the
        level of net sales for the first six months of 2007. The increase in sales
        resulted from the acquisition of Copperweld and from continuing growth in
        the
        Chinese market. Approximately 69.5% of sales for the first six months were
        generated through Dalian with the remainder coming from Fayetteville and
        Telford.
 
 **Gross
        Margin**
 
 **Six
                  Months Ended****June
                  30,****2008**
              
              **2007**
              
              **Change**Gross
                  Margin (in millions)
              
              $
              31.5
              
              $
              17.3
              
              $
              14.1
              
              
              81.6
              %As
                  a percent of sales
              
              
              27.0
              %
              
              36.7
              %
              
              (9.7
              %)
 
 The
        gross
        margin increased by $14.1 million or 81.6% during the first six months of
        2008
        compared to the same period in 2007 largely due to the increase in sales.
        The
        net margin as a percentage of sales declined largely because of lower margins
        in
        all three locations largely as a result of increases in raw material costs.
  40
  **Selling
        Expenses**
 
 **Six
                  Months Ended****2008**
              
              **2007**
              
              **Change**Selling
                  Expenses (in Millions)
              
              $
              2.1
              
              $
              0.4
              
              $
              1.7
              
              
              455.7
              %Selling
                  Expenses as a % of Net Sales
              
              
              1.8
              %
              
              0.8
              %
              
              1.0
              %
  Selling
        costs increased by approximately $1.4 million or 455.7% for the first six
        months
        of 2008 compared to the first six months of 2007 because of the addition
        of
        Copperweld and because of increases in shipping and sales costs in Dalian
        to
        accommodate greater sales volumes in the PRC. As a percentage of net sales,
        selling expenses were 1.8% of the first six months of 2008 compared to 0.8%
        in
        2007.
 
 **General
        and Administrative Expenses**
 
 **Six
                  Months Ended****2008**
              
              **2007**
              
              **Change**General
                  & Administrative Expense (in millions)
              
              $
              7.9
              
              $
              3.1
              
              $
              4.8
              
              
              152.1
              %G&A
                  as a percentage of Net Sales
              
              
              6.8
              %
              
              6.7
              %
              
              0.1
              %
  General
        and administrative expenses increased during the first six months of 2008
        by
        approximately $4.8 million or 152.2% compared to the same period in 2007.
        As a
        percentage of net sales, G&A increased from 6.7% of net sales in the first
        six months of 2007 to 6.8% of net sales for 2008. Non factory depreciation
        of
        $842,480 and amortization of intangible assets of $178,073 were included
        in
        general and administrative expenses for the six months ended June 30, 2008
        compared to $460,116 and $353,118 respectively for the same period during
        2007.
 
 **Interest
        Expense**
 
 **Six
                  Months Ended****2008**
              
              **2007**
              
              **Change**Other
                  income and expense (in millions)Interest
                  income
              
              $
              0.35
              
              $
              0.51
              
              $
              (0.16
              )
              
              (30.7
              %)Interest
                  expense
              
              $
              (5.59
              )
              $
              (3.28
              )
              $
              2.31
              
              
              70.4
              %Net
                  interest expense
              
              $
              (5.23
              )
              $
              (2.77
              )
              $
              2.46
              
              
              89.1
              %Net
                  Interest expense as a % of Net Sales
              
              
              4.5
              %
              
              5.9
              %
 
 Net
        interest expense increased substantially during the six month period ended
        June
        30, 2008 compared to the similar period during 2007 largely the result of
        interest accrued and amortization of costs relating to commission on debt
        issues
        resulting from the Kuhns’ verdict (See Part II, Item 1) in the amount of $2.1
        million. Net interest expense increased $2.46 million or 89.1% over the same
        six
        month period in the previous year. As a percentage of net sales, interest
        expense decreased from 5.9% for the second quarter of 2007 to 4.5% during
        the
        second quarter of 2008. The Kuhns charges of $2.1 million represent 2.0%
        of net
        sales.
  41
  
 **Selected
        Balance Sheet Data at June 30, 2008 (unaudited) and the year ended December
        31,
        2007:**
 
 Selected Balance Sheet Accounts As of:30-Jun-08
              
              31-Dec-07Unaudited
              
              
              
              Change
              
              %
                  ChangeCash
              
              $
              66.9
              
              $
              79.9
              
              
              (13.05
              )
              
              (16.3
              %)Accounts
                  Receivable, net
              
              $
              43.9
              
              $
              23.6
              
              
              20.29
              
              
              85.9
              %PP&E
              
              $
              105.5
              
              $
              87.2
              
              
              18.24
              
              
              20.9
              %Total
                  Assets
              
              $
              289.5
              
              $
              246.5
              
              
              43.05
              
              
              17.5
              %Short
                  Term Debt
              
              $
              26.4
              
              $
              23.8
              
              
              2.61
              
              
              10.9
              %Lont
                  Term Debt
              
              $
              54.2
              
              $
              68.5
              
              
              (14.27
              )
              
              (20.8
              %)Shareholders'
                  Equity
              
              $
              183.0
              
              $
              144.3
              
              
              38.73
              
              
              26.8
              %
  Our
        financial condition continues to improve as shown by an increase of 26.8%
        in
        shareholders’ equity during the first half of 2008. Cash decreased 16.3% during
        the quarter and our accounts receivable increased by 85.9% as a result of
        increased sales volume. Property, plant and equipment increased by 20.9%
        during
        the six month ended June 30, 2008 compared to the prior year end. Short term
        debt increased by 10.9% as a result of an increase in short term borrowings.
        Long term debt declined by 20.8% because the holder of $20.0 million in our
        convertible notes converted $15.0 million of such notes during the first
        quarter
        of 2008.
 
 **Net
        Sales by Product**
 
 Net
        sales
        were $116.6 million during the first six months of 2008 compared to $83.4,
        on a
        pro forma basis, during the first six months of 2007. Of the 39.8% in sales
        growth in the year to date period ended June 30, 2008, CCA contributed 58.7%
        of
        the growth while CCS declined by 8.2%. All of the CCS sales during the 2007
        period and the majority of CCS sales for the 2008 period are from Fayetteville
        and Telford. Dalian increased sales for the six month period ended June 30,
        2008
        by 73.5% over the same period in 2007 while Fayetteville sales declined by
        4.9%
        and Telford’s by 36.0% over the comparable period in 2007. The increase in
        Dalian’s net revenue was based primarily on increased volumes. The following
        chart below includes Copperweld and Copperweld UK’s net sales for the first six
        months of 2007 for comparison purpose.
 
 **Six Months Ended****June 30,****(in millions)**
              
              **2008**
              
              **2007**
              
              **Change**CCA
              
              $
              92.8
              
              $
              58.8
              
              $
              34.0
              
              
              57.8
              %CCS
              
              $
              21.6
              
              $
              23.3
              
              $
              (1.7
              )
              
              (7.2
              %)Other
              
              $
              2.2
              
              $
              1.4
              
              $
              0.8
              
              
              61.6
              %$
              116.6
              
              $
              83.4
              
              $
              33.2
              
              
              39.8
              %
 
 Note:
        Copperweld companies included in 2007 on pro forma basis for comparative
        purposes
  42
  **Net
        Sales by Industry**
 
 Six Months EndedJune 30,2008
              
              2007
              
              ChangeTelcom
              
              $
              62.1
              
              $
              45.7
              
              $
              16.5
              
              
              36.0
              %Utility
              
              $
              48.0
              
              $
              31.2
              
              $
              16.8
              
              
              54.0
              %Other
              
              $
              4.7
              
              $
              1.7
              
              $
              2.9
              
              
              167.3
              %Automotive
              
              $
              1.6
              
              $
              2.1
              
              $
              (0.5
              )
              
              (-25.5
              %)
 
 Note:
        Copperweld companies included in 2007 on pro forma basis for comparative
        purposes
 
 We
        are
        continuing to expand our markets beyond telecom, which historically has been
        the
        major user of our products, both in Dalian and Fayetteville. Telecom represented
        53.3% of sales for the six month period that ended June 30, 2008 compared
        to
        approximately 56.6% for the first six months of 2007. Notwithstanding the
        decline as a percentage of net sales, sales to the telecom industry actually
        increased by 36.0% during the first half of 2008. We anticipate that telecom
        will continue to maintain current or expanded volumes but our goal is to
        expand
        into other markets as well. We successfully increased sales to the utility
        market by $16.8 million or by 54.0% during the first half of 2008 compared
        to
        the prior year, on a pro forma basis. We believe that automotive, while
        comparatively small at present, joins the utility market as a potential market
        for future growth.
 
 **Quarters Ended**31-Mar-08
              
              30-Jun-08
              
              Change
              
              % ChangeTelecom
              
              $
              29.5
              
              $
              32.6
              
              $
              3.1
              
              
              10.4
              %Utility
              
              $
              21.3
              
              $
              26.7
              
              $
              5.4
              
              
              25.4
              %Auto
              
              $
              0.5
              
              $
              1.1
              
              $
              0.6
              
              
              135.6
              %Other
              
              $
              2.7
              
              $
              2.0
              
              $
              (0.7
              )
              
              (-26.5
              %)Total
              
              $
              54.0
              
              $
              62.6
              
              $
              8.7
              
              
              16.0
              %
 
 The
        above
        chart compares sales to market segments for the first two quarters of 2008.
        The
        chart shows a 25.4% gain in the utility sector compared to a10.4% sales growth
        in the telecom sector. Fayetteville and Telford both experienced declines
        in
        sales to the telecom sector during the first half of 2008 The automotive
        sales
        come from Fayetteville and Telford where the third quarter has historically
        been
        a stronger quarter than either the first or second.
  The
        following table presents sales breaks down by categories among our
        facilities:
 
 Six Months Ended June 30, 2008Dalian
              
              Fayetteville
              
              TelfordTons
                Shipped
              
              % of
                Tonnage
              
              Tons
                Shipped
              
              % of
                Tonnage
              
              Tons
                Shipped
              
              % of
                TonnageTelecom
              
              
              7,075.3
              
              
              35.8
              %
              
              2,849.7
              
              
              14.4
              %
              
              71.3
              
              
              0.4
              %Utility
              
              
              5,748.2
              
              
              29.1
              %
              
              2,626.2
              
              
              13.3
              %
              
              89.9
              
              
              0.5
              %Auto
              
              
              -
              
              
              0.0
              %
              
              107.9
              
              
              0.5
              %
              
              156.9
              
              
              0.8
              %Other
              
              
              342.3
              
              
              1.7
              %
              
              686.8
              
              
              3.5
              %
              
              -
              
              
              0.0
              %Total
              
              
              13,165.8
              
              
              66.6
              %
              
              6,270.6
              
              
              31.7
              %
              
              318.1
              
              
              1.6
              %
  43
  Dalian
        shipped 66.6% of total tonnage produced during the first half of 2008 with
        sales
        to the telecom market contributing 35.8% and sales to the utility market
        contributing 29.1% of total volume indicating a further diversification of
        sales
        from Dalian beyond the telecom market. Fayetteville shipped 31.7% of total
        tonnage split between telecom at 14.4% and utility with 13.3%. Auto was 0.5%
        for
        the first six months of 2008; however, historically, the majority of sales
        to
        this segment have been made during the last six months of the year. Telford
        shipped 1.6% of total tonnage split between telecom, utility and
        auto.
 
 **Capacity**
 
 The
        following table summarizes installed capacities and outputs for the six month
        period ended June 30, 2008. Capacity is stated on an annual basis while output
        is the amount of product shipped during the first half of 2008. Telford’s
        production does not include cladding and the numbers reflect CCS that was
        further processed by Telford during the period.
 
 Six Months ended June 30, 2008Dalian
              
              Fayetteville
              
              TelfordInstalled
                Capacity
              
              Output
              
              Installed
                Capacity
              
              Output
              
              Installed
                Capacity
              
              OutputProduct Line
              
              Metric Tons
              
              Metric Tons
              
              Metric Tons
              
              Metric Tons
              
              Metric Tons
              
              Metric TonsCCA
              
              
              33,600
              
              
              13,157.9
              
              
              12,400
              
              
              1,899.9CCS
              
              
              -
              
              
              7.9
              
              
              16,300
              
              
              4,366.4
              
              
              900
              
              
              246.3Other
              
              
              
              
              
              
              
              
              
              
              
              4.3
              
              
              
              
              
              71.8Total
              
              
              33,600
              
              
              13,165.8
              
              
              28,700
              
              
              6,270.6
              
              
              900
              
              
              318.1
  At
        June
        30 2008, we had combined annual production capacity for CCA of 46,000 metric
        tons and CCS capacity of 16,300 metric tons on an annual basis based on our
        product mix at June 30, 2008. Installed capacity can increase or decrease
        based
        on the size of the rod used in the cladding operation for CCA and on the
        conductivity engineered into the CCS production. We installed a remanufactured
        Copperweld CCA clad line in Dalian and began CCA production on the new line
        at
        the end of the first quarter 2008. We ordered a new CCA cladding line from
        Nexans in April and expect to have the new, additional CCA capacity installed
        in
        Dalian during the first quarter of 2009. The decision to purchase a new clad
        line versus refurbishing an existing line was made on the basis of costs.
        The
        estimated cost to refurbish a line from Fayetteville was approximately the
        same
        as purchasing a new machine. We plan to have CCS cladding capacity installed
        in
        Dalian by the end of 2008. Two CCS clad lines, two additional drawing machines
        from Fayetteville have been refurbished and will be shipped to and installed
        in
        Dalian with production expected early in 2009. Two CCS drawing machines are
        installed in Dalian and are ready for the clad lines to begin production.
 
 Six Months Ended June 30,Dalian
              
              Fayetteville
              
              TelfordAverage
                Price/Ton
              
              Average
                Price/Ton
              
              Average
                Price/Ton
              
              Average
                Price/Ton
              
              Average
                Price/Ton
              
              Average
                Price/Ton2008
              
              2007
              
              2008
              
              2007
              
              2008
              
              2007CCA
              
              $
              6,462
              
              $
              6,330
              
              
              7,017
              
              
              6,283
              
              
              0
              
              
              0CCS
              
              $
              4,264
              
              $
              3,207
              
              
              5,054
              
              
              4,142
              
              $
              9,720
              
              $
              8,865
  44
  Our
        products are engineered products rather than commodities; therefore, the
        selling
        prices of our products are dependent upon diameter, tensile strength,
        conductivity and other factors specified by each customer. For example, Dalian’s
        prices are lower than Fayetteville’s for CCA because our products sold for
        telecom may require less engineering and fewer manufacturing processes than
        for
        products sold in Fayetteville. Our Dalian facility sold small introductory
        quantities of CCS at the end of 2007 and during the first half to 2008 at
        introductory prices. For the first half of 2008, the average price of CCA
        produced in Dalian and sold primarily in the PRC was $6,462 per ton compared
        to
        $6,330 for the same period during 2007. The average price of CCA produced
        in
        Fayetteville during the first half of 2008 was $7,017 compared to $6,283
        per ton
        for 2007. Telford further manufacturers CCS material produced in Fayetteville
        and therefore extracts additional value added charges based on the level
        of
        additional production that is required to meet the customer’s demand. The
        average price of CCS sold by Telford during the first half of 2008 was $9,720
        versus $8,865 for the comparable period of 2007. Both Dalian and Fayetteville
        sell a variety of CCA products and the price for each variety may vary based
        on
        the amount of manufacturing required and the ratio of copper to aluminum.
        As
        with CCA, the average selling price of CCS varies by product type primarily
        based on the amount of copper in the product and the amount of manufacturing
        required.
 
 Quarters EndedMar-08
              
              Mar-08
              
              Mar-07
              
              Jun-07CCA
              
              
              73.9
              %
              
              77.3
              %
              
              59.5
              %
              
              65.7
              %CCS
              
              
              24.1
              %
              
              20.5
              %
              
              39.2
              %
              
              31.5
              %Other
              
              
              2.0
              %
              
              2.2
              %
              
              1.2
              %
              
              2.8
              %Total
              
              
              100.0
              %
              
              100.0
              %
              
              100.0
              %
              
              100.0
              %
 
 Note:
        Copperweld companies included in 2007 on pro forma basis for comparative
        purposes
  The
        chart
        above illustrates the growth of CCA as a percentage of tons sold comparing
        the
        first two quarters of 2008 to the first two quarters of 2007, on a pro forma
        basis. The decline in the percentage of sales to the CATV market from the
        Copperweld locations is a major cause for the decline.
 
 ***Customers***
 
 During
        the first half of 2008, our largest five customers accounted for 20.5% of
        our
        sales. The largest two customers, one a customer of Fayetteville and the
        other a
        customer of Dalian each represented 5.1% of net sales. Our ten largest customers
        represented 32.6% of sales for the first half of 2008. The acquisition of
        Copperweld resulted in both locations reducing exposure to our largest
        customers. Our strategy is to continue to expand and diversify our customer
        base
        in future periods. We believe this increased diversification significantly
        limits our market risk and gives us a stronger base on which to expand. We
        further believe our overall customer composition and the concentration of
        our
        top customers will continue to change as we expand our business and seek
        to
        shift our product sales portfolio to higher margin products. However, the
        loss
        of, or significant reduction in orders from any of our largest customers
        may
        have a material adverse impact on our financial condition and operating results.
        We are continuing to expand and consolidate the direction of our combined
        sales
        and marketing group in order to focus our resources on diversification of
        our
        customer base, product mix and geographic presence to mitigate customer
        concentration risk. Our objective is to focus on expanding our existing business
        relationships by offering a wider range of products and building new sales
        relationships throughout the world with our expanded sales organization.
  45
  The
        following table for the first half of 2008 sets forth our ten largest
        customers:
 
 Top Ten CustomersSix Months ended June 30, 2008Sales Office
              
              Tons Sold
              
              Amount of Sale
              
              % of SalesFayetteville
              
              
              1,131
              
              $
              5,944,411
              
              
              5.1
              %Dalian
              
              
              1,167
              
              $
              5,891,008
              
              
              5.1
              %Fayetteville
              
              
              713
              
              $
              4,441,759
              
              
              3.8
              %Dalian
              
              
              590
              
              $
              3,931,448
              
              
              3.4
              %Dalian
              
              
              612
              
              $
              3,722,774
              
              
              3.2
              %Dalian
              
              
              499
              
              $
              3,365,009
              
              
              2.9
              %Fayetteville
              
              
              547
              
              $
              3,210,375
              
              
              2.8
              %Dalian
              
              
              452
              
              $
              2,792,360
              
              
              2.4
              %Dalian
              
              
              407
              
              $
              2,680,943
              
              
              2.3
              %Dalian
              
              
              334
              
              $
              2,067,341
              
              
              1.8
              %
  ***Manufacturing***
 
 Our
        manufacturing activities are determined and scheduled upon both firm orders
        and
        projected sales information gathered by our sales personnel from direct contact
        with our customers. Customers typically submit purchase orders seven to thirty
        days prior to the requested delivery date. However, depending on the product
        and
        the available equipment run schedules, the lead time can be as short as three
        days. The sales price is determined at the time of purchase based on a formula
        or a unit price for each product. In either case, the purchase price is a
        function of the market price of our raw materials at the time of purchase,
        subject to adjustment at the time of delivery for many of our customers and
        to
        the processes required to produce our engineered products. For some customers,
        we adjust our prices based on the cost of raw materials for the previous
        month
        rather that prices at the time of shipment.
  ***Geography***
 
 Geographically,
        a substantial portion of our customers served by our Dalian sales force is
        based
        in the PRC. Some of our customers are US based corporations that have
        established subsidiaries operating inside the PRC. Several of these corporations
        were former customers of our Fayetteville facility but now place orders through
        their subsidiaries located in the PRC. We categorize these orders as domestic
        orders within the PRC. On the other hand, most of our customers served by
        our
        Fayetteville and Telford based sales group are located in the Americas, Europe,
        Africa, Asia, excluding the PRC and the Middle East. We are transferring
        our
        Asian customers to our PRC based sales group in order to provide more efficient
        customer service. As a result, we anticipate that most of our net sales will
        continue to be derived from sales to our Asian customers. We anticipate that
        our
        sales growth can continue worldwide because of our working capital base,
        our
        combined sales force, our production capacity and our commitment to innovative
        research and development of our existing products and for developing new
        products.
  46
  ***Cost
        of Goods Sold***
 
 **Six Months Ended**June 30,
              
              Pro FormaCombined:
              
              2008% COGS
              
              2007% COGS
              
              2007% COGSPrimary Material Cost
              
              $
              73.0
              
              
              85.8
              %
              $
              27.8
              
              
              93.0
              %
              $
              53.0
              
              
              84.1
              %Accessorial
                  material cost
              
              $
              1.3
              
              
              1.5
              %
              $
              0.6
              
              
              2.1
              %
              $
              0.7
              
              
              1.1
              %Labor
              
              $
              3.8
              
              
              4.5
              %
              $
              0.4
              
              
              1.2
              %
              $
              4.7
              
              
              7.4
              %Manufacturing
                  Overhead
              
              $
              7.0
              
              
              8.2
              %
              $
              1.1
              
              
              3.7
              %
              $
              4.6
              
              
              7.4
              %Cost
                  of Goods Sold
              
              $
              85.1
              
              
              100.0
              %
              $
              29.9
              
              
              100.0
              %
              $
              63.1
              
              
              100.0
              %COGS/Net
                  Revenue
              
              
              
              
              
              73.0
              %
              
              
              
              
              63.3
              %
              
              
              
              
              71.8
              %
 
 The
        cost
        of goods sold increased to $85.1 million during the first six months of 2008,
        from $27.8 million first six months of 2007 the result of the Copperweld
        acquisition, Dalian organic growth and increases in the cost of raw materials.
        As measured as a percentage of net revenue, cost of goods sold for the first
        six
        month of 2008 was 73.0% compared to 63.3% for the same period of 2007. Higher
        labor and manufacturing overhead costs represent increases to the cost of
        goods
        sold during the current six month period compared to the first six months
        of
        2007 largely because of the Copperweld acquisition. The pro forma columns
        in the
        chart show the first six months of 2007 on a combined basis for comparative
        purposes. The pro forma columns show the impact of higher non-material cost
        in
        Fayetteville and Telford which have historically had higher labor and overhead
        costs. Labor and overhead costs have been reduced since the first six months
        of
        2007 in Fayetteville through a reduction in salaries and benefits. Labor
        costs
        in both Fayetteville and Telford have been reduced over 2007 levels by
        reductions in the work force. Cost of goods sold principally consists of
        the
        cost of raw materials, labor, utilities, manufacturing costs, manufacturing
        related depreciation, machinery maintenance costs, purchasing and receiving
        costs, inspection costs, shipping and handling costs, and other fixed costs
        associated with the manufacturing process.
 
 ***Raw
        Materials***
 
 Six Months Ended June 30,2008
              
              2007Tons
              
              Costs
              
              Average
                per Ton
              
              Tons
              
              Costs
              
              Average
                per Ton
              
              Cost
                ChangeCopper
              
              
              5,804
              
              $
              50,144,555
              
              $
              8,639
              
              
              3,676
              
              $
              28,418,716
              
              
              7,730
              
              
              11.8
              %Aluminum
              
              
              12,323
              
              $
              30,249,260
              
              $
              2,455
              
              
              7,761.2
              
              $
              19,845,438
              
              
              2,557
              
              
              (-4.0
              %)Steel
              
              
              3,741
              
              $
              4,332,782
              
              $
              1,158
              
              
              3,969.4
              
              $
              3,717,365
              
              
              936
              
              
              23.7
              %Total
              
              
              21,868
              
              $
              84,726,598
              
              
              
              
              
              15,407
              
              $
              51,981,519
 
 Note:
        Copperweld companies included in 2007 on pro forma basis for comparative
        purposes
 
 Copper,
        aluminum and steel are the primary raw materials we use to manufacture our
        products. During the first half of 2008, we purchased over 5,804 tons of
        copper,
        12,323 tons of aluminum and 3,741 tons of steel. Raw material costs accounted
        for 86.1% of total cost of goods sold during the first half of 2008 and 84.1%
        for the first half of 2007. The cost of copper increased 118% over the same
        period in 2007. The cost of aluminum actually was about 4.0% less during
        the
        first half of 2008 compared to the first half of 2007. We experienced a
        significant increase in the cost of steel which rose by 23.7% during the
        first
        half of 2008 compared to the first half of 2007. (Note: The cost of material
        purchased will not necessarily equal material cost in the Cost of Good Sold
        Chart because of inventory increases or declines.)
  47
  ***Suppliers***
 
 We
        also
        significantly diversified our sources of supply. In Dalian, we have historically
        relied on two key suppliers for the procurement of copper strip and aluminum.
        These two suppliers combined to account for approximately 58.8% of our total
        raw
        material purchases during the quarter ended June 30, 2007. Our two largest
        suppliers accounted for 34.3% of our raw material purchases during the first
        six
        months of 2008.
 
 The
        following table sets forth our ten largest raw material suppliers for the
        six
        months ended June 30, 2008 and June 30, 2007.
 
 Six Months Ended June 30,2008
              
              
              
              2007Top Ten Raw Material Suppliers
              
              Amount of
                Purchases
              
              % of Total
                Purchases
              
              Top Ten Raw Material
                Suppliers
              
              Amount of
                Purchases
              
              % of Total
                PurchasesDalian—Copper
              
              $
              22,462,698
              
              
              26.4
              %
              
              Dalian—Copper
              
              $
              9,179,349
              
              
              16.91
              %Dalian—Copper
              
              $
              9,783,592
              
              
              11.5
              %
              
              Dalian—Aluminum
              
              $
              5,102,030
              
              
              9.40
              %Dalian—Aluminum
              
              $
              8,374,023
              
              
              9.8
              %
              
              Dalian—Aluminum
              
              $
              4,772,410
              
              
              8.79
              %Dalian—Aluminum
              
              $
              7,744,067
              
              
              9.1
              %
              
              Fayetteville—Copper
              
              
              4,143,375
              
              
              7.63
              %Dalian—Aluminum
              
              $
              6,159,834
              
              
              7.2
              %
              
              Dalian—Aluminum
              
              $
              4,091,310
              
              
              7.54
              %Fayetteville—Copper
              
              
              4,405,503
              
              
              5.2
              %
              
              Fayetteville—Aluminum
              
              
              3,910,860
              
              
              7.21
              %Fayetteville—Copper
              
              
              4,339,232
              
              
              5.1
              %
              
              Dalian—Aluminum
              
              $
              3,779,474
              
              
              6.96
              %Fayetteville—Copper
              
              
              3,239,780
              
              
              3.8
              %
              
              Fayetteville—Copper
              
              
              2,643,234
              
              
              4.87
              %Fayetteville—Aluminum
              
              
              3,196,916
              
              
              3.8
              %
              
              Fayetteville—Steel
              
              
              2,319,782
              
              
              4.27
              %Fayetteville—Steel
              
              
              2,664,204
              
              
              3.1
              %
              
              Fayetteville—Copper
              
              
              1,939,440
              
              
              3.57
              %
 
 Note:
        Copperweld companies included in 2007 on pro forma basis for comparative
        purposes
 
 **Taxation**
 
 *U.S.
        income tax*
 
 Fushi
        Copperweld, Inc. (formerly Fushi International, Inc.) is incorporated in
        the
        State of Nevada, Fushi Holdings is incorporated in the State of Delaware,
        Copperweld Bimetallics, LLC is chartered in the State of Delaware and Copperweld
        Bimetallics UK, Ltd., is registered in the United Kingdom. Prior to the
        acquisition of Copperweld, we conducted substantially all our operations
        through
        our PRC operating subsidiaries. With the acquisition of Copperweld, we have
        a
        manufacturing facility and administrative offices located in Fayetteville,
        Tennessee, USA and in Telford, England, UK. We are subject taxation on our
        net
        taxable income in the PRC, the US and the UK. We did not provide for United
        States income tax liability during the first six months of 2008 because we
        have
        sufficient tax loss carry forwards to offset any taxable income earned during
        the period. We have a tax loss carry forward asset arising from tax losses
        because Fushi had US expenses during prior periods but its revenue produced
        in
        PRC was not considered taxable income. No provision for US income tax was
        accrued on the earnings of our non-US operations because the earnings generated
        from our non-U.S. operating companies are generally subject to United States
        taxation only when such earnings are repatriated to the United States.
        Additionally, we believe that we will not generate any significant amount
        of US
        income tax liability under the income imputation rules applicable to a United
        States company that owns "controlled foreign corporations" for United States
        federal income tax purposes. Therefore, no provision for U.S. federal income
        taxes or tax benefits on the undistributed earnings and/or losses of our
        company
        has been made.
  48
  *P.R.C.
        enterprise income tax*
  During
        the first half of 2008, our PRC chartered subsidiaries continue to produce
        taxable income for PRC tax purposes. PRC enterprise income tax is calculated
        based on taxable income determined under PRC accounting principles. In
        accordance with “Income Tax Law of China for Enterprises with Foreign Investment
        and Foreign Enterprises,” or the Income Tax Law, “Foreign Invested Enterprises”,
        or FIEs, established in the PRC were generally subject to an “Enterprise Income
        Tax”, or EIT, rate of 33% prior to January 1, 2008. PRC domestic companies are
        governed by the Enterprise Income Tax Laws of the PRC and are also generally
        subject to an EIT.
 
 Effective
        January 1, 2008, the new EIT Law in PRC imposed a unified income tax rate
        of
        25.0% on all domestic-invested enterprises and FIEs, such as our PRC operating
        subsidiaries, unless they qualify under certain limited exceptions. But the
        EIT
        Law permits companies to continue to enjoy their existing preferential tax
        treatments until such treatments expire in accordance with their current
        terms.
        Any increase in our effective tax rate as a result of the above may adversely
        affect our operating results
 
 Fushi
        International (Dalian) (“FID”), a wholly owned subsidiary of Fushi Holdings,
        Inc., was incorporated in the PRC as an FIE and is subject to PRC income
        tax
        which is computed according to the relevant laws and regulations in the PRC.
        FID
        has located its factories in a special economic region in Dalian and is granted
        certain preferential treatments including a corporate income tax rate of
        24%. In
        September 2005, FID was approved as a wholly foreign owned enterprise. This
        economic region allowed FID a two-year income tax exemption for the years
        ended
        December 31, 2006 and 2007, and a 50% income tax reduction for the following
        three years ended December 31, 2008, 2009, and 2010. Therefore, during the
        current fiscal year, our PRC operations are taxed at a rate of 12% subject
        to
        appropriate adjustments.
 
 A
        provision for PRC income taxes was made during the six month period ended
        June
        30, 2008 in the amount of $2,844,180. No provision was made for the six month
        ended June 30, 2007.
 
 *U.K.
        income tax*
 
 Copperweld
        UK is organized as a United Kingdom private company and subject to 20% to
        28%
        statutory taxes on its taxable income. T he
        provision for income tax for the six months ended June 30, 2008 and 2007
        was
        $19,933 and 0, respectively.
  49
  **Net
        Income**
 
 **Six months ended June 30,****2008**
              
              **2007**
              
              **Change**(in millions)
              
              Unaudited
              
              Unaudited
              
              Amount
              
              % ChangeNet
                  income before taxes
              
              $
              16.53
              
              $
              11.96
              
              $
              4.57
              
              
              38.2
              %Provision
                  for income taxes
              
              $
              1.68
              
              $
              -
              
              $
              1.68
              
              
              0.0
              %Net
                  income
              
              $
              14.85
              
              $
              11.96
              
              $
              2.89
              
              
              24.2
              %Net
                  Income as a % of Net Sales
              
              
              12.7
              %
              
              25.3
              %
 
 Net
        income for the six month period ended June 30, 2008 increased to approximately
        $14.9 million from approximately $12.0 million for the period ended June
        30,
        2007representing an increase of $2.9 million or 24.2%. Current period charges
        resulting from the Kuhns verdict (See Item 1, Part II) reduced net income
        by
        approximately $2.1 million or 1.8% of net sales. Net income for the current
        semi-annual period was 12.7% of net sales compared to 25.3% for the same
        period
        for the prior year. The decline in net margin quarter over quarter is the
        result
        primarily from charges related to the Kuhns’ verdict and lower gross margin
        because of higher raw material costs and because of the historically lower
        gross
        margins from Fayetteville and Telford.
 
 Six months ended June 30,2008
              
              2007Unaudited
              
              UnauditedNet Income
              
              $
              14.85
              
              $
              11.96Basic
                  Weighted Average Number of Shares
              
              
              27,201,127
              
              
              21,116,447Net
                  Income per Share—Basic
              
              $
              0.55
              
              $
              0.57Diluted
                  Weigheted Average Number
              
              
              28,690,851
              
              
              24,667,346Net
                  Income per Share—Diluted
              
              $
              0.51
              
              $
              0.49Pro
                  Forma without Kuhns Verdict:Net
                  Income per Share—Basic
              
              $
              0.62Net
                  Income per Share—Diluted
              
              $
              0.59
 
 Basic
        and
        diluted earnings per share for the six months ended June 30, 2008 were $0.55
        and
        $0.51 compared to $0.57 and $0.49 for the same period in 2007. Pro forma
        basic
        and diluted earnings per share were $0.62 and $0.59 respectively absent the
        affect of the Kuhns verdict. The weighted average number of shares outstanding
        to calculate basic EPS was 27.2 million and 21.1 million for the six months
        ended June 30, 2008 and June 30, 2007, respectively. The weighted average
        number
        of shares outstanding to calculate diluted EPS was 28.7 million and 24.7
        million
        for the same periods.
  50
  **Foreign
        Currency Translation Gains**
 
 
 
 The
        value
        of the USD versus the RMB continued to decline during the first half of 2008.
        As
        a result of the appreciation of the RMB, we recognized a foreign currency
        translation gain of $12.1 million for the first six months of 2008 compared
        to a
        gain of $3.0 million for the same quarter last year. Given the uncertainty
        of
        exchange rate fluctuations, we cannot estimate the effect of these fluctuations
        on our future business, product pricing, and results of operations or financial
        condition.
 
 Prior
        to
        acquiring Copperweld, materially all of our revenues and a majority of our
        expenses were denominated in RMB Yuan. For our operations in the PRC, the
        income
        statement accounts were translated at 1 RMB Yuan to 0.14372 USD in second
        quarter of 2008 and 0.13977 in first quarter of 2008and balance sheet amounts
        with the exception of equity at June 30, 2008 were translated at 1 RMB Yuan
        to
        0.14579 USD.
 
 **LIQUIDITY
        AND CAPITAL RESOURCES**
 
 We
        have
        historically financed our operations and capital expenditures principally
        through private placements of debt and equity offerings, bank loans, and
        cash
        provided by operations. At June 30, 2008, the majority of our liquid assets
        were
        held in RMB denominations deposited in banks within the PRC. The PRC has
        strict
        rules for converting RMB to other currencies and for movement of funds from
        the
        PRC to other countries. Consequently, in the future, we may face difficulties
        in
        moving funds deposited within the PRC to fund working capital or capital
        expenditure requirements for our locations outside the PRC. To mitigate the
        difficulties of moving funds, we plan to maintain and expand our working
        capital
        lines for Fayetteville and Telford as necessary as our sales increase and
        our
        working capital needs grow.
 
 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.
  51
  In
        summary, our cash flows were:
 
 Six
                  Months Ended June 30,2008
              
              2007Net
                  cash provided by operating activities
              
              
              (4,579,390
              )
              
              6,331,245Net
                  cash used in investing activities
              
              
              (14,715,051
              )
              
              (12,152,046
              )Net
                  cash provided by financing activities
              
              
              1,403,740
              
              
              58,665,167Effect
                  of exchange rate on cash
              
              
              4,837,022
              
              
              1,867,519Cash
                  and cash equivalents at beginning of period
              
              
              79,914,758
              
              
              20,493,551Cash
                  and cash equivalents at end of period
              
              
              66,861,079
              
              
              75,204,436
 
 For
        the
        six months ended June 30, 2008, net cash provided by operating activities
        was a
        deficit of $4.6 million compared to cash provided of $6.3 during the same
        period
        in 2007. The difference in net cash provided was primarily attributable to
        increases of $16.9 million in accounts receivable, $10.9 million in inventories
        and $3.5 million in other payables. These reductions were offset to some
        degree
        by earnings of $2.9 million and an increase in accounts payable of $7.7
        million.
  For
        the
        six months ended June 30, 2008, net cash used in investing activities was
        $14.7
        million, and was primarily attributable to $13.6 million in property and
        equipment purchases, $3.1 million used as advances for purchase of equipment
        and
        $1.7 million used to purchase land use rights. The reduction was partially
        offset by the sale of marketable securities.
 
 For
        the
        six months ended June 30, 2008, net cash provided by financing activities
        was
        $1.4 million, which was primarily attributable to $16.9 million in bank loans
        and an increase in our revolving line of credit of $1.8 million mostly offset
        by
        repayments on bank loans of $17.2 million.
 
 At
        June
        30, 2008, our cash balance was $66.9 million compared to $75.2 million at
        June
        30, 2007.
  In
        future
        periods, as we continue with integration of the Copperweld acquisition, we
        believe we can realize significant savings on capital expenditures by moving
        under utilized equipment to locations with a need for that equipment. We
        anticipate that our working capital requirements may increase as a result
        of the
        expanded scale of the combined business, continued increases in sales, potential
        increases in the price of copper and our other raw materials, competition
        and
        our relationship with suppliers or customers. We believe that our existing
        cash,
        cash equivalents and cash flows from operations, combined with availability
        under our revolving credit facility, will be sufficient to meet our presently
        anticipated future cash needs for at least the next 12 months. We may, however,
        require additional cash resources due to changed business conditions or other
        future developments, including any investments or acquisitions we may decide
        to
        pursue. There can be no assurance that such finding will be available when
        needed, or, if available, that it will be available on terms acceptable to
        the
        Company.
 
 On
        August
        5, 2008, a judgment was entered in the Kuhns matter (See Part II, Item 1
        Litigation) awarding the plaintiffs $7.2 million and accordingly, we have
        adjusted our financial statements for the three month and six month periods
        ended June 30, 2008 accordingly. We
        have
        taken the necessary steps to appeal the decision, and will continue to
        vigorously defend against these claims which we believe to be without merit;
        however, we have no assurance that we will prevail in our appeal. Should
        we
        ultimately be required to pay the plaintiffs the amount of the judgment,
        the
        payment will have an impact upon our liquidity and working capital. We believe
        that the payment, should it be required, will not adversely affect our ability
        to fund our working capital needs or to fund our capital expenditure
        needs.
  52
  On
        January 24, 2007, we and Citadel Equity Fund Ltd. ("Citadel") entered a Notes
        Purchase Agreement (the “Notes Purchase Agreement”). Pursuant to the terms of
        the Notes Purchase Agreement, the Company offered and sold and Citadel purchased
        (a) $40,000,000 of the Company’s Guaranteed Senior Secured Floating Rate Notes
        due 2012 (the “HY Notes”) and (b) $20,000,000 of the Company’s 3.0% Senior
        Secured Convertible Notes due 2012 (the “Convertible Notes” and collectively
        with the HY Notes, the "Notes"). The details of the indentures are available
        in
        the Company’s Current Report on Form 8-K filed with the Commission on January
        26, 2007. The Convertible Notes allow the holder to convert the debt to common
        stock at a conversion rate of $7.00 for each share. On January 8, 2008, Citadel
        converted $15.0 million in debt to 2,141,857 shares of our common
        stock.
 
 On
        January 16, 2008, Copperweld, Copperweld Bimetallics International Holdings,
        LLC
        (“International Company”), International Manufacturing Equipment Suppliers, LLC
        (“IMES”), all of which are wholly-owned U.S. subsidiaries of the Company
        (collectively, “Subsidiaries”), entered a Settlement Agreement and a number of
        ancillary agreements with Tongling Jingda Special Magnet Wire Co., Ltd. (“TJS”)
        and Tongling Copperweld Bimetallics Co. Ltd. (“JV Company”), both of which are
        companies organized under the laws of the People’s Republic of China, in order
        for International Company to withdraw as a joint venture partner in the JV
        Company, to terminate certain contractual relationships between the JV Company
        and IMES, and to resolve all disputes that may exist among the Subsidiaries
        and/or TJS and the JV Company as a result of these transactions.
  Pursuant
        to the terms of the Settlement Agreement and related ancillary agreements:
  (1)
        The
        International Company transferred its equity interest in the JV Company to
        Hong
        Kong Heavy Trade Co., Ltd (“HK Company”), a limited liability company organized
        under the laws of Hong Kong, for a purchase price of $2.7 million. Of the
        $2.7
        million purchase price, the HK Company will pay $2.08 million to the JV Company
        on behalf of IMES as part of the refund of the down payment specified in
        (2)
        below, and the International Company will waive the remaining $620,000 in
        consideration of the JV Company’s entering into and performance of its
        obligations set forth in the agreement specified in (3) below.
  (2)
        IMES
        and the JV Company agreed to fully terminate and cancel the three equipment
        purchase contracts entered pursuant to which IMES had agreed to manufacture
        and
        deliver to the JV Company CCA clad line (Contract No. CPW061206/1), CCA
        Annealing Furnace (Contract No. CPW061206/2), and CPS Plating Line and Drawing
        Machine (Contract No. CPW061206/3) (collectively, “Equipment Contracts”), and
        IMES agreed to refund the down payment paid by the JV Company under the
        Equipment Contracts in the total amount of $3,137,019. Of the down payment
        to be
        refunded, the JV Company had previously paid $200,000 to the JV Company’s
        current account, Copperweld agreed to pay, on behalf of IMES, $857,019 to
        the JV
        Company, and the HK Company agreed to pay the JV Company the balance of $2.08
        million pursuant to the arrangement described in (1) above.
  53
  (3)
        To
        resolve all remaining disputes among the parties as a result of International
        Company’s withdrawal from the JV Company, Copperweld agreed to purchase from the
        JV Company a CCA rod breakdown machine, CPS rectifiers and a Metallographic
        Microscope for a total purchase price of $230,000.
  In
        consideration for the Subsidiaries’ entering into and performing the Settlement
        Agreement and related ancillary agreements, TJS, the JV Company and the HK
        Company each also agreed to (1) fully and completely release International
        Company from its obligation to contribute $1.22 million to the JV Company’s
        capital account under the Sino-foreign equity joint venture contract dated
        September 30, 2006 between TJS and the International Company, and (2) waive
        all
        claims that any of them may have against any of the Subsidiaries for damages
        or
        for specific performance under any and all causes of action, including but
        not
        limited to causes of action under any and all oral or written agreements
        entered
        into by the parties prior to the Settlement Agreement.
 
 The
        cost
        to close the Tongling joint venture totaled $977,519 in addition to the cost
        of
        the equipment in paragraph (3) above. A claim was duly filed against an escrow
        account establish by the Seller at the time we purchased Copperweld. We agreed
        to settle our claim against the escrow in the amount of $900,000. The remainder
        of our cost was expensed during the reporting period.
 
 On
        June
        1, 2008, John Christopher “Chris” Finley’s resignation as Chief Operating
        Officer was accepted and an agreement was reached where Mr. Finley will consult
        with the Company for a period of twelve months. Mr. Finley’s duties included
        oversight of manufacturing operations, global sales and research and
        development. As of June 30, 2008, no one had been named to replace Mr. Finley
        as
        Chief Operating Officer. General and production managers of our manufacturing
        facilities have assumed responsibility for manufacturing operations and Dwight
        Berry was employed as Vice President for Commercial Development where he
        oversees global sales and research and development. Other duties have been
        assumed by President Wenbing Chris Wang. We may choose to name a Chief Operating
        Officer at some future date; however, presently all responsibilities are
        effectively assumed by other managers within the company.
  **Critical
        Accounting Policies**
 
 There
        have been no changes in our critical accounting policies or significant
        accounting estimates as disclosed in our 2007 Annual Report on Form 10-K
        Note 2
        in the Notes to the Consolidated Financial Statements.
  **Item
        3.**  **Quantitative
        and Qualitative Disclosures about Market Risk**
 
 ***Commodity
        Price Risk***
  Certain
        raw materials used by us are subject to price volatility caused by supply
        conditions, political and economic variables and other unpredictable factors.
        The primary purpose of our commodity price management activities is to manage
        the volatility associated with purchases of commodities in the normal course
        of
        business. We do not speculate on commodity prices.
  54
  We
        are
        primarily exposed to price risk related to our purchase of copper and other
        raw
        materials used in the manufacture of our products. Our raw material price
        management strategy involves the use of natural techniques, where possible,
        such
        as purchasing copper for future delivery at fixed prices. We did not have
        any
        commodity price derivatives or hedging arrangements outstanding at June 30,
        2008
        and did not employ any commodity price derivatives during the six month period
        ended June 30, 2008.
  ***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 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 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. In
        addition, commencing on July 21, 2005, China reformed its exchange rate
        regime by changing to a managed floating exchange rate regime based on market
        supply and demand with reference to a basket of currencies. Under the managed
        floating exchange rate regime, the RMB is no longer pegged to the US Dollar.
        The
        exchange rate of the RMB against the US Dollar was adjusted to RMB 8.11 per
        US Dollar as of July 21, 2005, representing an appreciation of about 2%.
        The People’s Bank of China will announce the closing prices of foreign
        currencies such as the US Dollar traded against the RMB in the inter-bank
        foreign exchange market after the closing of the market on each business
        day,
        and will make such prices the central parity for trading against the RMB
        on the
        following business day. On May 19, 2007, the People’s Bank of China
        announced a policy to expand the maximum daily floating range of RMB trading
        prices against the U.S. dollar in the inter-bank spot foreign exchange market
        from 0.3% to 0.5%. While the international reactions to the RMB revaluation
        and
        widening of the RMB’s daily trading band have generally been positive, with the
        increased floating range of the RMB’s value against foreign currencies, the RMB
        may appreciate or depreciate significantly in value against the U.S. dollar
        or
        other foreign currencies in the long term, depending on the fluctuation of
        the
        basket of currencies against which it is currently valued.
  To
        date,
        we have not entered into any hedging transactions in an effort to reduce
        our
        exposure to foreign currency exchange risk. We recognized a foreign currency
        translation adjustment of approximately $12.2 million for the six month period
        ended June 30, 2008.
  ***Interest
        Rate Risk***
 
 We
        are
        primarily exposed to interest rate risk arising from 6 months LIBOR rate
        on
        which the interest rate for our Guaranteed Senior Secured Floating Rate Notes
        due 2012 (HY Notes) totaling $40 million or 48% of our total debt, is based.
        If
        there was a hypothetical 1% change in 6-month LIBOR interest rate, the net
        impact to earnings would be approximately $0.4 million on annualized basis.
  55
  In
        order
        to mitigate our exposure to volatility in interest rates and foreign currency
        exchange rates associated with the HY Notes, on April 10, 2007, the Company
        entered into a cross currency swap transaction (the Swap) with Merrill Lynch
        Capital Services, Inc. (“MLCS”). The Swap, with a notional principal value of
        $40 million, converts the LIBOR + 7% per annum USD variable interest rate
        to an 8.3% per annum RMB fixed interest rate. The agreement was deemed effective
        January 24, 2007. The Swap requires semi-annual payment in arrears on July
        24
        and January 24 and matures earlier of (1) cash settlement defined as early
        termination; or (2) January 24, 2012, at which point the Swap requires an
        exchange of RMB and USD based principals. Under the terms of the cross currency
        swap, the Company receives variable interest rate payments in USD and makes
        fixed interest rate payments in RMB with settlement netted in USD, thereby
        creating the equivalent of fixed-rate debt. The Company uses this derivative
        instrument only to hedge exposures in the ordinary course of business and
        does
        not invest in derivative instruments for speculative purposes.
 
 The
        fair
        value of the Swap is determined on an annual basis with the assistance of
        third
        party provided calculations which reflect the present values of the difference
        between estimated future variable-rate receipts in USD and future fixed-rate
        payments in RMB. For the fiscal year ended December 31, 2007, changes in
        fair
        value of the Swap designated and effective as cash flow hedge resulted in
        an
        increase in the liability and a loss to other comprehensive income of $8.5
        million, net of taxes. For the period ended June 30, 2008, the Swap resulted
        in
        a liability of $9,246,901 and a loss to other comprehensive income of $731,505,
        net of taxes. On January 24, 2008, the most recent interest payment date,
        the
        Company received cash in the amount of $738,376 from MLCS. The gain from
        derivative transactions for the six months ended June 30, 2008 was $355,189.
        As
        of June 30 2008, the Company had cross currency hedge receivable amounting
        to
        $322,983. For the six month period ended June 30, 2008, there were no amounts
        recorded in the consolidated statement of income in relation to this interest
        rate swap related to ineffectiveness.
 
 The
        Company accounts for this interest rate swap in accordance with FAS No. 133,
        “Accounting for Derivatives Instruments and Hedging Activity,” which requires
        all derivatives to be carried on the balance sheet at fair value and to meet
        certain documentary and analytical requirements to qualify for hedge accounting
        treatment. The above derivative qualifies for hedge accounting under FAS
        133
        and, accordingly, changes in the fair value is reported in accumulated other
        comprehensive income, net of related income tax effects.
 
 The
        Company also has outstanding senior convertible notes that may be converted
        into
        the Company’s common stock. On January 8, 2008, the convertible notes holder
        elected to convert $15.0 million of the $20 million convertible notes into
        common shares. The Company cannot estimate the possibility of the conversion
        of
        the $5 million Convertible Notes outstanding as of June 30, 2008.  If the
        $5 million Convertible Notes outstanding as of June 30, 2008 are not converted
        at maturity, January 24, 2012, the Company will have to repay the principal
        of
        $5 million and an additional redemption cost of $5,305,158.
 
 Under
        SFAS 157, the Company used Level 2 inputs for its valuation methodology for
        the
        $40 million HY note and $5 million convertible notes payable and outstanding,
        and their fair values are determined using cash flows discounted at relevant
        market interest rates in effect at the period close. The estimated fair value
        of
        the Company’s outstanding HY notes and convertible notes was $39.6 million at
        June 30, 2008.
  56
   Changes
        in the market value of the Company’s debt do not affect the reported results of
        operations unless the Company is retiring such obligations prior to their
        maturity. This analysis did not consider the effects of a changed level of
        economic activity that could exist in such an environment and certain other
        factors. Further, this sensitivity analysis assumes no changes in the Company’s
        financial structure.
  ***Credit
        Risk***
 
 We
        have
        not experienced significant credit risk, as most of our customers are long-term
        customers with excellent payment records. We review our accounts receivable
        on a
        regular basis to determine if the allowance for doubtful accounts is adequate
        at
        each quarter-end. We only extend 30 to 90 day trade credit to our largest
        customers, which tend to be well-established and large businesses, and we
        have
        not seen any major customer’s accounts receivable go uncollected beyond 90 days
        or experienced any material write-off of accounts receivable in the past.
  ***Inflation
        Risk***
 
 In
        recent
        years, China has not experienced significant inflation, and thus inflation
        has
        not had a material impact on our results of operations. According to the
        National Bureau of Statistics of China (NBS) (www.stats.gov.cn), the change
        in
        Consumer Price Index (CPI) in China was 3.9%, 1.8% and 1.5% in 2004, 2005
        and
        2006, respectively. However, in the fiscal year ended December 31, 2007,
        according to NBS, CPI rose significantly at a monthly average rate of 4.8%.
        Especially during the months of August, September, October, November, and
        December, CPI was up 6.5%, 6.2%, 6.5%, 6.9% and 6.5%, 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.
 57
  **Item
        4: Other Information**
 
 **Controls
        and Procedures**
  (a) *Evaluation
        of disclosure controls and procedures* .
        Our
        chief executive officer and our chief financial officer, after evaluating
        the
        effectiveness of the company’s “disclosure controls and procedures” (as defined
        in the Securities Exchange Act of 1934, as amended (the “Exchange Act”), Rules
        13a-15e and 15d-15e) as of the end of the period covered by this report (the
        “Evaluation Date”), have concluded that, as of the Evaluation Date, our
        disclosure controls and procedures were effective.
  (b) *Changes
        in internal controls* .
        During
        the fiscal quarter covered by this quarterly report, there was no change
        in our
        internal control over financial reporting that has materially affected, or
        is
        reasonably likely to materially affect our internal control over financial
        reporting.
 
 A
        control
        system, no matter how well conceived and operated, can provide only reasonable,
        not absolute, assurance that the objectives of the control systems are met.
        Because of the inherent limitations in all control systems no evaluation
        of
        controls can provide absolute assurance that all control issues, if any,
        within
        a company have been detected. Such limitations include the fact that human
        judgment in decision-making can be faulty and that breakdowns in internal
        control can occur because of human failures, such as simple errors or mistakes
        or intentional circumvention of the established process.
 
 **PART
        II**
 
 **Item
        1.** Litigation.
 
 On
        December 11, 2006 we received service of a complaint filed by Kuhns Brothers,
        Inc., Kuhns Brothers Securities Corp., and Kuhns Brothers & Co., Inc.
        (collectively the “Kuhns Brothers”) in the United States District Court,
        District of Connecticut (the “District Court”) on November 27, 2006.  Kuhns
        Brothers revised their complaint three times, and sought damages well in
        excess
        of $7.0 million, primarily stemming from an alleged breach of an engagement
        letter agreement, dated May 27, 2005, by and between Kuhns Brothers, Inc.
        and
        Dalian Fushi Bimetallic Manufacturing Company Ltd., which was terminated
        in
        September 2006. This matter was tried before the District Court, which awarded
        Kuhns Brothers damages in excess of $7.2 million in its decision issued on
        August 5, 2008.  We have taken the necessary steps to appeal the decision,
        and will continue to vigorously defend against these claims which we believe
        to
        be without merit.
  **Item
        4.** Submission
        of Matters to a Vote of Security Holders
 
 The
        Company held its Annual Meeting of Stockholders (the Meeting) on June 9,
        2008.
        Proxies for the Meeting were solicited pursuant to Regulation 14A under the
        Securities Exchange Act of 1934, as amended. A total of 27,433,515 shares
        of
        Common Stock with one vote each were entitled to vote at the Meeting and
        holders
        of 13,540,181 shares voted in person or by proxy, constituting a quorum.
        At the
        meeting, the Company’s directors were re-elected for terms ending at the 2009
        Annual Meeting of Shareholders by the vote set forth below:
  58
  Director
              
              Votes For
              
              Votes WithheldLi
                  Fu
              
              
              13,750,555
              
              
              17,563Wenbing
                  Christopher Wang
              
              
              13,540,181
              
              
              227,937Barry
                  Raeburn
              
              
              13,751,195
              
              
              16,923Feng
                  Bai
              
              
              13,540,181
              
              
              227,937Jiping
                  Hua
              
              
              13,540,206
              
              
              227,912John
                  Francis Perkowski
              
              
              13,751,195
              
              
              16,923
  A
        proposal to ratify the appointment of Moore Stephens Wurth Frazer and Torbet,
        LLP as the Company’s independent registered public accounting firm for the 2008
        fiscal year by the Audit Committee of the Board of Directors of the Company
        was
        approved by 13,754,910 cast in favor, 546,683 votes cast against and 200
        votes
        abstaining.
 
 **Item
        6.** **Exhibits**
 
 (a)
        Exhibits
 
 10.1-
        Settlement Agreement among Fushi Copperweld, Inc. and John Christopher
        Finley
 
 10.2
        -
        Employment Agreement of Dwight Berry
 
 31.1 –
        Certification of Chief Executive Officer pursuant to Section 302 of the
        Sarbanes-Oxley Act of 2002.
 
 31.2
–
        Certification of Chief Financial Officer pursuant to Section 302 of the
        Sarbanes-Oxley Act of 2002.
 
 32.1
–
        Certification of Chief Executive Officer and Chief Financial Officer pursuant to
        Section 906 of the Sarbanes-Oxley Act of 2002.
 
 59
 
 SIGNATURES
 
 Pursuant
        to the requirements of the Securities Act of 1934, the Registrant has duly
        caused this report to be signed on its behalf by the undersigned there unto
        duly
        authorized.
 
 FUSHI
                  COPPERWELD, INC.Date:
                  August 11, 2008
              BY:Wenbing
                  Chris WangChief
                  Financial Officer
 
 INDEX
        TO
        EXHIBITS
 
 EXHIBIT
                NUMBER
              
              DESCRIPTION10.1
              
              Settlement
                  Agreement among Fushi Copperweld, Inc. and John Christopher
                  Finley10.2
              
              Employment
                  Agreement of Dwight Berry31.1
              
              Certification
                  of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
                  Act of 2002.31.2
              
              Certification
                  of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
                  Act of 2002.32.1
              
              Certification
                  of Chief Executive Officer and Chief Financial Officer pursuant
                  to Section
                  906 of the Sarbanes-Oxley Act of
                  2002.
  60