UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549





FORM
10-Q





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




For the
quarterly period ended June 30, 2010





or





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





For the
transition period from ____ to _____




Commission
File Number:  0-19276





FUSHI
COPPERWELD, INC.


(Exact
name of registrant as specified in its charter)




Nevada
                13-3140715(State
      or other jurisdiction of incorporation or
                  organization)
                (I.R.S.
      Employer Identification No.)254
      Cottonmill Road
                  Fayetteville,
      Tennessee 37334 USA
                TYG
      Center Tower B, Suite 2601
                  Dongsanhuan
      Bei Lu, Bing 2
                  Beijing,
      PRC 100027(Address
      of principal executive offices) (Zip
  Code)







(931)-433-0460


(Registrant’s
telephone number, including area code)




______________________________________________________________________


(Former
name, former address and former fiscal year, if changed since last
report)





Indicate
by check whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days: Yesx  Noo





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).  Yeso  Noo










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 o Accelerated
filer x  Non-accelerated
filer (Do not check if a smaller reporting company)  o  Smaller
reporting company  o





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).Yeso  Nox





As of
August 8, 2010 the registrant had 37,718,595 shares of common stock
outstanding.








TABLE OF CONTENTS





PAGEPART I.
      FINANCIAL INFORMATIONItem
      1. Financial StatementsConsolidated
      Balance Sheets as of June 30, 2010 (Unaudited) and December 31,
      2009
            1Consolidated
      Statements of Income and Other Comprehensive Income for the Three and Six
      Months Ended June 30, 2010 and 2009 (Unaudited)
            2Consolidated
      Statements of Cash Flows for the Six Months Ended June 30, 2010 and 2009
      (Unaudited)
            3Consolidated
      Statement of Stockholders’ Equity for the Six Months Ended June 30, 2010
      (Unaudited) and the Year Ended December 31, 2009
            4Notes
      to Consolidated Financial Statements
            5Item
      2. Management’s Discussion and Analysis of Financial Condition and Results
      of Operations
            31Item
      3. Quantitative and Qualitative Disclosures About Market
    Risk
            44Item
      4. Controls and Procedures
            45PART
      II. OTHER INFORMATION45Item
      1. Legal ProceedingsItem
      1A. Risk Factors
            45Item
      2. Unregistered Sales of Equity Securities and Use of
    Proceeds
            45Item
      3. Defaults Upon Revolving Line of Credit
            45Item
      5. Other Information
            46Item
      6. Exhibits
            46Signatures
            47








PART I. FINANCIAL
INFORMATION





Item 1.
Financial Statements


FUSHI
COPPERWELD, INC. AND SUBSIDIARIES




CONSOLIDATED
BALANCE SHEETS


AS OF
JUNE 30, 2010 AND DECEMBER 31, 2009





June 30,
                                
                                
                                December 31,2010
                                
                                
                                2009UnauditedASSETSCURRENT
      ASSETS:Cash
                                
                                $
                                73,787,555
                                
                                
                                $
                                60,597,849Accounts
      receivable, trade, net of allowance of bad debt of $ 1,031,398 and
      $1,024,684as
      of June 30, 2010 and December 31, 2009, respectively
                                
                                
                                64,058,653
                                
                                
                                
                                67,284,600Inventories
                                
                                
                                22,547,129
                                
                                
                                
                                10,875,782Notes
      receivables
                                
                                
                                184,658
                                
                                
                                
                                122,972Other
      receivables and prepaid expenses
                                
                                
                                685,255
                                
                                
                                
                                1,137,566Advances
      to suppliers
                                
                                
                                25,177,421
                                
                                
                                
                                8,582,346Deposit
      in derivative hedge
                                
                                
                                -
                                
                                
                                
                                1,000,000Total
      current assets
                                
                                
                                186,440,671
                                
                                
                                
                                149,601,115PLANT
      AND EQUIPMENT, net
                                
                                
                                130,964,932
                                
                                
                                
                                117,385,566OTHER
      ASSETS:Advances
      to suppliers, non-current
                                
                                
                                711,311
                                
                                
                                
                                1,356,404Notes
      receivables, non-current
                                
                                
                                429,106
                                
                                
                                
                                699,106Intangible
      assets, net of accumulated amortization
                                
                                
                                14,275,013
                                
                                
                                
                                11,924,056Deferred
      loan expense, net
                                
                                
                                -
                                
                                
                                
                                2,045,349Deferred
      tax assets
                                
                                
                                15,248,484
                                
                                
                                
                                11,722,469Total
      other assets
                                
                                
                                30,663,914
                                
                                
                                
                                27,747,384Total
      assets
                                
                                $
                                348,069,517
                                
                                
                                $
                                294,734,065LIABILITIES AND SHAREHOLDERS'
      EQUITYCURRENT
      LIABILITIES:Revolver
      line of credit
                                
                                $
                                -
                                
                                
                                $
                                4,033,783Accounts
      payable, trade
                                
                                
                                7,313,267
                                
                                
                                
                                4,002,773Notes
      payable, current
                                
                                
                                -
                                
                                
                                
                                10,000,000Other
      payables and accrued liabilities
                                
                                
                                5,167,396
                                
                                
                                
                                3,928,374Taxes
      payable
                                
                                
                                3,907,036
                                
                                
                                
                                2,599,055Cross
      currency hedge payable
                                
                                
                                -
                                
                                
                                
                                436,702Obligation
      under capital lease, current
                                
                                
                                76,557
                                
                                
                                
                                71,503Total
      current liabilities
                                
                                
                                16,464,256
                                
                                
                                
                                25,072,190LONG-TERM
      LIABILITIES:Notes
      payable, non-current
                                
                                
                                -
                                
                                
                                
                                25,000,000Obligation
      under capital lease, non-current
                                
                                
                                110,719
                                
                                
                                
                                153,626Fair
      value of derivative instrument
                                
                                
                                -
                                
                                
                                
                                7,532,527Total
      long-term liabilities
                                
                                
                                110,719
                                
                                
                                
                                32,686,153Total
      liabilities
                                
                                
                                16,574,975
                                
                                
                                
                                57,758,343COMMITMENTS
      AND CONTINGENCIES
                                
                                
                                5,075,000SHAREHOLDERS'
      EQUITY:Preferred
      stock, $0.001 par value, 5,000,000 shares authorized, none issued or
      outstanding as of June 30, 2010 and December 31, 2009
                                
                                
                                -
                                
                                
                                
                                -Common
      stock, $0.006  par value, 100,000,000 shares authorized, June
      30, 2010: 37,518,595 shares issued and outstanding December 31, 2009:
      29,772,780 shares issued and outstanding
                                
                                
                                225,113
                                
                                
                                
                                178,638Additional
      paid in capital
                                
                                
                                164,829,350
                                
                                
                                
                                105,540,676Statutory
      reserves
                                
                                
                                19,511,407
                                
                                
                                
                                16,282,793Retained
      earnings
                                
                                
                                114,865,703
                                
                                
                                
                                97,283,748Accumulated
      other comprehensive income
                                
                                
                                26,987,969
                                
                                
                                
                                17,689,867Total
      shareholders' equity
                                
                                
                                326,419,542
                                
                                
                                
                                236,975,722Total
      liabilities and shareholders' equity
                                
                                $
                                348,069,517
                                
                                
                                $
                                294,734,065





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


- 1
-





FUSHI
COPPERWELD, INC.  AND SUBSIDIARIES




CONSOLIDATED
STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME (LOSS)


FOR THE
THREE AND SIX MONTHS ENDED JUNE 30, 2010 AND 2009


(UNAUDITED)





Three months ended June 30,
                
                
                Six months ended June 30,2010
                
                
                2009
                
                
                2010
                
                
                2009REVENUES
                
                $
                69,005,366
                
                
                $
                48,301,545
                
                
                $
                128,555,208
                
                
                $
                83,558,081COST
      OF GOODS SOLD
                
                
                49,415,219
                
                
                
                34,848,865
                
                
                
                91,143,795
                
                
                
                61,166,026GROSS
      PROFIT
                
                
                19,590,147
                
                
                
                13,452,680
                
                
                
                37,411,413
                
                
                
                22,392,055OPERATING
      EXPENSES:Selling
      expenses
                
                
                1,365,164
                
                
                
                1,086,414
                
                
                
                2,617,126
                
                
                
                2,288,561General
      and administrative expenses
                
                
                4,161,196
                
                
                
                3,167,361
                
                
                
                7,919,070
                
                
                
                6,237,603Total
      operating expenses
                
                
                5,526,360
                
                
                
                4,253,775
                
                
                
                10,536,196
                
                
                
                8,526,164INCOME
      FROM OPERATIONS
                
                
                14,063,787
                
                
                
                9,198,905
                
                
                
                26,875,217
                
                
                
                13,865,891OTHER
      INCOME (EXPENSE):Interest
      income
                
                
                197,151
                
                
                
                83,004
                
                
                
                389,941
                
                
                
                166,621Interest
      expense
                
                
                (5,973
                )
                
                
                (1,478,203
                )
                
                
                (514,455
                )
                
                
                (2,949,071
                )Bargain
      purchase gain
                
                
                1,765,376
                
                
                
                -
                
                
                
                5,070,389
                
                
                
                -Gain
      (Loss) on cross currency hedge
                
                
                -
                
                
                
                (215,964
                )
                
                
                (753,666
                )
                
                
                (382,374
                )Gain
      (Loss) on derivative instrument settlement
                
                
                -
                
                
                
                -
                
                
                
                (6,650,000
                )
                
                
                -Gain
      (Loss) on debt extinguishment
                
                
                -
                
                
                
                -
                
                
                
                (2,395,778
                )
                
                
                -Change
      in fair value of derivative liability - warrants
                
                
                -
                
                
                
                (688,876
                )
                
                
                -
                
                
                
                (752,114
                )Change
      in fair value of derivative liability - conversion option
                
                
                -
                
                
                
                (4,583,809
                )
                
                
                -
                
                
                
                (5,122,846
                )Other
      income (expense), net
                
                
                122,628
                
                
                
                (140,133
                )
                
                
                (18,444
                )
                
                
                (246,482
                )Total
      other income (expense), net
                
                
                2,079,182
                
                
                
                (7,023,981
                )
                
                
                (4,872,013
                )
                
                
                (9,286,266
                )INCOME
      BEFORE INCOME TAXES
                
                
                16,142,969
                
                
                
                2,174,924
                
                
                
                22,003,204
                
                
                
                4,579,625(PROVISION)
      BENEFIT FOR INCOME TAXES:Deferred
      income tax benefit
                
                
                79,529
                
                
                
                738,180
                
                
                
                3,526,015
                
                
                
                2,364,707Current
      income tax expense
                
                
                (2,782,689
                )
                
                
                (1,350,404
                )
                
                
                (4,718,650
                )
                
                
                (2,280,715
                )(Provision)
      benefit for income taxes, net
                
                
                (2,703,160
                )
                
                
                (612,224
                )
                
                
                (1,192,635
                )
                
                
                83,992NET
      INCOME
                
                
                13,439,809
                
                
                
                1,562,700
                
                
                
                20,810,569
                
                
                
                4,663,617OTHER
      COMPREHENSIVE INCOME (LOSS):Foreign
      currency translation adjustment
                
                
                1,890,314
                
                
                
                433,866
                
                
                
                1,765,575
                
                
                
                39,957Change
      in fair value of derivative instrument
                
                
                -
                
                
                
                (751,227
                )
                
                
                882,527
                
                
                
                (3,513,356
                )Reclassification
      of change in cash flow hedge to earnings
                
                
                -
                
                
                
                -
                
                
                
                6,650,000
                
                
                
                -COMPREHENSIVE
      INCOME
                
                $
                15,330,123
                
                
                $
                1,245,339
                
                
                $
                30,108,671
                
                
                $
                1,190,218EARNINGS
      PER SHARE:Basic
                
                $
                0.36
                
                
                $
                0.06
                
                
                $
                0.58
                
                
                $
                0.17Diluted
                
                $
                0.35
                
                
                $
                0.06
                
                
                $
                0.57
                
                
                $
                0.17WEIGHTED
      AVERAGE SHARES:Basic
                
                
                37,343,714
                
                
                
                27,827,838
                
                
                
                36,016,078
                
                
                
                27,696,388Diluted
                
                
                37,991,800
                
                
                
                28,323,611
                
                
                
                36,633,668
                
                
                
                28,054,226




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


- 2
-





FUSHI
COPPERWELD, INC.  AND SUBSIDIARIES




CONSOLIDATED
STATEMENTS OF CASH FLOWS


FOR THE
SIX MONTHS ENDED JUNE 30, 2010 AND 2009


(UNAUDITED)





2010
                        
                        
                        2009CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income
                        
                        $
                        20,810,569
                        
                        
                        $
                        4,663,617Adjustments
      to reconcile net incomeprovided
      by operating activities:Bad
      debt expense
                        
                        
                        -
                        
                        
                        
                        27,793Write-off
      of non-current advances to suppliers
                        
                        
                        525,588
                        
                        
                        
                        -Write-off
      of patent
                        
                        
                        87,500
                        
                        
                        
                        -Reserve
      for inventories
                        
                        
                        56,000
                        
                        
                        
                        23,272Inventories
      write-off
                        
                        
                        -
                        
                        
                        
                        179,654Depreciation
                        
                        
                        5,822,284
                        
                        
                        
                        4,612,405Loss
      on sale of property and equipment
                        
                        
                        -
                        
                        
                        
                        117,430Deferred
      taxes
                        
                        
                        (3,526,015
                        )
                        
                        
                        (2,364,707
                        )Reserve
      for notes receivables
                        
                        
                        250,000
                        
                        
                        
                        -Amortization
      of intangible assets
                        
                        
                        255,982
                        
                        
                        
                        238,283Amortization
      of loan commission
                        
                        
                        249,571
                        
                        
                        
                        544,900Amortization
      of stock compensation expense
                        
                        
                        373,649
                        
                        
                        
                        928,727Loss
      on cross currency hedge
                        
                        
                        753,666
                        
                        
                        
                        382,374Loss
      on derivative instrument settlement
                        
                        
                        6,650,000
                        
                        
                        
                        -Loss
      on debt extinguishment
                        
                        
                        2,395,778
                        
                        
                        
                        -Bargain
      purchase gain
                        
                        
                        (5,070,389
                        )
                        
                        
                        -Change
      in fair value of derivative liability - conversion option
                        
                        
                        -
                        
                        
                        
                        5,122,846Change
      in fair value of derivative liability - warrants
                        
                        
                        -
                        
                        
                        
                        752,114Change
      in operating assets and liabilities:Accounts
      receivable
                        
                        
                        6,477,996
                        
                        
                        
                        (9,906,381
                        )Inventories
                        
                        
                        (10,215,093
                        )
                        
                        
                        (10,699,400
                        )Notes
      receivables
                        
                        
                        (41,241
                        )
                        
                        
                        63,638Other
      receivables and prepayments
                        
                        
                        460,654
                        
                        
                        
                        102,867Advances
      to suppliers - current
                        
                        
                        (15,826,015
                        )
                        
                        
                        12,233,042Accounts
      payable
                        
                        
                        318,422
                        
                        
                        
                        (2,091,085
                        )Other
      payables and accrued liabilities
                        
                        
                        (1,767,349
                        )
                        
                        
                        (2,477,339
                        )Taxes
      payable
                        
                        
                        926,092
                        
                        
                        
                        2,062,180Net
      cash provided by operating activities
                        
                        
                        9,967,649
                        
                        
                        
                        4,516,230CASH
      FLOWS FROM INVESTING ACTIVITIES:Payment
      for purchase of subsidiaries
                        
                        
                        (6,375,000
                        )
                        
                        
                        -Cash
      acquired from acquisition of subsidiaries
                        
                        
                        901,463
                        
                        
                        
                        -Payments
      on cross currency hedge payable
                        
                        
                        (1,190,368
                        )
                        
                        
                        (114,580
                        )Payment
      for unwind of cross currency hedge
                        
                        
                        (5,650,000
                        )
                        
                        
                        -Proceeds
      from sale of property and equipment
                        
                        
                        -
                        
                        
                        
                        424,444Purchases
      of property and equipment
                        
                        
                        (1,736,395
                        )
                        
                        
                        (3,135,693
                        )Net
      of payments on prepayment of equipment
                        
                        
                        -
                        
                        
                        
                        (2,473,841
                        )Net
      of claimed VAT on purchases of property and equipment
                        
                        
                        25,755
                        
                        
                        
                        -Net
      cash used in investing activities
                        
                        
                        (14,024,545
                        )
                        
                        
                        (5,299,670
                        )CASH
      FLOWS FROM FINANCING ACTIVITIES:Net
      payments on revolver line of credit
                        
                        
                        (9,513
                        )
                        
                        
                        (222,709
                        )Payoff
      of revolver line of credit
                        
                        
                        (4,024,270
                        )
                        
                        
                        -Payments
      on short-term bank loans
                        
                        
                        -
                        
                        
                        
                        (17,553,600
                        )Release
      of restricted cash
                        
                        
                        -
                        
                        
                        
                        1,000,000Payment
      on capital lease obligation
                        
                        
                        (37,853
                        )
                        
                        
                        -Payment
      of high yield notes payable
                        
                        
                        (35,600,000
                        )
                        
                        
                        -Proceeds
      on issuance of common stock
                        
                        
                        56,361,500
                        
                        
                        
                        1,920,000Net
      cash provided by (used in) financing activities
                        
                        
                        16,689,864
                        
                        
                        
                        (14,856,309
                        )EFFECT
      OF EXCHANGE RATE ON CASH
                        
                        
                        556,738
                        
                        
                        
                        (38,459
                        )CHANGE
      IN CASH
                        
                        
                        13,189,706
                        
                        
                        
                        (15,678,208
                        )CASH,
      beginning of period
                        
                        
                        60,597,849
                        
                        
                        
                        65,611,770CASH,
      end of period
                        
                        $
                        73,787,555
                        
                        
                        $
                        49,933,562Supplemental
      cash flow disclosures:Interest
      paid
                        
                        $
                        1,401,542
                        
                        
                        $
                        1,988,420Income
      tax paid
                        
                        $
                        3,830,567
                        
                        
                        $
                        1,933,546





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


- 3
-





FUSHI
COPPERWELD, INC AND SUBSIDIARIES


CONSOLIDATED
STATEMENT OF SHAREHOLDERS' EQUITY





Common stockShares outstanding
                  
                  
                  Shares In escrow
                  
                  
                  Additional
                  
                  
                  Common stock
                  
                  
                  Retained earnings
                  
                  
                  AccumulatedNumber
                  
                  
                  Par
                  
                  
                  Number
                  
                  
                  Par
                  
                  
                  paid in
                  
                  
                  subscription
                  
                  
                  Statutory
                  
                  
                  Unrestricted
                  
                  
                  comprehensiveof shares
                  
                  
                  value
                  
                  
                  of shares
                  
                  
                  value
                  
                  
                  capital
                  
                  
                  receivable
                  
                  
                  reserves
                  
                  
                  earnings
                  
                  
                  income (loss)
                  
                  
                  TotalsBALANCE,
      December 31, 2008, as previously reported
                  
                  
                  27,399,034
                  
                  
                  $
                  164,395
                  
                  
                  
                  100,000
                  
                  
                  $
                  600
                  
                  
                  $
                  91,172,890
                  
                  
                  $
                  
                  
                  
                  $
                  12,316,147
                  
                  
                  $
                  78,613,158
                  
                  
                  $
                  20,712,502
                  
                  
                  $
                  202,979,692Cumulative
      effect of reclassification of conversion option
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (1,357,150
                  )
                  
                  
                  
                  
                  
                  
                  (1,357,150
                  )BALANCE,
      January 1, 2009, as adjusted
                  
                  
                  27,399,034
                  
                  
                  
                  164,395
                  
                  
                  
                  100,000
                  
                  
                  
                  600
                  
                  
                  
                  91,172,890
                  
                  
                  
                  -
                  
                  
                  
                  12,316,147
                  
                  
                  
                  77,256,008
                  
                  
                  
                  20,712,502
                  
                  
                  
                  201,622,542Shares
      issued for cash @ $4.80
                  
                  
                  400,000
                  
                  
                  
                  2,400
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  1,706,157
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  1,708,557Shares
      placed in escrow (subscription receivable)
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  2,200,000
                  
                  
                  
                  13,200
                  
                  
                  
                  6,249,481
                  
                  
                  
                  (6,262,681
                  )
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  -Shares
      removed from escrow as payment
                  
                  
                  100,000
                  
                  
                  
                  600
                  
                  
                  
                  (100,000
                  )
                  
                  
                  (600
                  )
                  
                  
                  
                  
                  
                  
                  343,084
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  343,084Reclassification
      of derivative liability-warrant to equity
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  963,557
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  963,557Exercise
      of stock option
                  
                  
                  1,625
                  
                  
                  
                  10
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (10
                  )
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  -Stock
      compensation expense
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  928,727
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  928,727Net
      income
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  4,663,617
                  
                  
                  
                  
                  
                  
                  
                  4,663,617Adjustment
      to statutory reserve
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  1,672,524
                  
                  
                  
                  (1,672,524
                  )
                  
                  
                  
                  
                  
                  
                  -Change
      in fair value of derivative instrument
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (3,513,356
                  )
                  
                  
                  (3,513,356
                  )Foreign
      currency translation gain
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  39,957
                  
                  
                  
                  39,957BALANCE,
      June 30, 2009, unaudited
                  
                  
                  27,900,659
                  
                  
                  
                  167,405
                  
                  
                  
                  2,200,000
                  
                  
                  
                  13,200
                  
                  
                  
                  101,020,802
                  
                  
                  
                  (5,919,597
                  )
                  
                  
                  13,988,671
                  
                  
                  
                  80,247,101
                  
                  
                  
                  17,239,103
                  
                  
                  
                  206,756,685Shares
      issued for Convertible notes extinguishment @ $9.08
                  
                  
                  440,529
                  
                  
                  
                  2,643
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  3,997,357
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  4,000,000Shares
      removed from escrow as payment of liability
                  
                  
                  1,370,752
                  
                  
                  
                  8,225
                  
                  
                  
                  (1,370,752
                  )
                  
                  
                  (8,225
                  )
                  
                  
                  
                  
                  
                  
                  5,919,597
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  5,919,597Shares
      cancelled from escrow
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (829,248
                  )
                  
                  
                  (4,975
                  )
                  
                  
                  4,975
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  -Exercise
      of warrants for cash @ $3.1064
                  
                  
                  52,352
                  
                  
                  
                  314
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  166,312
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  166,626Exercise
      of stock option
                  
                  
                  3,637
                  
                  
                  
                  22
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (22
                  )
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  -Stock
      compensation expense
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  351,281
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  351,281Correction
      of 2007 warrant exercise calculation error
                  
                  
                  4,851
                  
                  
                  
                  29
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (29
                  )
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  -Net
      income
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  19,330,769
                  
                  
                  
                  
                  
                  
                  
                  19,330,769Adjustment
      to statutory reserve
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  2,294,122
                  
                  
                  
                  (2,294,122
                  )
                  
                  
                  
                  
                  
                  
                  -Change
      in fair value of derivative instrument
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  357,905
                  
                  
                  
                  357,905Foreign
      currency translation gain
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  92,859
                  
                  
                  
                  92,859BALANCE,
      December 31, 2009
                  
                  
                  29,772,780
                  
                  
                  
                  178,638
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  105,540,676
                  
                  
                  
                  -
                  
                  
                  
                  16,282,793
                  
                  
                  
                  97,283,748
                  
                  
                  
                  17,689,867
                  
                  
                  
                  236,975,722Shares
      issued for cash @ $8.00
                  
                  
                  7,475,000
                  
                  
                  
                  44,850
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  56,316,650
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  56,361,500Exercise
      of stock option
                  
                  
                  7,657
                  
                  
                  
                  46
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (46
                  )
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  -Stock
      compensation expense
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  373,649
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  373,649Common
      shares issued for purchase of Hongtai
                  
                  
                  263,158
                  
                  
                  
                  1,579
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  2,598,421
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  2,600,000Net
      income
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  20,810,569
                  
                  
                  
                  
                  
                  
                  
                  20,810,569Adjustment
      to statutory reserve
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  3,228,614
                  
                  
                  
                  (3,228,614
                  )
                  
                  
                  
                  
                  
                  
                  -Change
      in fair value of derivative instrument
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  882,527
                  
                  
                  
                  882,527Reclassification
      of change in cash flow hedge to earnings
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  6,650,000
                  
                  
                  
                  6,650,000Foreign
      currency translation gain
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  1,765,575
                  
                  
                  
                  1,765,575BALANCE,
      June 30, 2010, unaudited
                  
                  
                  37,518,595
                  
                  
                  $
                  225,113
                  
                  
                  
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  164,829,350
                  
                  
                  $
                  -
                  
                  
                  $
                  19,511,407
                  
                  
                  $
                  114,865,703
                  
                  
                  $
                  26,987,969
                  
                  
                  $
                  326,419,542




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


- 4
-


FUSHI
COPPERWELD, INC. AND SUBSIDIARIES


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


JUNE 30,
2010


(Unaudited)





Note
1 - Organization and Line of Business





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





On
October 29, 2007, Fushi acquired Copperweld Bimetallics, LLC, (“Copperweld”), a
limited liability company registered in the state of Delaware, which is the
parent company of Copperweld Bimetallics UK, Ltd. (“Copperweld UK”), a private
company registered in the United Kingdom. Copperweld is a bimetallic sales and
manufacturing operation headquartered in Fayetteville, Tennessee. Copperweld UK
is a manufacturing, distribution and customer service facility located in
Telford, England.





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





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





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





The
Company is in the business of developing, designing, manufacturing, marketing
and distributing bimetallic wire products, principally copper-clad aluminum and
copper-clad steel. The Company’s products are primarily focused on serving
end-user applications in the telecommunication, electrical utility, and
transportation markets. The Company’s products are sold in North
America, South America, Europe, North Africa, the Middle East, and the
Asia.





Note
2 – Summary of Significant Accounting Policies





Basis of
presentation





Management
has included all adjustments, consisting only of normal recurring adjustments,
considered necessary to give a fair presentation of operating results for the
periods presented. Interim results are not necessarily indicative of results for
a full year. The information included in this Form 10-Q should be read
in conjunction with information included in the 2009 annual report filed on Form
10-K.





Principles of
consolidation





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





In
accordance with the interpretation of Generally Accepted Accounting Principles
(GAAP), variable interest entities (VIEs) are generally entities that lack
sufficient equity to finance their activities without additional financial
support from other parties or whose equity holders lack adequate decision making
ability.  All VIEs with which the Company is involved must be
evaluated to determine the primary beneficiary of the risks and rewards of the
VIE. The primary beneficiary is required to consolidate the VIE for
financial reporting purposes.





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


- 5
-


FUSHI
COPPERWELD, INC. AND SUBSIDIARIES


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


JUNE 30,
2010


(Unaudited)





Use of
estimates





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





Revenue
recognition





Sales
revenue is recognized at the date of shipment to customers when a formal
arrangement exists, the price is fixed or determinable, the delivery is
completed, no other significant obligations of the Company exist and
collectability is reasonably assured. Payments received before all of the
relevant criteria for revenue recognition are recorded as customer
deposits. The Company does not establish reserve funds for potential
customer claims because, historically, it has not experienced significant
customer complaints or returns.





Shipping and handling
costs





Shipping
and handling costs related to costs of goods sold are included in selling costs
which totaled $1,356,590 and $985,222 for the six months ended June 30, 2010 and
2009, respectively, and $698,294 and $431,577 for the three months ended June
30, 2010 and 2009, respectively.





Foreign currency translation
and other comprehensive income





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





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





The
balance sheet amounts with the exception of equity at June 30, 2010 were
translated at 6.782 RMB and 0.669 GBP to $1.00 USD, respectively. The balance
sheet amounts with the exception of equity at December 31, 2009 were
translated at 6.826 RMB and 0.619 GBP to $1.00, respectively. The average
translation rates applied to income and cash flow statement amounts for six
months ended June 30, 2010 were 6.825 RMB and 0.656 GBP to $1.00 USD,
respectively.  The average translation rates applied to income and
cash flow statement amounts for six months ended June 30, 2009 were 6.833 RMB
and 0.669 GBP to $1.00 USD, respectively.





Cash
flows from the Company’s operations are calculated based upon the local
currencies. As a result, amounts related to assets and liabilities reported on
the consolidated statements of cash flows will not necessarily agree with
changes in the corresponding balances on the consolidated balance
sheets.





Cash and concentration of
risk





The
Company considers all highly liquid investments with original maturities of
three months or less at the time of purchase to be cash equivalents, for cash
flow statement purposes. Cash includes cash on hand and demand deposits in
accounts maintained with state owned banks within the PRC and with banks in the
UK and the United States (“US”).





Certain
financial instruments, which subject the Company to concentration of credit
risk, consist of cash. The Company maintains balances at financial institutions
which, from time to time, may exceed deposit insurance limits for the banks
located in the US and UK. Balances at financial institutions or state owned
banks within the PRC are not covered by insurance. As of June 30, 2010 and
December 31, 2009, the Company had deposits in excess of federally insured
limits totaling $73,345,142 and $60,231,401, respectively. The Company has
not experienced any losses in such accounts and believes it is not exposed to
any significant risks on its cash in bank accounts.





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


- 6
-


FUSHI
COPPERWELD, INC. AND SUBSIDIARIES


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


JUNE 30,
2010


(Unaudited)





Additional product sales
information





The
Company has expanded its geographic sales area from the Chinese domestic market
to the international market. The following chart shows that the PRC market
remains the largest single market for the Company while approximately 22% and
23% of sales were spread across international markets during the first two
quarters of 2010 and 2009, respectively.





June30,2010
                
                
                June30,2009(Unaudited)
                
                
                (Unaudited)China
                
                $
                100,144,783
                
                
                $
                64,210,887USA
                
                
                20,871,927
                
                
                
                14,933,674Europe
                
                
                4,209,363
                
                
                
                1,943,156Other
      countries
                
                
                3,329,135
                
                
                
                2,470,364Total
      sales
                
                $
                128,555,208
                
                
                $
                83,558,081





The
following chart shows that the PRC market remains the largest single market for
the Company while approximately 21% and 20% of sales were spread across
international markets during the three months ended June 30, 2010 and 2009,
respectively.





June 30, 2010
                
                
                June 30, 2009(Unaudited)
                
                
                (Unaudited)China
                
                $
                54,451,218
                
                
                $
                38,669,320USA
                
                
                10,847,910
                
                
                
                7,626,838Europe
                
                
                2,020,127
                
                
                
                464,910Other
      countries
                
                
                1,686,111
                
                
                
                1,540,477Total
      sales
                
                $
                69,005,366
                
                
                $
                48,301,545





Major customers and
suppliers





Ten major
customers accounted for 25% and 27% of sales for the six months ended June 30,
2010 and 2009, respectively. Total receivables balance due from the top ten
customers at June 30, 2010 and December 31, 2009 amounted to $15,940,467 and
$18,484,819, respectively.





Five
major suppliers provided approximately 67% and 82% of the Company’s raw
materials for the six months ended June 30, 2010 and 2009, respectively. At June
30, 2010, our advances to the major five suppliers were $24,294,168, all of
which was current. At December 31, 2009, our advances to the major five
suppliers were $6,816,228, all of which was current.





Accounts receivables and
allowance for doubtful accounts





During
the normal course of business, the Company extends unsecured credit to its
customers. Management regularly reviews aging of receivables and changes in
payment trends by its customers, and records a reserve when they believe
collection of amounts due are at risk. Accounts considered uncollectible are
written off through a charge to the valuation allowance. As of June 30, 2010 and
December 31, 2009, management concluded its allowance for bad debts was
sufficient.





Inventories





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





The
Company reviews its inventories regularly for possible obsolete goods and
establishes reserves when determined necessary.





Derivative
instrument





Effective
January 1, 2009, the Company began disclosing qualitative disclosures about
objectives and strategies for using derivatives and quantitative disclosures
about the fair value of and gains and losses on derivative instruments. The
Company used a cross currency hedge, a derivative financial instrument, to hedge
the risk of rising interest rates on its variable interest rate debt. This type
of derivative financial instrument is known as a cash flow
hedge.


- 7
-


FUSHI
COPPERWELD, INC. AND SUBSIDIARIES


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


JUNE 30,
2010


(Unaudited)





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





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





Financial
instruments





The
Company analyzes all financial instruments with features of both liabilities and
equity under GAAP requirements. The convertible note issued in 2007 did not
require bifurcation or result in liability accounting. However, with the
adoption of amended GAAP requirements in the first quarter of 2009, the embedded
conversion feature was bifurcated from its host instrument and accounted for
separately as a derivative liability. Additionally, the Company analyzes
registration rights agreements associated with any equity instruments issued to
determine if penalties triggered for late filing should be accrued.





The
Company adopted Fair Value Measurements on January 1, 2008 which defines fair
value and establishes a three-level valuation hierarchy for disclosures of fair
value measurement. Receivables, payables, notes, loans, and derivatives all meet
the definition of financial instruments. The carrying amounts reported in the
balance sheets for accounts receivable, notes receivable, accounts payable,
other payables, and short term bank loans qualify as financial instruments
and are a reasonable estimate of fair value because of the short period of time
between the origination and their expected realization and, if applicable, the
stated interest rate is equivalent to interest rates currently
available.  The three levels are defined as follows:





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


·
              Level
      2 inputs to the valuation methodology 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.





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





Derivative
liability





Using the
criteria under GAAP, a contract is designated as an asset or a liability
and is carried at fair value on a company’s balance sheet, with any changes in
fair value recorded in a company’s results of operations.  The Company
then determines which options, warrants and embedded features require liability
accounting and records the fair value as a derivative liability. The changes in
the values of these instruments are shown in the accompanying consolidated
statements of income and other comprehensive income as “change in fair value of
derivative liability – warrants” or “conversion option.”





Prior to
January 1, 2009, the conversion option embedded in the Company’s $5,000,000
convertible notes was not separately accounted for as a derivative instrument
liability.  However, effective January 1, 2009, the conversion option
met the criteria of a derivative instrument liability because it required that
the conversion price be adjusted in certain circumstances that do not meet the
“fixed-for-fixed’ criteria in that issue.  As a result, the Company
was required to separately account for the embedded conversion option as a
derivative instrument liability, carried at fair value and marked-to-market each
period, with changes in the fair value each period charged or credited to
income.





The
cumulative effect of this change in accounting principle of $1,357,150 has been
recognized as a reduction of the opening balance of retained earnings as January
1, 2009.  That cumulative effect adjustment is the difference between
the amounts previously recognized in the Company’s consolidated balance sheet as
of December 31, 2008 and the amounts that would have been recognized if the
Convertible Notes had been accounted for as a derivative instrument liability
from the issuance date.





The
company repurchased all convertible notes during the third quarter of 2009.
Thus, for the six months ended June 30, 2010 and 2009, the Company recognized a
loss in the change in fair value of derivative liability – conversion option in
the amounts of $0 and $5,122,846, respectively. For the three months ended
June 30, 2010 and 2009, the Company recognized a loss in the change in fair
value of derivative liability – conversion option in the amounts of $0 and
$4,583,809, respectively.


- 8
-


FUSHI
COPPERWELD, INC. AND SUBSIDIARIES


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


JUNE 30,
2010


(Unaudited)





On
February 23, 2009, the Company sold in a private placement 400,000 shares of its
common stock, par value $0.006 per share (the “Common Stock”) for an average
price of $4.80 per share, and warrants to purchase 300,000 shares of Common
Stock, for a total purchase price of $1,920,000. Because of certain cash
redemption clauses related to these warrants, the Company at issuance followed
the criteria in the accounting standards and recorded the fair value of these
warrants as “derivative liability – warrants” in the accompanying consolidated
financial statements.





On June
30, 2009, the Company and the holders amended the original warrant agreements to
remove the certain cash redemption clauses as mentioned above.  As of
June 30, 2009, the Company had re-classified the derivative liability – warrants
to additional paid in capital.  The changes in the values of these
warrants are shown in the accompanying consolidated statements of income and
other comprehensive income.  Thus, for the six months ended June 30,
2010 and 2009 the Company recognized a loss in the change in fair value of
derivative liability – warrants in the amounts of $0 and $752,114,
respectively. For the three months ended June 30, 2010 and 2009, the Company
recognized a loss in the change in fair value of derivative liability – warrants
in the amounts of $0 and $688,876, respectively.





Stock-based
compensation





The
Company records and reports stock-based compensation by measuring the cost of
services received in exchange for an award of equity instruments based on the
grant-date fair value of the award. That cost is recognized over the period
during which services are received. Stock compensation for stock granted to
non-employees is determined as the fair value of the consideration received or
the fair value of equity instruments issued, whichever is more reliably
measured.





Plant and equipment, net





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





EstimatedUsefulLifeBuildings
      and improvements
                  
                  20-39.5
      yearsMachinery
      and equipment
                  
                  7-15
      yearsOffice
      furniture and equipment
                  
                  3-5
      yearsTransportation
      equipment
                  
                  3-5
      years





Construction
in progress represents the costs incurred in connection with the construction of
buildings or new additions to the Company’s plant facilities. Costs classified
to construction in progress include all cost of obtaining the asset and bringing
it to the location and condition necessary for its intended use. No depreciation
is provided for construction in progress until such time as the assets are
completed and are placed into service. Interest incurred during construction is
capitalized into construction in progress. All other interest is expensed
as incurred.  Total interest capitalized for the six months ended June
30, 2010 and 2009 amounted to $0 and $1,350, respectively. No interest was
capitalized for the three months ended June 30, 2010 and 2009.





If a cost
does not extend an assets useful life, increase its productivity, improve its
operating efficiency or add additional production capacity, the cost is regarded
as repairs and maintenance and recognized as an expense as incurred; if it does,
the cost is regarded as major renewals and betterments and
capitalized.  For the three and six months ended June 30, 2010 and
2009, there were no amounts expended for major renewals and betterments that
were capitalized.





The
repairs and maintenance expense for the six months ended June 30, 2010 and 2009
amounted to $627,186 and $324,416, respectively, and for the three months ended
June 30, 2010 and 2009 amounted to $340,523, and $193,998,
respectively.





Long-lived
assets





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





Intangible
assets





Land use
rights – Land in the PRC is government owned. As a result, the government
grants land use rights. The Company amortizes land use rights on a straight line
basis over the 50 year life.


- 9
-


FUSHI
COPPERWELD, INC. AND SUBSIDIARIES


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


JUNE 30,
2010


(Unaudited)





Patents –
Patents are stated at cost, less accumulated amortization. The Company amortizes
patents on a straight line basis over their legal life of 7-20
years.





The
Company evaluates intangible assets for impairment at least annually and more
often whenever events or changes in circumstances indicate that the carrying
value may not be recoverable from its estimated future cash flows.
Recoverability of intangible assets, other long-lived assets, and goodwill is
measured by comparing their net book value to the related projected undiscounted
cash flows from these assets, considering a number of factors including past
operating results, budgets, economic projections, market trends and product
development cycles. If the net book value of the asset exceeds the related
undiscounted cash flows, the asset is considered impaired, and a second test is
performed to measure the amount of impairment loss. Based on its review, the
Company believes that, as of June 30, 2010 and December 31, 2009, the
impairments of its intangible assets amounted to $87,500 and 0,
respectively.





Research and
development





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





Research
and development costs are recorded in general and administrative expenses.
Research and development costs were $12,666 and $107,701 for the six months
ended June 30, 2010 and 2009, respectively and $7,352 and $31,149 for the three
months ended June 30, 2010 and 2009, respectively.





Earnings per
share





The
Company reports earnings per share and presents both basic and diluted earnings
per share in conjunction with the disclosure of the methodology used in
computing such earnings per share. Basic earnings per share excludes dilution
and is computed by dividing income available to common stockholders by the
weighted average common shares outstanding during the period. Diluted earnings
per share takes into account the potential dilution that could occur if
securities or other contracts to issue common stock were exercised and converted
into common stock using the treasury method. For the six and three months ended
June 30, 2010 and 2009, the Company properly excluded options, warrants and
convertible notes with anti-dilutive effects from the diluted earnings per share
calculation.





Income
taxes





The
provision for income taxes consists of taxes currently due plus deferred taxes.
The recognition of deferred income tax liabilities and assets for the estimated
future tax effects is attributable to temporary differences and operating loss
and tax credit carryforwards. A deferred tax liability or asset attributable to
temporary differences is accounted for using the balance sheet liability method
in respect of temporary differences between income tax basis and financial
reporting basis of assets and liabilities. Deferred tax expense or benefit
is the change during the year in deferred tax liabilities and
assets.  Deferred taxes are determined separately for each tax-paying
component (an individual entity or group of entities that is consolidated
for tax purposes) in each tax jurisdiction. Deferred tax liability or asset is
calculated at the tax rates that are expected to apply to the period when the
asset is realized or the liability is settled. Deferred tax is charged or
credited in the income statement, except when it is related to items
credited or charged directly to equity, in which case the deferred tax is also
dealt with in equity. Deferred tax assets and liabilities are offset when they
relate to income taxes levied by the same taxation authority and the Company
intends to settle its current tax assets and liabilities on a net basis.
Deferred tax assets are reduced by a valuation allowance if, based on the weight
of available evidence, it is more likely than not (a likelihood of more than 50
percent) that some portion or all of the deferred tax assets will not be
realized.





The
evaluation of a tax position is a two-step process. The first step is to
determine whether it is more-likely-than-not that a tax position will be
sustained upon examination, including the resolution of any related appeals or
litigation based on the technical merits of that position. The second step is to
measure a tax position that meets the more-likely-than-not threshold to
determine the amount of benefit to be recognized in the financial statements. A
tax position is measured at the largest amount of benefit that is greater than
50 percent likely of being realized upon ultimate settlement. Tax positions that
previously failed to meet the more-likely-than-not recognition threshold should
be recognized in the first subsequent period in which the threshold is met.
Previously recognized tax positions that no longer meet the more-likely-than-not
criteria should be de-recognized in the first subsequent financial reporting
period in which the threshold is no longer met.  Penalties and
interest incurred related to underpayment of income tax are classified as income
tax expense in the year incurred.  No significant penalties or interest
relating to income taxes have been incurred during the six months ended June 30,
2010 and 2009.  GAAP also provides guidance on de-recognition,
classification, interest and penalties, accounting in interim periods,
disclosures and transition.


- 10
-


FUSHI
COPPERWELD, INC. AND SUBSIDIARIES


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


JUNE 30,
2010


(Unaudited)





Value-added
tax





Sales
revenue represents the invoiced value of goods, net of a value-added tax
(“VAT”). All of the Company’s products that are produced and sold in the PRC are
subject to a Chinese VAT at a rate of 17% of the gross sales price. All of the
Company’s products that are manufactured and sold in the UK are subject to a UK
VAT at a rate of 17.5% of the gross sales price. This VAT may be offset by VAT
paid by the Company on raw materials and other materials included in the cost of
producing their finished product. The Company recorded VAT payable and VAT
receivable net of payments in the consolidated financial statements. The VAT tax
return is filed offsetting the payables against the receivables.





Segment
reporting





The
Company uses a “management approach” model for segment reporting. The management
approach model is based on the way a company’s management organizes segments
within the company for making operating decisions and assessing performance. The
Company has determined that it has two reportable segments, PRC and US (See
Note 20).





Recently issued
accounting
pronouncements





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





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





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





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


- 11
-


FUSHI
COPPERWELD, INC. AND SUBSIDIARIES


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


JUNE 30,
2010


(Unaudited)





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





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





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





Reclassification





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





Note–3
- Accounts receivable





Accounts
receivable consisted of the following:





June30,2010
                  
                  
                  December31,2009(Unaudited)Trade
      accounts receivable
                  
                  $
                  65,090,051
                  
                  
                  $
                  68,309,284Allowance
      for bad debts
                  
                  
                  (1,031,398
                  )
                  
                  
                  (1,024,684
                  )Trade
      accounts receivable, net
                  
                  $
                  64,058,653
                  
                  
                  $
                  67,284,600





The
following table consists of allowance for doubtful accounts:





Allowance
      for doubtful accounts at December 31, 2008
                
                $
                318,529Recovery
      of bad debt
                
                
                27,793Accounts
      receivable write off
                
                
                -Effect
      of foreign currency translation
                
                
                (339
                )Allowance
      for doubtful accounts at June 30, 2009 (Unaudited)
                
                
                345,983Additional
      reserves
                
                
                678,032Accounts
      receivable write off
                
                
                -Effect
      of foreign currency translation
                
                
                669Allowance
      for doubtful accounts at December 31, 2009
                
                
                1,024,684Additional
      reserves
                
                
                -Accounts
      receivable write off
                
                
                -Effect
      of foreign currency translation
                
                
                6,714Allowance
      for doubtful accounts at June 30, 2010 (Unaudited)
                
                $
                1,031,398




- 12
-


FUSHI
COPPERWELD, INC. AND SUBSIDIARIES


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


JUNE 30,
2010


(Unaudited)





Note–4 - Inventories





Inventories
consisted of the following:





June30,2010
                  
                  
                  December31,2009(Unaudited)Raw
      materials
                  
                  $
                  13,496,170
                  
                  
                  $
                  5,137,002Work
      in process
                  
                  
                  4,228,269
                  
                  
                  
                  2,777,890Finished
      goods
                  
                  
                  4,925,079
                  
                  
                  
                  3,007,279Totals
                  
                  
                  22,649,518
                  
                  
                  
                  10,922,171Less
      allowance for obsolete inventory
                  
                  
                  (102,389
                  )
                  
                  
                  (46,389
                  )Totals
                  
                  $
                  22,547,129
                  
                  
                  $
                  10,875,782





The
following table consists of allowance for obsolete inventory:





Allowance
      for obsolete inventory at December 31, 2008
                
                $
                160,487Additional
      reserves
                
                
                23,272Recovery
      of reserve
                
                
                -Effect
      of foreign currency translation
                
                
                -Allowance
      for obsolete inventory at June 30, 2009 (Unaudited)
                
                
                183,759Additional
      reserves
                
                
                -Reserves
      write off
                
                
                (137,370
                )Effect
      of foreign currency translation
                
                
                -Allowance
      for obsolete inventory at December 31, 2009
                
                
                46,389Additional
      reserves
                
                
                56,000Recovery
      of reserve
                
                
                -Effect
      of foreign currency translation
                
                
                -Allowance
      for obsolete inventory at June 30, 2010 (Unaudited)
                
                $
                102,389





Note–5
- Plant and equipment





Plant and
equipment consisted of the following:





June 30, 2010
                  
                  
                  December 31, 2009(Unaudited)Land
                  
                  $
                  100,726
                  
                  
                  $
                  100,726Buildings
      and improvements
                  
                  
                  66,321,303
                  
                  
                  
                  43,665,594Transportation
      equipment
                  
                  
                  4,205,211
                  
                  
                  
                  4,177,943Machinery
      and equipment
                  
                  
                  84,291,163
                  
                  
                  
                  74,463,717Office
      furniture
                  
                  
                  1,218,920
                  
                  
                  
                  1,172,121Construction
      in progress
                  
                  
                  6,430,326
                  
                  
                  
                  19,449,384Totals
                  
                  
                  162,567,649
                  
                  
                  
                  143,029,485Less
      accumulated depreciation
                  
                  
                  (31,602,717
                  )
                  
                  
                  (25,643,919
                  )Totals
                  
                  $
                  130,964,932
                  
                  
                  $
                  117,385,566





Construction
in progress at June 30, 2010, consisted of the following:


- 13
-


FUSHI
COPPERWELD, INC. AND SUBSIDIARIES


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


JUNE 30,
2010


(Unaudited)





No.
                        Project Description
                        
                        June30,
                          2010
                        
                        Commencement
                          Date
                        
                        Expected
                          completion
                          date1
                        Manufacturing
      machinery and equipment for CCA/CCS (Multiple)
                        
                        $
                        3,366,335
                        
                        Dec
      2007
                        
                        Sep,
      20102
                        Manufacturing
      machinery and equipment for CCA/CCS (Multiple)
                        
                        
                        2,846,745
                        
                        Dec
      2009
                        
                        Mar,
      20113
                        Manufacturing
      machinery and equipment for CCA
                        
                        
                        217,246
                        
                        Oct
      2009
                        
                        Sep,
      2010Total
                        
                        $
                        6,430,326





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





Project
No. 2 “Manufacturing Machinery and Equipment for CCA/CCS” is primarily related
to ancillary equipment relocated to Dalian, China in December 2009. The
estimated cost to complete Project No.2 as of June 30, 2010 is approximately
$0.3 million.





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





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





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





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





The
change in plant and equipment is as follows:





PlantandequipmentBalance
      as of December 31, 2009
                      
                      $
                      143,029,485Acquired
      through acquisition of Jinchuan and Hongtai
                      
                      
                      16,934,162Acquired
      through cash payment
                      
                      
                      661,324Acquired
      from advanced payments
                      
                      
                      1,290,409Acquired
      from accounts payable
                      
                      
                      12,071Fixed
      assets transferred from CIP
                      
                      
                      13,775,722CIP
      transferred to fixed assets
                      
                      
                      (13,775,722
                      )VAT
      claimed on purchase of capital assets
                      
                      
                      (185,256
                      )FX
      rate effect
                      
                      
                      825,454Balance
      as of June 30, 2010 (Unaudited)
                      
                      $
                      162,567,649





Depreciation
expense for the six months ended June 30, 2010 and 2009 amounted to $5,822,284
and $4,612,405, respectively, and the three months ended June 30, 2010 and 2009
amounted to $3,059,535 and $2,515,197, respectively.


- 14
-


FUSHI
COPPERWELD, INC. AND SUBSIDIARIES


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


JUNE 30,
2010


(Unaudited)





Note
6 – Advances to suppliers





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





Advances
to suppliers consisted of the following:





June30,2010
                  
                  
                  December31,2009(Unaudited)Advances
      for inventories – current
                  
                  $
                  25,177,421
                  
                  
                  $
                  8,582,346Advances
      for equipment – non current
                  
                  
                  711,311
                  
                  
                  
                  1,356,404Total
      advances to suppliers
                  
                  $
                  25,888,732
                  
                  
                  $
                  9,938,750





Note
7 – Intangible assets





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





June30,2010
                          
                          
                          December31,2009(Unaudited)Patents
                          
                          $
                          2,591,370
                          
                          
                          $
                          1,754,270Land
      use rights
                          
                          
                          14,437,371
                          
                          
                          
                          12,472,131Total:
                          
                          
                          17,028,741
                          
                          
                          
                          14,226,401Less:
      accumulated amortization
                          
                          
                          (2,753,728
                          )
                          
                          
                          (2,302,345
                          )Intangible
      assets, net
                          
                          $
                          14,275,013
                          
                          
                          $
                          11,924,056





Amortization
expense for the six months ended June 30, 2010 and 2009 amounted to $255,982 and
$238,283, and for the three months ended June 30, 2010 and 2009 amounted to
$133,495 and $119,207, respectively.





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




June30,
                  
                  Amount2011
                  
                  $
                  567,0292012
                  
                  
                  567,0292013
                  
                  
                  481,6702014
                  
                  
                  423,2892014
                  
                  
                  423,289Thereafter
                  
                  
                  11,812,707





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





Prepaid
taxes and taxes payable consisted of the following:





June30,2010
                  
                  
                  December31,
                    2009(Unaudited)Income
      tax
                  
                  $
                  2,922,667
                  
                  
                  $
                  1,796,019VAT
      provision
                  
                  
                  855,045
                  
                  
                  
                  769,025Others
                  
                  
                  129,324
                  
                  
                  
                  34,011Total
      taxes payable
                  
                  $
                  3,907,036
                  
                  
                  $
                  2,599,055





Income
tax





The
Company and its subsidiaries had the following tax rates for the six months
ended June 30:


- 15
-


FUSHI
COPPERWELD, INC. AND SUBSIDIARIES


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


JUNE 30,
2010


(Unaudited)





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





(a)  China income tax





The
Company’s subsidiaries incorporated in PRC are subject to PRC income tax of 25%.
Fushi International, Dalian Fushi, Jinchuan and Hongtai were incorporated in the
PRC. Beginning January 1, 2008, the new Chinese Enterprise Income Tax (“EIT”)
law replaced the former income tax laws for Domestic Enterprises (“DEs”) and
Foreign Invested Enterprises (“FIEs”). The new standard EIT rate of 25% replaced
the 33% rate previously applicable to both DEs and FIEs. The two years tax
exemption, three years 50% tax reduction tax holiday for production-oriented
FIEs, was eliminated. However, the new EIT Law permits companies to continue to
enjoy their former preferential tax treatments until such treatments expire in
accordance with their current terms.





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





The
estimated tax savings from the tax exemptions for the six months ended June 30,
2010, amounted to $4,542,475. The net effect on earnings per share had the
income tax been applied would decrease basic earnings per share from $0.58 to
$0.45 and diluted earnings per share from $0.57 to $0.44. The estimated tax
savings from the tax exemptions for the six months ended June 30, 2009, amounted
to $2,470,774. The net effect on earnings per share had the income tax been
applied would decrease basic earnings per share from $0.17 to $0.08 and diluted
earnings per share from $0.17 to $0.08.





The
estimated tax savings from the tax exemptions for the three months ended June
30, 2010, amounted to $2,775,376. The net effect on earnings per share had the
income tax been applied would decrease basic earnings per share from $0.36 to
$0.29 and diluted earnings per share from $0.35 to $0.27. The estimated tax
savings from the tax exemptions for the three months ended June 30, 2009,
amounted to $1,462,937. The net effect on earnings per share had the income tax
been applied would decrease basic earnings per share from $0.06 to $0.004 and
diluted earnings per share from $0.06 to $0.004.





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





The
provision for China income tax for the six months ended June 30, 2010 and 2009
was $4,718,650 and $2,280,715, respectively; and for the three months ended June
30, 2010 and 2009 amounted to $2,782,689 and $1,350,404,
respectively.





(b)
UK income tax





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





(c)
US income tax





The
Company is also subject to the United States federal income tax at a tax rate of
34%. Fushi, Fushi Holdings and Copperweld were incorporated in the United States
and as a consolidated unit have incurred net operating losses for income tax
purposes since inception. The net operating loss carry forwards for United
States income taxes may be available to reduce future years’ taxable income.
These carryforwards will expire in varying amounts in the years 2025 to
2030 if not utilized.





The
Company has cumulative undistributed earnings from foreign subsidiaries of
approximately $149 million and $127 million as of June 30, 2010 and December 31
2009, respectively, included in the consolidated retained earnings and will
continue to be indefinitely reinvested in international
operations.  Accordingly, no provision has been made for US deferred
taxes related to future repatriation of these earnings, nor is it practicable to
estimate the amount of income taxes that would have to be provided if we
concluded that such earnings will be remitted in the future.


- 16
-


FUSHI
COPPERWELD, INC. AND SUBSIDIARIES


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


JUNE 30,
2010


(Unaudited)





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





Three months ended June 30,
                          
                          
                          Six months ended June 30,2010
                          
                          
                          2009
                          
                          
                          2010
                          
                          
                          2009(Unaudited)
                          
                          
                          (Unaudited)
                          
                          
                          (Unaudited)
                          
                          
                          (Unaudited)Effective
      foreign income taxes - current
                          
                          
                          (2,782,689
                          )
                          
                          
                          (1,350,404
                          )
                          
                          
                          (4,718,650
                          )
                          
                          
                          (2,280,715
                          )US
      federal income tax - deferred
                          
                          
                          79,529
                          
                          
                          
                          738,180
                          
                          
                          
                          3,526,015
                          
                          
                          
                          2,364,707(Provision)
      benefit for income tax
                          
                          
                          (2,703,160
                          )
                          
                          
                          (612,224
                          )
                          
                          
                          (1,192,635
                          )
                          
                          
                          83,992Effective
      tax rate
                          
                          
                          16.7
                          %
                          
                          
                          28.1
                          %
                          
                          
                          5.4
                          %
                          
                          
                          -1.83
                          %





Deferred tax
assets





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





AmountThe
      deferred tax activity consisted of the following:Deferred
      tax assets at December 31, 2008
                      
                      $
                      7,804,027Additions
      to deferred tax assets
                      
                      
                      3,918,442Deferred
      tax assets at December 31, 2009
                      
                      $
                      11,722,469Additions
      to deferred tax assets
                      
                      
                      3,526,015Deferred
      tax assets at June 30, 2010 (unaudited)
                      
                      $
                      15,248,484





A
valuation allowance is required against deferred tax assets if, based on the
weight of available evidence, it is more-likely-than-not that some or all of the
deferred tax assets will not be realized. Management believes that the
realization of the benefits can be used by their US operating subsidiary in
future periods because expectations are that Copperweld US will have taxable
income in future periods. US companies must generate a total of $44.8 million of
taxable net income (including the recovery of time difference) by years
2025 to 2030 (the recovery of time difference is not subject to those years) in
order to recover the deferred tax asset balance.





Value added
tax





VAT on
sales and VAT on purchases in Dalian China amounted to $17,583,319 and
$12,693,443 for the six months ended June 30, 2010, and $11,187,919 and
$9,072,688 for the six months ended June 30, 2009, respectively. For the three
months ended June 30, 2010, VAT on sales and VAT on purchases in Dalian China
amounted to $9,488,749 and $6,539,349, and for the three months ended June 30,
2009, amounted to $6,710,553 and $1,957,599, respectively.





VAT on
sales and VAT on purchases in Copperweld UK amounted to $121,781 and $314,350
for the six months ended June 30, 2010 and $50,567 and $111,827 for the six
months ended June 30, 2009, respectively. For the three months ended June 30,
2010, VAT on sales and VAT on purchases in Copperweld UK amounted to $59,169 and
$218,541, and for the three months ended June 30, 2009, amounted to $22,385 and
$54,289, respectively.





Sales and
purchases are recorded net of VAT collected and paid as the Company acts as an
agent for the government. VAT taxes are not impacted by the income tax
holiday.


- 17
-





FUSHI
COPPERWELD, INC. AND SUBSIDIARIES


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


JUNE 30,
2010


(Unaudited)





Note–9
- Revolving credit lines





Revolving
credit linesconsisted of the
following:





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





Revolving line of credit–Copperweld
US





Copperweld
maintained a revolving line of credit with Wells Fargo Bank (the “Lender”) under
a Financing Agreement dated April 5, 2007, as amended (the “Financing
Agreement”). On February 2, 2010, the Company paid off its entire obligation on
the revolving line of credit to Wells Fargo in the amount totaling $4,024,270
and closed the line.





The
annual interest rate was equal to the daily three month LIBOR rate (0.25%) plus
six percent under Forbearance Agreement before the line was paid off and
closed.





Revolving line of credit–Copperweld
UK





Copperweld
UK maintains an invoice discounting credit facility with a limit of
approximately $1,121,000 (or ₤750,000). The facility provides cash advances of
85% of approved sales ledger and is secured by trade accounts receivable of
Copperweld UK. The facility has a life minimum of 36 month periods and shall be
automatically renewed every year thereafter based on an annual review conducted
by the financing institute. Copperweld UK is required to maintain a projected
turnover each 12 month period and a minimum net worth of ₤750,000 at all times
if the credit facility has an outstanding balance. The facility had no balance
outstanding as of June 30, 2010 and December 31, 2009.





Total
interest expense on the revolving credit line for the six months ended June 30,
2010 and 2009 amounted to $23,328 and $136,938, respectively. Interest for the
three months ended June 30, 2010 and 2009 was $0 and $46,163,
respectively.





Note
10 – Notes payable





Notes
payable consisted of the following:


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





On
January 24, 2007, the Company and Citadel Equity Fund Ltd ("Citadel") entered a
Notes Purchase Agreement.  In this transaction, Citadel
purchased   $40 million principal amount (less 3% Notes discount
and 4% commission for proceeds of $37,200,000) of guaranteed senior secured
floating rate notes (“HY Notes”) due between July 2009 to January 2012 and a $20
million principal amount (less 4% commission for proceeds of $19,200,000) of the
Company’s 3% senior secured convertible notes (“Convertible Notes”) due January
2012, which are convertible into shares of the Company's common stock at an
initial conversion price of $7.00 per share.





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





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





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





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


- 18
-


FUSHI
COPPERWELD, INC. AND SUBSIDIARIES


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


JUNE 30,
2010


(Unaudited)





Amortization
of commission costs for the six months ended June 30, 2010 and 2009 amounted to
$160,000 and $524,995, respectively. Amortization of commission costs for the
three months ended June 30, 2010 and 2009 amounted to $0 and $ 262,497,
respectively. Interest on long term notes for the six months ended June 30, 2010
and 2009 amounted to $318,492 and $2,185,542, respectively. Interest on long
term notes, for the three months ended June 30, 2010, and 2009 amounted to $0,
and $1,073,352, respectively. Both amortized commission and interest on long
term notes are recorded as interest expense.





Note
11 – Capital lease





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





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





June30,2010
                
                
                December 31, 2009Plant
      facility
                
                $
                266,598
                
                
                $
                266,598Less:
      accumulated depreciation
                
                
                (22,216
                )
                
                
                (8,887
                )Net
      leased plant facility
                
                $
                244,382
                
                
                $
                257,711





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





Year ending June 30,
                      
                      Minimum lease
                        Payment2011
                      
                      $
                      92,5612012
                      
                      
                      100,976Thereafter
                      
                      
                      16,830Total
      minimum lease payments
                      
                      
                      210,367Less:
      interest *1
                      
                      
                      (23,091
                      )Present
      value of net minimum lease payments *2
                      
                      $
                      187,276





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





*2. The
present value of the minimum lease payments is reflected in the balance sheet as
current and non-current obligations under capital lease of $76,557 and $110,719,
respectively.





Interest
expense related to capital leases amounted to $12,635 and $0 for the six months
ended June 30, 2010 and 2009, respectively. Interest expense related to capital
leases amounted to $5,973 and $0 for the three months ended June 30, 2010 and
2009, respectively.





Note
12 – Derivative instrument





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





On April
10, 2007, effective January 24, 2007, the Company entered into a cross currency
swap transaction (the SWAP) with Merrill Lynch Capital Services, Inc. (“MLCS”)
on the $40 million HY notes which converts the USD based variable interest
rate of initially LIBOR + 7% per annum and LIBOR + 5.6% per annum after a
qualified step-down to an 8.3% per annum RMB fixed interest rate. The Swap
requires semi-annual payment in arrears on July 24 and January 24 and matures on
the earlier of (1) cash settlement defined as early termination; or (2) January
24, 2012, at which point the Swap requires an exchange of RMB and USD based
principals. Under the terms of the 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. In July, 2008, the Company placed the
$1,000,000 deposit with MLCS to secure the agreement.


- 19
-


FUSHI
COPPERWELD, INC. AND SUBSIDIARIES


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


JUNE 30,
2010


(Unaudited)





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




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





Changes
in the fair values of derivative instruments accounted for as cash flow hedges
to the extent they qualify for hedge accounting, are recorded in accumulated
other comprehensive income.  For the six months ended June 30, 2010
and 2009, a gain of $882,527 and loss of $3,513,356 was recorded on the
derivative instrument, respectively, in other comprehensive income. For the
three months ended June 30, 2010 and 2009, a loss of $0 and $751,227 was
recorded on the derivative instrument, respectively, in other comprehensive
income.





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





During
the six and three months ended June 30, 2010 and prior to the termination date
the Company paid $1,190,368 and $0 as hedging payment related to the cross
currency hedge payable and recognized $753,666 and $0 of loss from
derivative transactions as cash flow hedge. During the six and three months
ended June 30, 2009, the Company paid $114,580 and $0 as hedging payment
related to the cross currency hedge payable and recognized $382,374 and $215,964
of loss related to derivative transactions as cash flow
hedge.





Changes of cross currency
hedge are as follows:





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





Note
13 - Earnings per share





The
following is information of net income per share:





Three months ended June 30,
                              
                              
                              Six months ended June 30,2010
                              
                              
                              2009
                              
                              
                              2010
                              
                              
                              2009(Unaudited)
                              
                              
                              (Unaudited)
                              
                              
                              (Unaudited)
                              
                              
                              (Unaudited)Net
      income for basic and diluted earnings per share
                              
                              $
                              13,439,809
                              
                              
                              $
                              1,562,700
                              
                              
                              $
                              20,810,569
                              
                              
                              $
                              4,663,617Weighted
      average shares used in basic computation
                              
                              
                              37,343,714
                              
                              
                              
                              27,827,838
                              
                              
                              
                              36,016,078
                              
                              
                              
                              27,696,388Dilutive
      effect of warrants, options and convertible note
                              
                              
                              648,086
                              
                              
                              
                              495,773
                              
                              
                              
                              617,590
                              
                              
                              
                              357,838Weighted
      average shares used in diluted computation
                              
                              
                              37,991,800
                              
                              
                              
                              28,323,611
                              
                              
                              
                              36,633,668
                              
                              
                              
                              28,054,226Earnings
      per shareBasic
                              
                              $
                              0.36
                              
                              
                              $
                              0.06
                              
                              
                              $
                              0.58
                              
                              
                              $
                              0.17Diluted
                              
                              $
                              0.35
                              
                              
                              $
                              0.06
                              
                              
                              $
                              0.57
                              
                              
                              $
                              0.17





Shares
excluded from the calculation of diluted earnings per share:





Date
                          issued/
                          granted
                        
                        Nature
                        
                        Excise price
                        
                        
                        Shares excluded
                          for year diluted
                          EPS calculation
                        
                        Reason for
                          exclusion11/31/2007
                        
                        Warrants
                        
                        $
                        16.80
                        
                        
                        
                        100,000
                        
                        Anti-dilutive05/21/2007
      to 11/13/2007
                        
                        Options
                        
                        $
                        11.75-20.94
                        
                        
                        
                        385,000
                        
                        Anti-dilutive04/10/2008
      to 6/25/2008
                        
                        Options
                        
                        $
                        15.04-23.25
                        
                        
                        
                        126,000
                        
                        Anti-dilutive


- 20
-


FUSHI
COPPERWELD, INC. AND SUBSIDIARIES


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


JUNE 30,
2010


(Unaudited)





Note 14 - Stockholders'
Equity





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





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





Warrants





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





Exercise
                        Price
                      
                      Number
                      
                      
                      Average
                        Remaining Life
                        (years)$
                      3.11
                      
                      
                      279,772
                      
                      
                      
                      1.50$
                      16.80
                      
                      
                      100,000
                      
                      
                      
                      1.40$
                      5.25
                      
                      
                      100,000
                      
                      
                      
                      0.04$
                      5.50
                      
                      
                      100,000
                      
                      
                      
                      0.04$
                      6.00
                      
                      
                      100,000
                      
                      
                      
                      0.55679,772
                      
                      
                      
                      0.92





The
following is a summary of the warrant activity:





Number of
                                                      Warrants
                                                      Outstanding
                                                    
                                                    
                                                    Weighted
                                                      -Average
                                                      Exercise
                                                      Price
                                                    
                                                    Average
                                                      Remaining
                                                      Contractual
                                                      LifeBalance,
      at December 31, 2008
                                                    
                                                    
                                                    432,124
                                                    
                                                    
                                                    $
                                                    6.28
                                                    
                                                    2.92
      yearsGranted
                                                    
                                                    
                                                    300,000
                                                    
                                                    
                                                    $
                                                    5.58Forfeited
                                                    
                                                    
                                                    -Exercised
                                                    
                                                    
                                                    -Balance,
      at June 30, 2009 (unaudited)
                                                    
                                                    
                                                    732,124
                                                    
                                                    
                                                    $
                                                    5.99
                                                    
                                                    2.05
      yearsGranted
                                                    
                                                    
                                                    -Forfeited
                                                    
                                                    
                                                    -Exercised
                                                    
                                                    
                                                    (52,352
                                                    )
                                                    
                                                    $
                                                    3.11Balance,
      at December 31, 2009
                                                    
                                                    
                                                    679,772
                                                    
                                                    
                                                    $
                                                    6.22
                                                    
                                                    1.24
      yearsGranted
                                                    
                                                    
                                                    -Forfeited
                                                    
                                                    
                                                    -Exercised
                                                    
                                                    
                                                    -Balance,
      at June 30, 2010 (unaudited)
                                                    
                                                    
                                                    679,772
                                                    
                                                    
                                                    $
                                                    6.22
                                                    
                                                    0.92
      years





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


- 21
-


FUSHI
COPPERWELD, INC. AND SUBSIDIARIES


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


JUNE 30,
2010


(Unaudited)





Note
15 – Stock based compensation




2007 Incentive
Plan




On
October 24, 2007, the Board of Directors approved the adoption of the Fushi
Copperweld, Inc. 2007 Stock Incentive Plan (the “2007 Plan”).   The
majority of the options awarded under the 2007 Plan vest in two years from the
grant date and the majority of the options granted expire in 3 years. 
Under the 2007 Plan, the Company granted share options and restricted stock to
all executives, directors and employees as summarized in below two
tables:




Grant
                                    Year
                                  
                                  
                                  Granted
                                    Options
                                    (Shares)
                                  
                                  
                                  Forfeited and expired
                                    Option
                                    (Shares)
                                  
                                  
                                  
                                  Exercise Price
                                    Option
                                    ($)2007
                                  
                                  
                                  
                                  335,000
                                  
                                  
                                  
                                  325,000
                                  
                                  
                                  $
                                  16.44-$20.942008
                                  
                                  
                                  
                                  151,000
                                  
                                  
                                  
                                  25,000
                                  
                                  
                                  $
                                  15.04-$23.252009
                                  
                                  
                                  
                                  688,000
                                  
                                  
                                  
                                  198,300
                                  
                                  
                                  $
                                  4.95-$7.932010
                                  
                                  
                                  
                                  156,530
                                  
                                  
                                  
                                  24,555
                                  
                                  
                                  $
                                  8.61Total
                                  
                                  
                                  
                                  1,330,530
                                  
                                  
                                  
                                  572,855





Grant
                    Year
                  
                  Granted
                    Restricted Stock
                    (Shares)
                  
                  
                  Forfeited and
                    expired
                    Restricted Stock
                    (Shares)
                  
                  
                  Vested
                    Restricted stock
                    (Shares)
                  
                  
                  Grant date Fair
                    market value
                    ($)2009
                  
                  
                  50,000
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  $
                  8.082010
                  
                  
                  51,000
                  
                  
                  
                  -
                  
                  
                  
                  25,500
                  
                  
                  $
                  8.61Total
                  
                  
                  101,000
                  
                  
                  
                  -
                  
                  
                  
                  25,500





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





The fair
value of each option award is estimated on the date of grant using the
Black-Scholes model using the following weighted-average
assumptions:




Sixmonths ended,
                    2010
                  
                  Year ended,
                    2009
                  
                  Year ended
                    2008
                  
                  Year ended
                    2007Risk-free interest
      rate(1)
                  
                  0.87%
                  
                  0.78%-2.2%
                  
                  1.84%-2.82%
                  
                  3.54%-4.57%Expected dividend
      yield(2)
                  
                  -
                  
                  -
                  
                  -
                  
                  -Expected option
      life(3)
                  
                  2
      Years
                  
                  2-5
      Years
                  
                  0.5-2
      Years
                  
                  2
      YearsExpected stock price
      volatility(4)
                  
                  60%
                  
                  60%
                  
                  50%
                  
                  50%Weighted
      average fair value of options granted
                  
                  $2.88
                  
                  $2.77
                  
                  $4.57
                  
                  $4.08




(1)
            Risk-free interest
      rate – Risk-free interest rate is based on US Treasury
      zero-coupon issues with maturity terms similar to the expected term on the
      expected life of the option. An increase in the risk-free interest rate
      will increase compensation expense.





(2)
            Expected dividend
      yield – The dividend
      yield was estimated by the Company based on its expected dividend policy
      over the expected term of the options. The Company has no plans to pay any
      dividend in the foreseeable future. Therefore, the Company considers the
      dividend yield to be zero.





(3)
            Expected option
      life – Because the Company has no historical share option
      exercise experience to estimate future exercise patterns, the expected
      life was determined using the simplified method as these awards meet the
      definition of “plain-vanilla” options under the rules prescribed by
      accounting standards. An increase in expected life will increase
      compensation expense.


- 22
-


FUSHI
COPPERWELD, INC. AND SUBSIDIARIES


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


JUNE 30,
2010


(Unaudited)





(4)
            Expectedstock price
      volatility – This is a measure of the amount by which a price
      has fluctuated or is expected to fluctuate. As a forward-looking measure,
      the Company uses implied volatility of Company’s 225 days call options
      with strike price of $5.00 on March 7, 2009 (source: Morningstar.com),
      adjusted by the 2-year historical volatility of the Company’s stock as
      well as 2-year historical volatilities of the Company’s comparable public
      companies, to calculate the expected stock price volatility. An increase
      in the expected volatility will increase compensation
      expense.





Stock
compensation expense is recognized based on awards expected to vest.  The
forfeitures are estimated at the time of grant and revised in subsequent periods
pursuant to actual forfeitures, if it differs from those estimates.




The
Company recognized $373,648 and $928,727 share-based compensation expense in
general and administrative expenses for the six months ended June 30, 2010 and
2009, respectively. For the three months ended June 30, 2010 and 2009, the
Company recognized share-based compensation expense of $180,591 and $337,859,
respectively.





As of
June 30, 2010 and 2009, the total compensation cost related to stock options not
yet recognized was $1,125,106 and $419,591 and will be recognized over the
weighted average life of 0.97 years and 0.16 years, respectively. At June 30,
2010 and 2009 the total compensation cost related to restricted stock not yet
recognized was $623,555 and $0 and will be recognized over the weighted average
life of 1.7 years and 0 years, respectively.





As of
June 30, 2010, the 581,500 executive options, 240,000 director options and
283,925 employee options outstanding had fair values of approximately
$2,274,584, $912,761 and $807,810, respectively.





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





Number of
                                Options
                                Outstanding
                              
                              
                              Weighted
                                -Average
                                Exercise
                                Price
                              
                              
                              Aggregate
                                Intrinsic
                                ValueBalance,
      December 31, 2008
                              
                              
                              1,067,333
                              
                              
                              $
                              14.9
                              
                              
                              
                              -Granted
                              
                              
                              388,000
                              
                              
                              $
                              4.95
                              
                              
                              
                              -Forfeited
                              
                              
                              (35,250
                              )
                              
                              $
                              4.95
                              
                              
                              
                              -Exercised
                              
                              
                              (4,000
                              )
                              
                              
                              4.95
                              
                              
                              
                              -Balance,
      June 30, 2009 (unaudited)
                              
                              
                              1,416,083
                              
                              
                              $
                              12.42
                              
                              
                              
                              -Granted
                              
                              
                              300,000
                              
                              
                              $
                              6.19
                              
                              
                              
                              -Forfeited
                              
                              
                              (13,800
                              )
                              
                              $
                              4.95
                              
                              
                              
                              -Expired
                              
                              
                              (95,000
                              )
                              
                              $
                              17.19
                              
                              
                              
                              -Exercised
                              
                              
                              (9,000
                              )
                              
                              $
                              4.95
                              
                              
                              
                              -Balance,
      December 31, 2009
                              
                              
                              1,598,283
                              
                              
                              $
                              11.38
                              
                              
                              $
                              2,383,162Granted
                              
                              
                              156,530
                              
                              
                              $
                              8.61
                              
                              
                              
                              -Forfeited
                              
                              
                              (138,805
                              )
                              
                              $
                              7.45
                              
                              
                              
                              -Expired
                              
                              
                              (496,333
                              )
                              
                              $
                              13.92
                              
                              
                              
                              -Exercised
                              
                              
                              (14,250
                              )
                              
                              $
                              4.95
                              
                              
                              
                              -Balance,
      June 30, 2010 (unaudited)
                              
                              
                              1,105,425
                              
                              
                              $
                              10.42
                              
                              
                              $
                              897,714





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




Outstanding Option
                          
                          
                          Exercisable OptionsExercise
                            Price
                          
                          
                          Number
                          
                          
                          Average
                            Remaining
                            Contractual
                            Life
                          
                          
                          Average
                            Exercise
                            Price
                          
                          
                          Number
                          
                          
                          Weighted
                            Average
                            Exercise
                            Price$
                          12.30
                          
                          
                          
                          100,000
                          
                          
                          1.89
      years
                          
                          
                          $
                          12.30
                          
                          
                          
                          100,000
                          
                          
                          $
                          12.30$
                          11.75
                          
                          
                          
                          150,000
                          
                          
                          2.01
      years
                          
                          
                          $
                          11.75
                          
                          
                          
                          150,000
                          
                          
                          $
                          11.75$
                          13.70
                          
                          
                          
                          125,000
                          
                          
                          1.24
      years
                          
                          
                          $
                          13.70
                          
                          
                          
                          125,000
                          
                          
                          $
                          13.70$
                          16.36
                          
                          
                          
                          10,000
                          
                          
                          1.37
      years
                          
                          
                          $
                          16.36
                          
                          
                          
                          10,000
                          
                          
                          $
                          16.36$
                          23.25
                          
                          
                          
                          59,000
                          
                          
                          1.50
      years
                          
                          
                          $
                          23.25
                          
                          
                          
                          59,000
                          
                          
                          $
                          23.25$
                          15.04
                          
                          
                          
                          17,000
                          
                          
                          1.78
      years
                          
                          
                          $
                          15.04
                          
                          
                          
                          17,000
                          
                          
                          $
                          15.04$
                          20.04
                          
                          
                          
                          50,000
                          
                          
                          2.89
      years
                          
                          
                          $
                          20.04
                          
                          
                          
                          50,000
                          
                          
                          $
                          20.04$
                          4.95
                          
                          
                          
                          262,450
                          
                          
                          2.50
      years
                          
                          
                          $
                          4.95
                          
                          
                          
                          262,450
                          
                          
                          $
                          4.95$
                          7.93
                          
                          
                          
                          200,000
                          
                          
                          9.41
      years
                          
                          
                          $
                          7.93
                          
                          
                          
                          -
                          
                          
                          $
                          7.93$
                          8.61
                          
                          
                          
                          131,975
                          
                          
                          6.51
      years
                          
                          
                          $
                          8.61
                          
                          
                          
                          38,614
                          
                          
                          $
                          8.61Total
                          
                          
                          
                          1,105,425
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          812,064


- 23
-


FUSHI
COPPERWELD, INC. AND SUBSIDIARIES


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


JUNE 30,
2010


(Unaudited)





Note
16 - Statutory reserves





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





Surplus reserve
fund





The
Company is required to transfer 10% of its China entities net income, as
determined in accordance with the PRC accounting rules and regulations to a
statutory surplus reserve fund until such reserve balance reaches 50% of the
Company’s China entities registered capital. As of June 30, 2010, the Company’s
China entities have total registered capital of approximately $117 million (RMB
796 million). As of June 30, 2010 and December 31, 2009, the Company had
statutory reserves amounting to $19,511,407 and $16,282,793, respectively. The
Company’s China entities are required to contribute an additional $38 million
from future earnings if the company’s China facility has net income for future
years.





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





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





Note
17 – Employee pension





The
Company’s employee pension for China employees generally includes two parts: the
first to be paid by the Company is 20% of the employee’s actual salary in the
prior year. The other part, paid by the employee, is 8% of the actual salary.
The Company made $83,255 and $77,602 in contributions of employment benefits for
China employees in the six months ended June 30, 2010 and 2009, respectively.
For the three months ended June 30, 2010 and 2009, the Company made
contributions of employee benefits for China employees of $43,868 and $45,611,
respectively.





US
employees are provided a 401(k) plan.  US employees are eligible for the
defined contribution plan after three-months of full-time employment. 
Employee deferrals and company matching are 100% vested immediately upon
eligibility. As of June 1, 2009, the Company no longer matches employee
contributions for US employees. The Company made $0 and $47,729 in contributions
of employment benefits for US employees in the six months ended June 30, 2010
and 2009, respectively. For the three months ended June 30, 2010 and 2009, the
Company made contributions of employment benefits for US employees of $0 and
$17,189, respectively.





Copperweld
UK operates a defined contribution pension scheme for employees. All UK
employees are eligible to join the pension on satisfactory completion of their
trial period, which is typically three months. UK employees can contribute as
much as they like subject to current UK laws, but the company will match only
the first 2.5% of gross pay in the current year. The assets of the scheme are
held separately from those of the company. The annual contributions payable are
charged to expense. The Company made $4,525 and $5,400 in contributions of
employment benefits for UK employees in the six months ended June 30, 2010 and
2009. For the three months ended June 30, 2010 and 2009, the Company made
contributions of employment benefits for UK employees of $2,340 and $2,622,
respectively.





Note
18 - Commitments and contingencies





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





Note
19 – Business combination





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


- 24
-


FUSHI
COPPERWELD, INC. AND SUBSIDIARIES


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


JUNE 30,
2010


(Unaudited)





Acquisition of
Jinchuan





On
January 21, 2010, the Company’s PRC subsidiary, Fushi International (Dalian)
Bimetallic Cable Co., Ltd. (“Fushi International”) had entered into an agreement
to purchase 100% of the equity interest of Dalian Jinchuan Electric Cable Co.,
Ltd. (“Jinchuan”), a Chinese manufacturer of electric wire and electric cables,
from Jinchuan’s shareholders.





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





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





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





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





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





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





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





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





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





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





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





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


- 25
-


FUSHI
COPPERWELD, INC. AND SUBSIDIARIES


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


JUNE 30,
2010


(Unaudited)





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





The
results of operations of the acquired company are included in the consolidated
statement of income since February 5, 2010 (the acquisition date) to the end of
the quarter. Jinchuan’s revenue amounted to $13,394,516 and net income amounted
to $1,685,822 which was included in the consolidated statements of income and
other comprehensive income for the six months ended June 30, 2010. Jinchuan’s
revenue amounted to $9,127,375 and net income amounted to $1,224,071 which was
included in the consolidated statements of income and other comprehensive income
for the three months ended June 30, 2010.





Acquisition of
Hongtai





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





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





The
Company also announced a strategic investment in Yixing, an industrial center
within the Shanghai economic zone, centrally located between Shanghai, Nanjing,
and Hangzhou in Eastern China.  The Company will relocate Hongtai
assets and key personnel to Yixing and establish Fushi International (Jiangsu)
Bimetallic Cable Co., Ltd. (“Fushi Jiangsu”).  By relocating to
Yixing, Fushi Jiangsu will be able to leverage the center's extensive
transportation network to deliver its CCA and CCAM products to customers within
the Shanghai economic zone more quickly and cost effectively. The Company
expects the establishment of Fushi (Jiangsu) to be mildly accretive to earnings
in 2010.





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





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





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





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





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





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





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





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


- 26
-


FUSHI
COPPERWELD, INC. AND SUBSIDIARIES


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


JUNE 30,
2010


(Unaudited)





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





The
results of operations of the acquired company are included in the consolidated
statement of income since May 31, 2010 (the acquisition date) to the end of the
quarter. Since acquisition of Hongtai, the Company has been working on
relocating the assets and key personnel of Hongtai to Yixing to establish Fushi
Jiangsu. Thus, Hongtai has yet to begin operations since acquisition date. The
Company reflected a net loss amounting to $89,799 that was included in the
consolidated statements of income and other comprehensive income for the three
and six months ended June 30, 2010.





Supplemental
Pro Forma





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





Proforma
                  
                  For the three
                    months ended
                    June 30,
                  
                  
                  For the three
                    months ended
                    June 30,
                  
                  
                  For the six
                    months ended
                    June 30,
                  
                  
                  For the six
                    months ended
                    June 30,2010
                  
                  
                  2009
                  
                  
                  2010
                  
                  
                  2009Sales
                  
                  $
                  70,695,518
                  
                  
                  $
                  57,704,974
                  
                  
                  $
                  133,904,554
                  
                  
                  $
                  99,510,940Cost
      of Goods Sold
                  
                  
                  50,515,589
                  
                  
                  
                  41,920,866
                  
                  
                  
                  94,923,669
                  
                  
                  
                  73,140,166Gross
      Profit
                  
                  
                  20,179,929
                  
                  
                  
                  15,784,108
                  
                  
                  
                  38,980,885
                  
                  
                  
                  26,370,774Operating
      Expenses
                  
                  
                  5,602,683
                  
                  
                  
                  4,512,118
                  
                  
                  
                  10,793,945
                  
                  
                  
                  9,043,390Income
      from Operations
                  
                  
                  14,577,246
                  
                  
                  
                  11,271,990
                  
                  
                  
                  28,186,940
                  
                  
                  
                  17,327,384Other
      Income (Expense), net
                  
                  
                  2,079,182
                  
                  
                  
                  -7,016,297
                  
                  
                  
                  -4,894,630
                  
                  
                  
                  -9,278,582Income
      before Income Tax
                  
                  
                  16,656,428
                  
                  
                  
                  4,255,693
                  
                  
                  
                  23,292,310
                  
                  
                  
                  8,048,802Income
      tax expense
                  
                  
                  2,831,526
                  
                  
                  
                  1,130,495
                  
                  
                  
                  1,516,422
                  
                  
                  
                  781,381Net
      Income
                  
                  $
                  13,824,902
                  
                  
                  $
                  3,125,198
                  
                  
                  $
                  21,775,888
                  
                  
                  $
                  7,267,421





Note 20 - Segment Information





Pursuant
to the “Disclosures about Segments of an Enterprise and Related Information”
from GAAP, which establishes standards for reporting information about operating
segments. Operating segments are defined as components of an enterprise about
which separate financial information is available that is evaluated regularly by
the chief operating decision maker in deciding how to allocate resources and
assess performance. The Company’s chief operating decision makers have been
identified as the Chief Executive Officer and Chief Financial Officer. The
accounting policies of the reportable segments are the same as those described
in the summary of significant accounting policies.





For the
years ended June 30, 2010 and 2009, the Company has two reportable
segments: PRC, and US. We analyze our worldwide operations based on two
geographic reportable segments: 1) “PRC” which consists of our facilities
Located in the People’s Republic of China (PRC) and 2) ”US” which consists of
our Fayetteville, Tennessee, (US), and Telford, England, (UK)
facilities.


- 27
-


FUSHI
COPPERWELD, INC. AND SUBSIDIARIES


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


JUNE 30,
2010


(Unaudited)





The PRC
segment, through Dalian, Jinchuan and Hongtai manufacturing facility, is engaged
in developing, designing, manufacturing, marketing and distributing copper-clad
bi-metallic engineered conductor products, principally copper-clad aluminum
(CCA) and primarily services the Asia-Pacific region, and specifically
the PRC market.





The US
segment, consisting of two manufacturing facilities, one in Fayetteville,
Tennessee, USA and a second in Telford, England, are engaged in developing,
designing, manufacturing, marketing and distributing copper-clad bimetallic
engineered conductor products, principally CCA and copper-clad steel
(CCS) and primarily services the North and South American, European, Middle
Eastern and North African markets. Due to the size of the UK operations,
the Company combined it with the US operation as one segment.





The below
table illustrates the composition of the UK operations:





For the six months
                      ended June30,2010
                    
                    
                    For the six months
                      ended June30,2009Revenue
                    
                    $
                    2,285,317
                    
                    
                    $
                    1,398,157Net
      income (loss)
                    
                    
                    60,032
                    
                    
                    
                    (186,234
                    )





For thethree months
                      ended June30,2010
                    
                    
                    For the three months
                      ended June30,2009Revenue
                    
                    $
                    1,135,015
                    
                    
                    $
                    701,437Net
      income (loss)
                    
                    
                    27,590
                    
                    
                    
                    (156,979
                    )





June30,2010
                  
                  
                  December 31, 2009Assets
                  
                  $
                  2,950,494
                  
                  
                  $
                  2,673,254




The
Company evaluates segment performance and allocates resources based on segment
gross profit and segment operating income. Segment operating income represents
income from continuing operations before interest income, interest expense,
other income (expense), other financial costs and income tax.





Corporate
operating expenses are primarily stock-based compensation, professional fees and
outside service expenses.





Analysis
of reportable segments (management information):





For the six months ended June30, 2010PRC
                
                
                US
                
                
                Corporate
                
                
                Eliminations
                
                
                TotalRevenues
                
                $
                103,097,984
                
                
                $
                27,425,876
                
                
                $
                -
                
                
                $
                (1,968,652
                )
                
                $
                128,555,208Gross
      Profit
                
                
                33,556,710
                
                
                
                3,854,703
                
                
                
                -
                
                
                
                -
                
                
                
                37,411,413Selling,
      general and administrative expenses
                
                
                5,727,972
                
                
                
                2,656,730
                
                
                
                2,151,494
                
                
                
                -
                
                
                
                10,536,196Operating
      income (loss)
                
                
                27,828,738
                
                
                
                1,197,973
                
                
                
                (2,151,494
                )
                
                
                -
                
                
                
                26,875,217Capital
      expenditures
                
                
                1,594,149
                
                
                
                142,246
                
                
                
                -
                
                
                
                -
                
                
                
                1,736,395Depreciation
      expense (Included in cost of goods sold and Operating
    expense)
                
                $
                4,848,652
                
                
                $
                973,632
                
                
                $
                -
                
                
                $
                -
                
                
                $
                5,822,284


- 28
-





FUSHI
COPPERWELD, INC. AND SUBSIDIARIES


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


JUNE 30,
2010


(Unaudited)





For
      the three months ended June 30, 2010PRC
                
                
                US
                
                
                Corporate
                
                
                Eliminations
                
                
                TotalRevenues
                
                $
                55,733,198
                
                
                $
                14,119,871
                
                
                $
                -
                
                
                $
                (847,703
                )
                
                $
                69,005,366Gross
      Profit
                
                
                17,542,417
                
                
                
                2,047,730
                
                
                
                -
                
                
                
                -
                
                
                
                19,590,147Selling,
      general and administrative expenses
                
                
                3,057,711
                
                
                
                1,319,864
                
                
                
                1,148,785
                
                
                
                -
                
                
                
                5,526,360Operating
      income (loss)
                
                
                14,484,706
                
                
                
                727,866
                
                
                
                (1,148,785
                )
                
                
                -
                
                
                
                14,063,787Capital
      expenditures
                
                
                347,236
                
                
                
                126,666
                
                
                
                -
                
                
                
                -
                
                
                
                473,902Depreciation
      expense (Included in cost of goods sold and Operating
    expense)
                
                $
                2,574,346
                
                
                $
                485,189
                
                
                $
                -
                
                
                $
                -
                
                
                $
                3,059,535




For
      the six months ended June 30, 2009PRC
                
                
                US
                
                
                Corporate
                
                
                Eliminations
                
                
                TotalRevenues
                
                $
                65,817,481
                
                
                $
                17,649,847
                
                
                $
                -
                
                
                $
                90,753
                
                
                $
                83,558,081Gross
      Profit
                
                
                20,888,875
                
                
                
                1,503,180
                
                
                
                -
                
                
                
                -
                
                
                
                22,392,055Selling,
      general and administrative expenses
                
                
                3,493,460
                
                
                
                2,931,883
                
                
                
                2,100,821
                
                
                
                -
                
                
                
                8,526,164Operating
      income (loss)
                
                
                17,395,415
                
                
                
                (1,428,703
                )
                
                
                (2,100,821
                )
                
                
                -
                
                
                
                13,865,891Capital
      expenditures
                
                
                5,353,890
                
                
                
                255,645
                
                
                
                -
                
                
                
                -
                
                
                
                5,609,535Depreciation
      expense (Included in cost of goods sold and Operating
    expense)
                
                $
                3,780,340
                
                
                $
                832,065
                
                
                $
                -
                
                
                $
                -
                
                
                $
                4,612,405





For
      the three months ended June 30, 2009PRC
                
                
                US
                
                
                Corporate
                
                
                Eliminations
                
                
                TotalRevenues
                
                $
                39,480,037
                
                
                $
                8,879,618
                
                
                $
                
                
                
                $
                (58,110
                )
                
                $
                48,301,545Gross
      Profit
                
                
                12,229,639
                
                
                
                1,223,041
                
                
                
                
                
                
                
                
                
                
                
                13,452,680Selling,
      general and administrative expenses
                
                
                1,829,642
                
                
                
                1,335,836
                
                
                
                1,088,297
                
                
                
                
                
                
                
                4,253,775Operating
      income (loss)
                
                
                10,399,997
                
                
                
                (112,795
                )
                
                
                (1,088,297
                )
                
                
                
                
                
                
                9,198,905Capital
      expenditures
                
                
                100,857
                
                
                
                78,280
                
                
                
                
                
                
                
                
                
                
                
                179,137Depreciation
      expense (Included in cost of goods sold and Operating
    expense)
                
                $
                2,046,456
                
                
                $
                468,741
                
                
                $
                
                
                
                $
                
                
                
                $
                2,515,197





PRC
                  
                  
                  US
                  
                  
                  Corporate
                  
                  
                  TotalAs
      of June 30, 2010Property,
      plant and equipment, net
                  
                  $
                  119,715,464
                  
                  
                  $
                  11,249,468
                  
                  
                  $
                  -
                  
                  
                  $
                  130,964,932Total
      assets
                  
                  $
                  300,888,155
                  
                  
                  $
                  28,990,694
                  
                  
                  $
                  18,190,668
                  
                  
                  $
                  348,069,517As
      of December 31, 2009Property,
      plant and equipment, net
                  
                  $
                  105,190,257
                  
                  
                  $
                  12,195,309
                  
                  
                  $
                  -
                  
                  
                  $
                  117,385,566Total
      assets
                  
                  $
                  254,054,799
                  
                  
                  $
                  25,902,180
                  
                  
                  $
                  14,777,086
                  
                  
                  $
                  294,734,065


- 29
-





FUSHI
COPPERWELD, INC. AND SUBSIDIARIES


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


JUNE 30,
2010


(Unaudited)





Note
21 – Supplemental information for cash flow statement





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





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





See Note
19 – Business Combination for detail.





Note
22 – Subsequent Events





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


- 30
-




Item 2. Management’s Discussion and Analysis of
Financial Condition and Results of Operations





The
following discussion of our financial condition and results of operations should
be read in conjunction with our consolidated financial statements and the notes
to those financial statements appearing elsewhere in this Form
10-Q.





Certain
statements in this Report constitute "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, Section 21E of the
Securities Exchange Act of 1934 and the Private Securities Litigation Reform Act
of 1995. Such forward-looking statements include statements, which involve risks
and uncertainties, regarding, among other things, (a) our projected sales,
profitability, and cash flows, (b) our growth strategies, (c) anticipated trends
in our industries, (d) our future financing plans, and (e) our anticipated needs
for, and use of, working capital. They are generally identifiable by use of the
words “may,” “will,” “should,” “anticipate,” “estimate,” “plan,” “potential,”
“project,” “continuing,” “ongoing,” “expects,” “management believes,”
“we believe,” “we intend,” or the negative of these words or other
variations on these words or comparable terminology. Actual events or results
may differ materially from those discussed in forward-looking statements as a
result of various factors, including, without limitation, the risks outlined
under “Risk Factors” in our Annual Report on Form 10-K and matters described in
this report generally. In light of these risks and uncertainties, there can be
no assurance that the forward-looking statements contained in this filing will
in fact occur. You should not place undue reliance on these forward-looking
statements.





The
forward-looking statements speak only as of the date on which they are made,
and, except to the extent required by federal securities laws, we undertake no
obligation to update any forward-looking statement to reflect events or
circumstances after the date on which the statement is made or to reflect the
occurrence of unanticipated events.




The
"Company", "we," "us," "our," and the "Registrant" refer to (i) Fushi
Copperweld, Inc., (ii) Fushi Holdings, Inc., (iii) Fushi International (Dalian)
Bimetallic Cable Co., Ltd. (formerly Dalian Diversified Product Inspections
Bimetallic Cable, Co., Ltd.) (“Fushi International (Dalian)”), (iv) Dalian
Jinchuan Power Cable Co., Ltd. (“Jinchuan”); (v) Shanghai Hongtai
Industrial Co., Ltd.( “Hongtai”) (vi) Dalian Fushi Bimetallic Wire
Manufacturing, Co., Ltd. (“Dalian Fushi”), (vii) Copperweld Holdings, LLC,
(viii) Copperweld Bimetallic, LLC (“Copperweld”) and (ix) Copperweld Bimetallics
UK, LLC. Unless the context otherwise requires, all references to
(i)  “PRC” and “China” are to the People’s Republic of China;
(ii) “U.S. dollar,” “$” and “US$” are to United States dollars; (iii) “RMB” are
to Yuan Renminbi of China; (iv) “Securities Act” are to the Securities Act of
1933, as amended; and (v) “Exchange Act” are to the Securities Exchange Act of
1934, as amended.





Overview





We
believe we are one of the world’s largest producers, based on manufacturing
capacity, and a leading innovator of bimetallic wire products, principally
copper-clad aluminum (CCA) and copper-clad steel (CCS) products. Our products
are primarily used in the telecommunications, electrical utility, and
transportation industries, and are sold as conductor components in the
broadband wire and cable market, and finished products in the electrical utility
and transportation markets.  Our products significantly reduce the amount
of copper required to manufacture a conductor, and since copper is expensive; we
significantly reduce conductor costs through the addition of an aluminum or
steel core.  CCA and CCS conductors are generally used as substitutes for
solid copper conductors where either cost savings or specific electrical and/or
physical attributes are either required or desired.  In the second
fiscal quarter of 2010, our products were sold to over 400 customers in over 30
countries. We market our products under the trademarked names of “Copperweld®”
and “FushiTM,” and sell either directly to cable manufacturers or through
distributors or sales agents to end-users.





Although
we are engaged in one line of business, as a result of the differing markets
served by each of our manufacturing facilities and significant differences in
the operating results among each of our facilities, we analyze our worldwide
operations based on two geographic reportable segments: 1) “PRC” which consists
of our facilities located in the People’s Republic of China (PRC) and 2) “US”
which consists of our Fayetteville, Tennessee, US, and Telford, England, (UK)
facilities.





We
believe we have a strong market position in all markets in which we compete due
to the quality of our products, superior customer service, geographic and
customer diversity and our ability to deliver superior products while operating
as a low cost provider.  As a result, we believe we are now one of the
leading producers of bimetallic wire products in the world and are one of the
market leaders in North America, Europe, Northern Africa, the Middle East and
the People’s Republic of China.  We continue to expand within current and
developing markets and create shareholder value by:





·
            Investing
      in organic and inorganic growth in both infrastructure-based and
      fast-growing markets;





·
            Focusing
      on new, higher-margin products, applications and markets through
      investment in new machinery and research and
  development;





·
            Improving
      business processes throughout the Company by focusing on key performance
      indicators and operational
excellence;





·
            Strategically
      hiring and developing  talent, to improve the effectiveness of
      our performance management processes;
and


- 31
-


·
            Protecting
      and enhancing the Fushi Copperweld
brand.





To
accomplish these goals, we are focused on continuously improving operational
efficiency in areas we view to be vital: quality, pricing, delivery, cost,
customer service and innovation. We also take an opportunistic approach to
achieving our goals, and thus, we seek acquisitions of businesses which
facilitate overall growth and cash flows for the Company.





We
manufacture, market and distribute bimetallic conductors (two-metal
conductors).  These bimetallic conductors are primarily CCA and CCS. 
Both CCA and CCS are either aluminum or steel cores, surrounded by an outer
layer of pure copper, resulting in a composite bimetallic conductor. The copper
sheath, through our processing methods, is metallurgically “bonded” to the core
metal.  The amount of copper-metal used in cladding the core-metal varies
widely, and is based on customers’ needs.  However, bimetallic conductors,
compared to solid copper conductors, can reduce the amount of copper used by as
much as 90% by volume, or 73% by weight which is a considerable cost
savings for our customers - wire and cable manufactures - and end-users of their
products. For many applications, bimetallic conductors offer significant
advantages over copper wire. Manufacturers in the wire and cable industry have
increasingly pursued and considered alternative technologies such as bimetallics
due to performance and economic considerations.  Relative to traditional
copper conductors, bimetallic conductors offer greater value to a variety of
customers.  Because of the benefits of bimetallic conductors, we
believe there are substantial opportunities to capture increased market share in
applications that have historically been dominated by solid copper
wire.





We
believe our engineered bimetallic conductor products offer end-users greater
value-performance than “solid” copper conductors.  Our bimetallic
conductors combine the efficiency of copper with the lightweight qualities of
aluminum (CCA), or the ruggedness and strength of steel (CCS). 
 Bimetallic conductors offer favorable cost characteristics, weight savings
(CCA), increased flexibility and end-product ease-of-handling (CCA),
increased tensile strength (CCS), improved corrosion characteristics and
decreased theft risk.  Conductivity can be customized, by changing the
percentage of copper, to fit many applications. The physical and electrical
attributes of our bimetallic products provide our customers cost savings beyond
their intrinsic pricing advantages.





We
believe our proprietary manufacturing technology allows us to produce superior
products compared to other manufacturers and creates a significant barrier to
entry.  Manufacturing copper-clad products involves bonding copper tape to
an aluminum or steel core rod, drawing the clad product to a finished diameter
and heat treating (annealing) as necessary depending on customer specifications.
Our proprietary cladding process differentiates us in terms of manufacturing
capabilities, offering superior product quality.  Our developmental
capabilities support the ongoing evolution of our current products.  We are
continuously working toward new technologies and products that we expect will
improve the performance and capabilities of our bimetallic products thereby
allowing us to enter new markets.





While the
pricing volatility of our raw materials, especially copper, is a primary cause
of cost variations in our products, changes in raw material costs do not
materially affect our dollar earnings on a per pound basis. Although an increase
in the price of raw materials may serve to reduce our gross margins as a
percentage of net sales, likewise, a decline in raw material prices may increase
our gross margin as a percentage of net sales. We generally pass the cost of
price changes in our raw materials to our customers rather than the percentage
changes. We establish prices for our products based on market factors and our
cost to produce our products. Typically, we set a base price for our products to
our customers with an understanding that as prices of raw materials change,
primarily for copper but also for aluminum and steel, we will pass the change
through to our customers. Therefore, when prices of raw material increase, our
prices to our customers increase and the amount of our total net sales increases
while the dollar amount of our gross margin remains relatively stable.  As
a result, the impact on earnings per share from volatile raw material prices is
minimal, although there are timing delays of varying lengths depending upon
volatility of metals prices, the type of product, competitive conditions and
particular customer arrangements.





Factors
driving and affecting operating results include raw material prices, product and
price competition, economic conditions in various geographic regions, foreign
currency exchange rates, interest rates, changes in technology, fluctuations in
customer demand, variations in the mix of products, production capacity and
utilization, working capital sufficiency, availability of credit and general
market liquidity, patent and intellectual property issues, litigation results
and legal and regulatory developments, and our ability to accurately forecast
sales demand and calibrate manufacturing to such demand, manage volatile raw
material costs, develop, manufacture and successfully market new and
enhanced products and product lines, control operating
costs, and attract, motivate and retain key personnel to manage our
operational, financial and management information systems.





Highlights
for the three months ended June 30, 2010 include:





·
            GAAP
      net income increased 760.0% to $13.4M or $0.35 per diluted share compared
      to the three months ended June 30, 2009, adjusted net income increased
      74.5% to $12.4M or $0.33 per diluted
share;





·
            Metric
      tons of volume shipped from our US segment increased 28.6% compared to the
      second quarter of 2009;





·
            Added
      8,200 metric tons of additional capacity of CCS at our Dalian
      facility;





·
            Operating
      income margin increased 140 basis points from 19.0% to 20.4% of
      revenues;


- 32
-


·
            Returned
      to profitability at Fayetteville facility; generated approximately $0.6
      million of net income; and





·
            Closed
      acquisition of Hongtai to establish new facility in Yixing,
      China.





Current
Business Environment and Outlook for the Remainder of 2010:
 
 We
continue to see strengthening of demand for our products throughout the globe
despite a slower than expected economic recovery in certain regions and a
decrease in telecommunication infrastructure projects, specifically the 3G
build-out, in China. We continue to persistently and systematically pursue
potential organic and inorganic growth opportunities throughout the globe.
Although delays in large-scale infrastructure projects could impact certain
markets in the short-term, we think the following macro-level trends will
positively impact our business and offer us opportunities to enhance
profitability and capture new business in the context of improving global
economic conditions:
 
 ·
              Government
      stimulus packages focused on infrastructure: high-speed railways,
      transmission and distribution and power grid build
  out;
 
 ·
              Worldwide
      underlying long-term growth trends in the electric utility and
      infrastructure markets;
 
 ·
              Population
      growth in developing countries with growing middle classes which influence
      demand for wire and cable; and
 
 ·
              Continuing
      demand for cost effective, energy saving
  alternatives.
 
 In order
to capture the growth opportunities, we will focus on driving profitability by
continuing to streamline our organizational structure and business procedures,
increasing operational efficiency and optimizing operating processes, while
managing production costs and operating expenses.
 
 In
addition, we are seeking to continue to develop the high potential utility and
transportation markets, to enhance productivity and to expand our sales of
higher margin products.  We view the market for CCA and CCS wires and
cables within the utilities market to be worldwide. We continue to educate
the PRC market on the benefits of CCS for the utilities market. With our recent
announcement that 8,200 metric tons of CCS production is now online at our PRC
facility, we have begun to target this market more aggressively. Furthermore, we
believe the acquisition of Jinchuan will accelerate our expansion into the power
cable industry by allowing us to provide our products to the early adopters,
both suppliers and customers, more quickly.
 
 We
recently closed the acquisition of Hongtai, which is a leading manufacturer of
CCA and copper-clad aluminum magnesium alloy, or CCAM, and serves Southeast
China’s telecommunication, utility and industrial wire needs. This acquisition
adds to our production capacity and ancillary drawing and finishing capabilities
for CCA and CCAM products, and provides additional opportunities with respect to
over 100 telecom and power wire and cable manufacturers in Eastern and
Southeastern China.
 
 Meanwhile,
we are also working to strengthen sales management and customer relations. We
will seek to consolidate our relationships with our best customers, stop or
suspend selling to customers that pose significant credit risk, and develop new
customers cautiously.  In addition, as part of our ongoing efforts to
reduce total operating costs, we continuously improve our ability to efficiently
utilize existing and new manufacturing capacity to manage expansion and growth.
We believe that effectively utilized manufacturing assets and economy of scale
generated, will help offset high raw material prices and dilute overhead over
time, thus improving profitability.
 
 We
actively seek to identify and promptly respond to key economic and industry
trends in order to capitalize on expanding niche markets for our products and
possibly entering into new markets both down and up stream, in order to achieve
better returns.  We have the resources, technology, working capital and
capacity to meet growing market demands.  Over the long-term, we believe
that we are well positioned to benefit from the growth opportunities in China
and throughout the world.


Results
of Operations





The
following table sets forth, for the periods indicated, statement of operations
data in millions of dollars:


- 33
-


(in millions, except percentages)
                                
                                Three Months Ended
                                
                                
                                
                                
                                
                                Six Months EndedJune 30,
                                
                                
                                June 30,
                                
                                
                                
                                
                                
                                June 30,
                                
                                
                                June 30,2010
                                
                                
                                2009
                                
                                
                                % Change
                                
                                
                                2010
                                
                                
                                2009
                                
                                
                                % ChangeRevenues
                                
                                $
                                69.0
                                
                                
                                $
                                48.3
                                
                                
                                
                                42.9
                                %
                                
                                $
                                128.6
                                
                                
                                $
                                83.6
                                
                                
                                
                                53.9
                                %Gross
      Profit
                                
                                
                                19.6
                                
                                
                                
                                13.5
                                
                                
                                
                                45.2
                                %
                                
                                
                                37.4
                                
                                
                                
                                22.4
                                
                                
                                
                                67.0
                                %Selling,
      general and administrative expenses
                                
                                
                                5.5
                                
                                
                                
                                4.3
                                
                                
                                
                                27.9
                                %
                                
                                
                                10.5
                                
                                
                                
                                8.5
                                
                                
                                
                                23.5
                                %Operating
      Income
                                
                                
                                14.1
                                
                                
                                
                                9.2
                                
                                
                                
                                53.3
                                %
                                
                                
                                26.9
                                
                                
                                
                                13.9
                                
                                
                                
                                93.5
                                %Income
      Before Taxes
                                
                                
                                16.1
                                
                                
                                
                                2.2
                                
                                
                                
                                631.8
                                %
                                
                                
                                22.0
                                
                                
                                
                                4.6
                                
                                
                                
                                378.3
                                %Net
      Income Tax Provision
                                
                                
                                (2.7
                                )
                                
                                
                                (0.6
                                )
                                
                                
                                350.0
                                %
                                
                                
                                (1.2
                                )
                                
                                
                                0.1
                                
                                
                                
                                -1300.0
                                %Net
      Income
                                
                                $
                                13.4
                                
                                
                                $
                                1.6
                                
                                
                                
                                737.5
                                %
                                
                                $
                                20.8
                                
                                
                                $
                                4.7
                                
                                
                                
                                342.6
                                %





Comparison
of the Three Months Ended June 30, 2010 and June 30, 2009:





Net
Sales by Segment





The
following tables set forth net sales in millions and metric tons (MT)
of copper-clad products sold by each of our reporting segments on a combined
basis:






Net Sales(in millions, exceptpercentage)
                                                        
                                                        Three Months Ended June30,2010
                                                        
                                                        
                                                        2009Amount
                                                        
                                                        
                                                        % ofNet
                                                          Sales
                                                        
                                                        
                                                        Amount
                                                        
                                                        
                                                        % of Net
                                                          Sales
                                                        
                                                        
                                                        Dollar
                                                          Change
                                                        
                                                        
                                                        % ChangePRC
                                                        
                                                        $
                                                        54.9
                                                        
                                                        
                                                        
                                                        79.6
                                                        %
                                                        
                                                        $
                                                        39.4
                                                        
                                                        
                                                        
                                                        81.6
                                                        %
                                                        
                                                        $
                                                        15.5
                                                        
                                                        
                                                        
                                                        39.3
                                                        %US
                                                        
                                                        
                                                        14.1
                                                        
                                                        
                                                        
                                                        20.4
                                                        %
                                                        
                                                        
                                                        8.9
                                                        
                                                        
                                                        
                                                        18.4
                                                        %
                                                        
                                                        
                                                        5.2
                                                        
                                                        
                                                        
                                                        58.4
                                                        %Total
      net sales
                                                        
                                                        $
                                                        69.0
                                                        
                                                        
                                                        
                                                        100.0
                                                        %
                                                        
                                                        $
                                                        48.3
                                                        
                                                        
                                                        
                                                        100.0
                                                        %
                                                        
                                                        $
                                                        20.7
                                                        
                                                        
                                                        
                                                        42.9
                                                        %





Metric Tons SoldThree Months Ended June30,2010
                
                
                2009MT
                
                
                % of MT
                  Sales
                
                
                MT
                
                
                % of MT
                  Sales
                
                
                Tonnage
                  Change
                
                
                % ChangePRC *
                
                
                7,454
                
                
                
                74.7
                %
                
                
                9,060
                
                
                
                82.2
                %
                
                
                -1,606
                
                
                
                -17.7
                %US
                
                
                2,520
                
                
                
                25.3
                %
                
                
                1,960
                
                
                
                17.8
                %
                
                
                560
                
                
                
                28.6
                %Total
      sales volume*
                
                
                9,974
                
                
                
                100.0
                %
                
                
                11,020
                
                
                
                100.0
                %
                
                
                -1,046
                
                
                
                -9.5
                %





*
Does not include volume contributed by the Jinchuan acquisition which is
measured by meters.





Net sales
were $69.0 million in the second quarter of 2010, compared to $48.3 million in
the same period of last year. Organic growth excluding the impact of the
acquisition of Jinchuan during the quarter was 22.0%. The $20.7
million increase in net sales was primarily driven by continued
improvement in global demand, higher average selling prices which was partially
due to increased copper prices, and incremental contributions from recent
acquisition.





The PRC
segment experienced an increase of 39.3% in net sales for the second quarter
ended June 30, 2010 compared to the similar period of 2009. The increase in PRC
net sales is due to a 40.9% increase in average selling prices as a result
of higher acquisition costs of raw materials and the inclusion of Jinchuan,
which contributed $9.1 million in net sales, partially offset by a 17.7% drop in
volume primarily as a result of the slowdown in capital spending related to
China’s 3G build-out. For the remainder of the year and beyond, we expect
continued expansion into the telecommunication and utility markets as
delays in government spending on infrastructure related build-out,
specifically the 3G build-out, subside and installation of CCS cladding
capacity. In addition, the acquisition of Jinchuan allows us to process our
products further downstream and provides a strategic expansion into the utility
market sub-segment.





The US
segment experienced an increase of 58.4% in net sales for the second quarter of
2010 compared to the second quarter of 2009. The increase is primarily due to a
(i) 28.6% volume increase, (ii) 26.6% increase in average selling price
resulting from a higher acquisition cost of raw materials and (iii) the increase
in the utilization rate from 26.1% to 33.0%. We continued to see strengthening
of global demand throughout the second quarter and believe global infrastruture
investment will continue.


- 34
-




Net
Sales by Industry





The
following table presents the breakdown of combined net sales in
millions by industry:




Net SalesThree Months Ended June 30,(in millions, except percentages)
                
                2010
                
                
                2009Amount
                
                
                % of Net
                  Sales
                
                
                Amount
                
                
                % of Net
                  Sales
                
                
                Dollar
                  Change
                
                
                % ChangeTelecommunication
                
                $
                28.1
                
                
                
                40.7
                %
                
                $
                23.1
                
                
                
                47.8
                %
                
                
                5.0
                
                
                
                21.6
                %Utility
                
                
                38.2
                
                
                
                55.3
                %
                
                
                22.1
                
                
                
                45.8
                %
                
                
                16.1
                
                
                
                72.9
                %Transportation
                
                
                1.1
                
                
                
                1.6
                %
                
                
                0.4
                
                
                
                0.8
                %
                
                
                0.7
                
                
                
                175.0
                %Other
                
                
                1.6
                
                
                
                2.4
                %
                
                
                2.7
                
                
                
                5.6
                %
                
                
                -1.1
                
                
                
                -40.7
                %Total
      net sales
                
                $
                69.0
                
                
                
                100.0
                %
                
                $
                48.3
                
                
                
                100.0
                %
                
                
                20.7
                
                
                
                42.9
                %





The
following table presents the breakdown of metric tons (MT) of copper-clad
products shipped to customers by industry:





Three Months Ended June 30,2010
                
                
                2009MT
                
                
                % of MT
                  Sales
                
                
                MT
                
                
                % of MT
                  Sales
                
                
                Tonnage
                  Change
                
                
                % ChangeTelecommunication
                
                
                4,883
                
                
                
                49.0
                %
                
                
                5,294
                
                
                
                48.0
                %
                
                
                -411
                
                
                
                -7.8
                %Utility
      *
                
                
                4,518
                
                
                
                45.3
                %
                
                
                4,887
                
                
                
                44.4
                %
                
                
                -369
                
                
                
                -7.6
                %Transportation
                
                
                147
                
                
                
                1.5
                %
                
                
                64
                
                
                
                0.6
                %
                
                
                83
                
                
                
                129.7
                %Other
                
                
                426
                
                
                
                4.2
                %
                
                
                775
                
                
                
                7.0
                %
                
                
                -349
                
                
                
                -45.0
                %Total
      sales volume *
                
                
                9,974
                
                
                
                100.0
                %
                
                
                11,020
                
                
                
                100.0
                %
                
                
                -1,046
                
                
                
                -9.5
                %





*
Does not include volume contributed by the Jinchuan acquisition which is
measured by meters.





During
the quarter ended June 30, 2010, our copper-clad wire sales to the
telecommunication markets decreased by 411 metric tons, or 7.8%, compared to the
same period in 2009 due to a slowing in the 3G build-out in China and was
partially offset increased demand within the Americas and Europe.





Utility
sales of copper-clad products in volume decreased by 369 metric tons, or 7.6%,
in the second quarter 2010 compared to the similar period in 2009. The 72.9%
increase in net sales in dollar amount to the utility markets was primarily
attributable to higher average selling price and the inclusion of the
Jinchuan acquisition which contributed $9.1 million in sales. The acquisition of
Jinchuan allows us to process our products further downstream and provides a
strategic expansion into the utility market sub-segment.





Capacity
and Metric Tons Sold





The
following table summarizes installed cladding capacities and output for the
three month period ended June 30, 2010:





Three Months Ended June 30, 2010PRC
                
                
                US(MT)
                
                Capacity
                  (MT)
                
                
                Sold
                  (MT)
                
                
                Capacity
                  (MT)
                
                
                Sold
                  (MT)CCA
                
                
                10,000
                
                
                
                7,303
                
                
                
                3,062
                
                
                
                868CCS
                
                
                2,050
                
                
                
                19
                
                
                
                4,274
                
                
                
                1,618Total
                
                
                12,050
                
                
                
                7,322
                
                
                
                7,336
                
                
                
                2,486





We
successfully installed 8,200 MT of CCS cladding capacity at our Dalian facility
within the PRC segment at the onset of the second quarter of 2010. This
additional capacity is targeted for the telecommunications, electric utilities
and transportation industries in Asia where we believe there is significant
demand for CCS. We are currently working with our customers to increase demand
for CCS at our Dalian facility to further accelerate our
growth.


- 35
-


Net
Sales by Product Mix





The
following table summarizes the breakdown of metric tons (MT) of copper-clad
products shipped to customers by product mix:




Metric Tons SoldThree Months Ended June 30,2010
                
                
                2009(MT)
                
                MT
                
                
                % of MT
                  Sales
                
                
                MT
                
                
                % of MT
                  Sales
                
                
                Tonnage
                  Change
                
                
                % ChangeCCA
                
                
                8,171
                
                
                
                81.9
                %
                
                
                9,309
                
                
                
                84.5
                %
                
                
                -1,138
                
                
                
                -12.2
                %CCS
                
                
                1,637
                
                
                
                16.4
                %
                
                
                1,479
                
                
                
                13.4
                %
                
                
                158
                
                
                
                10.7
                %Others
      *
                
                
                166
                
                
                
                1.7
                %
                
                
                232
                
                
                
                2.1
                %
                
                
                -66
                
                
                
                -28.4
                %Total
      net sales *
                
                
                9,974
                
                
                
                100.0
                %
                
                
                11,020
                
                
                
                100.0
                %
                
                
                -1,046
                
                
                
                -9.5
                %





*
Does not include volume contributed by the Jinchuan acquisition which is
measured by meters.





CCA sales
volume from our PRC segment decreased by 19.3%, or 1,525 metric tons in the
second quarter of 2010 compared to the same period in 2009 due to the slowdown
of China’s 3G build-out. However, the CCA sales volume from our Fayetteville
facility increased by 80.6%, or 387 metric tons in the second quarter of 2010
compared to the same period in 2009 due to strengthening global
demand.





CCS sales
volume from our US facility increased by 10.4%, or 154 metric tons in the second
quarter of 2010 compared to the same period in 2009, primarily due to increased
demand within the domestic US and other geographical areas.





Our
overall sales volume decreased 9.5%, or 1,046 metric tons in the second quarter
2010 compared to the same period of 2009. While we experienced some slowdown
within certain sectors, such as 3G network build-out, compared to the prior
year’s period we continue to see high demand for certain bimetallic products for
other applications within the telecom industry, as well as the utility and
transportation industries in some of the more inland, rural areas in China as
government initiatives place a premium on the development of these
regions.





Gross
Profit and Gross Margin





Three Months Ended June 30,
                
                
                Change(in millions, except percentage)
                
                2010
                
                
                2009
                
                
                Dollar
                
                
                %Gross Profit
                
                $
                19.6
                
                
                $
                13.5
                
                
                $
                6.1
                
                
                
                45.2
                %Gross
      Margin
                
                
                28.4
                %
                
                
                27.9
                %
                
                
                
                
                
                
                0.5
                %





Gross
profit was $19.6 million in the quarter ended June 30, 2010 compared to $13.5
million in the same period of 2009, representing an increase of 45.2%.
Gross margin for our Dalian facility increased to approximately 34.3% versus
31.0% for the year ago period.  The increase can be attributed to a better
product mix and improved pricing discipline within the wire and cable industry
as a whole.  The gross margin for our Fayetteville facility decreased from
15.5% during the three months ended June 30, 2009 to 14.6% during the quarter
ended June 30, 2010, primarily due to higher raw material prices and partially
offset by benefits of operational leverage gained as a result of cost savings
initiatives.





Selling
Expenses





Three Months Ended June 30,
                
                
                Change(in millions, except percentage)
                
                2010
                
                
                2009
                
                
                Dollar
                
                
                %Selling
      Expenses
                
                $
                1.4
                
                
                $
                1.1
                
                
                $
                0.3
                
                
                
                27.3
                %as
      a percentage of net sales
                
                
                2.0
                %
                
                
                2.2
                %
                
                
                
                
                
                
                -0.2
                %





Selling
expenses were $1.4 million in the quarter ended June 30, 2010 compared to
$1.1 million in the similar period in 2009, representing an increase of
27.3%. This increase is primarily due to increased global sales efforts and an
increase in costs resulting from the acquisitions of Jinchuan
andHongtai, partially offset by cost savings initiatives. As a
percentage of net sales, selling expenses decreased from 2.2% in the second
quarter of 2009 to 2.0%.





General
and Administrative Expenses





Three Months Ended June 30,
                
                
                Change(in millions, except percentage)
                
                2010
                
                
                2009
                
                
                Dollar
                
                
                %General
      and Administrative Expenses
                
                $
                4.2
                
                
                $
                3.2
                
                
                $
                1.0
                
                
                
                31.3
                %as
      a percentage of net sales
                
                
                6.0
                %
                
                
                6.6
                %
                
                
                
                
                
                
                -0.6
                %





General
and administrative expenses were $4.2 million in the quarter ended
June 30, 2010 compared to $3.2 million in the same period in 2009, representing
an increase of 31.3%, or $1.0 million. This increase is primarily due to
the acquisitions of Jinchuan and Hongtai, partially offset by cost savings
initiatives. As a percentage of net sales, general
and administration expenses decreased from 6.6% in the second quarter of
2009 to 6.0% in the same period of 2010 primarily due to increased revenues and
benefits of operational leverage.


- 36
-


Operating
Income





The
following table sets forth operating income by segment:





Three Months Ended June 30,(in millions, exceptpercentage)
                  
                  2010
                  
                  
                  2009Amount
                  
                  
                  % of
                    Operating
                    income
                  
                  
                  Amount
                  
                  
                  % of
                    Operating
                    income
                  
                  
                  Dollar
                    Change
                  
                  
                  % ChangePRC
                  
                  $
                  14.5
                  
                  
                  
                  102.8
                  %
                  
                  $
                  10.4
                  
                  
                  
                  113.0
                  %
                  
                  $
                  4.1
                  
                  
                  
                  39.4
                  %US
                  
                  $
                  0.7
                  
                  
                  
                  5.0
                  %
                  
                  $
                  (0.1
                  )
                  
                  
                  -1.0
                  %
                  
                  $
                  0.8
                  
                  
                  
                  800
                  %Corporate
                  
                  $
                  (1.1
                  )
                  
                  
                  -7.8
                  %
                  
                  $
                  (1.1
                  )
                  
                  
                  -12.0
                  %
                  
                  $
                  0.0
                  
                  
                  
                  -Total
      operating income
                  
                  $
                  14.1
                  
                  
                  
                  100.0
                  %
                  
                  $
                  9.2
                  
                  
                  
                  100.0
                  %
                  
                  $
                  4.9
                  
                  
                  
                  53.3
                  %





Total
operating income was $14.1 million in the quarter ended June 30, 2010
compared to $9.2 million in the same period of 2009, representing
an increase of 53.3%, or $4.9 million. This increase is primarily due to a
significant increase of revenues and operating profit contributed by our PRC
segment of $15.5 million and $4.1 million, respectively. The operating income
within our US segment was $0.7 million compared with a deficit of $0.1 million
in the same period of last year due to sales growth and benefits of operational
leverage from cost savings initiatives implemented during the course of
2009.





Other
Income (Expense)





Interest
income (expenses)


Three Months Ended June 30,
                    
                    
                    Change(in millions, except percentage)
                    
                    2010
                    
                    
                    2009
                    
                    
                    Dollar
                    
                    
                    %Interest
      Income
                    
                    $
                    0.2
                    
                    
                    $
                    0.1
                    
                    
                    $
                    0.1
                    
                    
                    
                    100.0
                    %Interest
      (Expense)
                    
                    $
                    -
                    
                    
                    $
                    (1.5
                    )
                    
                    $
                    1.5
                    
                    
                    
                    100.0
                    %Net
      Interest Income / (Expense)
                    
                    $
                    0.2
                    
                    
                    $
                    (1.4
                    )
                    
                    $
                    1.6
                    
                    
                    
                    114.3
                    %as
      a percentage of net sales
                    
                    
                    0.3
                    %
                    
                    
                    -2.9
                    %
                    
                    
                    
                    
                    
                    
                    3.2
                    %





Net
interest income was $0.2 million in the quarter ended June 30, 2010 compared to
interest expenses of $1.4 million in the same period of 2009. The change is
primarily the result of the repayment of the
revolving credit line at our US operations in the first quarter of 2010and repurchase and retirement of the Company’s Senior Secured Convertible
Notes and Senior Secured Floating Rate Notes Due 2012.





Tax





Three Months Ended June 30, 2010(in millions, except percentage)
                  
                  PRC
                  
                  
                  US
                  
                  
                  Parent Company
                  
                  
                  ConsolidatedProfit
      (Loss) before income tax
                  
                  $
                  16.3
                  
                  
                  $
                  0.6
                  
                  
                  $
                  (0.8
                  )
                  
                  $
                  16.1Income
      tax expense (credit)
                  
                  $
                  2.8
                  
                  
                  
                  -
                  
                  
                  
                  (0.1
                  )
                  
                  
                  2.7Profit
      (loss) after income tax
                  
                  $
                  13.5
                  
                  
                  $
                  0.6
                  
                  
                  $
                  (0.7
                  )
                  
                  $
                  13.4





Profit
before tax for PRC was $16.3 million in the three months ended June 30,
2010 with profits from the US segment before tax of $0.6 million. Loss at the
parent company level was $0.8 million. On a consolidated basis, profit before
tax was $16.1 million in the three months ended June 30, 2010 and we recognized
a net tax expense of $2.7 million. The effective tax rate on a consolidation
basis for this quarter was 16.7%





Net
Income





Three Months Ended June 30,
                
                
                Change(in millions, except percentage)
                
                2010
                
                
                2009
                
                
                Dollar
                
                
                %Income
      Before Taxes
                
                $
                16.1
                
                
                $
                2.2
                
                
                $
                13.9
                
                
                
                631.8
                %Provision
      for Income Taxes
                
                $
                2.7
                
                
                $
                0.6
                
                
                $
                2.1
                
                
                
                350.0
                %Net
      Income After Taxes
                
                $
                13.4
                
                
                $
                1.6
                
                
                $
                11.8
                
                
                
                737.5
                %as
      a percentage of net sales
                
                
                19.5
                %
                
                
                3.2
                %
                
                
                
                
                
                
                16.3
                %




Net
income was $13.4 million in the quarter ended June 30, 2010 compared to
$1.6 million in the same period in 2009, representing an increase of
737.5%. As a percentage of net sales, net income increased from 3.2% in the
second quarter of 2009 to 19.5% in the same period of 2010. The increase can be
attributed to higher revenues, increased margins, acquisition gains and fewer
expenses tied to changes in derivative liabilities.


- 37
-


Earnings
per Share





Three Months Ended June 30,2010
                
                
                2009Unaudited
                
                
                UnauditedNet Income
      for Basic Earnings Per Share
                
                $
                13,439,809
                
                
                $
                1,562,700Basic
      Weighted Average Number of Shares
                
                
                37,343,714
                
                
                
                27,827,838Net
      Income per Share – Basic
                
                $
                0.36
                
                
                $
                0.06Net
      Income for Diluted Earnings Per Share
                
                $
                13,439,809
                
                
                $
                1,562,700Diluted
      Weighted Average Number of Shares
                
                
                37,991,800
                
                
                
                28,323,611Net
      Income per Share – Diluted
                
                $
                0.35
                
                
                $
                0.06




Basic and
diluted earnings per share (EPS) for the quarter ended June 30, 2010, were $0.36
and $0.35, respectively, compared to $0.06 and $0.06, respectively, for the
comparable period in 2009.





Comparison
of the Six Months Ended June 30, 2010 and June 30, 2009:





Net
Sales by Segment





The
following tables set forth net sales in millions and metric tons (MT) of
copper-clad products sold by each of our reporting segments on a combined
basis:


Net SalesSixMonths Ended June 30,2010
                    
                    
                    2009(In millions, except percentage)
                    
                    Amount
                    
                    
                    % of Net
                      Sales
                    
                    
                    Amount
                    
                    
                    % of Net
                      Sales
                    
                    
                    Dollar
                      Change
                    
                    
                    % ChangePRC
                    
                    $
                    101.2
                    
                    
                    
                    78.7
                    %
                    
                    $
                    65.8
                    
                    
                    
                    78.7
                    %
                    
                    $
                    35.4
                    
                    
                    
                    53.8
                    %US
                    
                    
                    27.4
                    
                    
                    
                    21.3
                    %
                    
                    
                    17.8
                    
                    
                    
                    21.3
                    %
                    
                    
                    9.6
                    
                    
                    
                    53.9
                    %Total
      net sales
                    
                    $
                    128.6
                    
                    
                    
                    100.0
                    %
                    
                    $
                    83.6
                    
                    
                    
                    100.0
                    %
                    
                    $
                    45.0
                    
                    
                    
                    53.8
                    %




SixMonths Ended June 30,2009
                    
                    
                    2009Tonnage
                    
                    
                    % of Net
                      Sales
                    
                    
                    Tonnage
                    
                    
                    % of Net
                      Sales
                    
                    
                    Tonnage
                      Change
                    
                    % ChangePRC*
                    
                    
                    14,122
                    
                    
                    
                    74.0
                    %
                    
                    
                    14,947
                    
                    
                    
                    78.7
                    %
                    
                    
                    -825
                    
                    
                    
                    -5.5
                    %US
                    
                    
                    4,952
                    
                    
                    
                    26.0
                    %
                    
                    
                    4,054
                    
                    
                    
                    21.3
                    %
                    
                    
                    898
                    
                    
                    
                    22.2
                    %Total
      sales volume *
                    
                    
                    19,074
                    
                    
                    
                    100.0
                    %
                    
                    
                    19,001
                    
                    
                    
                    100.0
                    %
                    
                    
                    73
                    
                    
                    
                    0.4
                    %





* Does not include volume
contributed by the Jinchuan acquisition which is measured by
meters.





Net sales
increased 53.8% over the same period one year earlier. The drivers behind this
performance remain the continued infrastructure build-out occurring in the
developing nations of the world and a preference among buyers for high quality
bimetallic solutions as a cost effective alternative to pure copper
solutions.





The PRC
segment experienced an increase of 53.8% in net sales for the six months ended
June 30, 2010 relative to the comparable 2009 periods. The increase in PRC net
sales for the six months ended June 30, 2010, is primarily due to a 41.1%
increase in the average selling price of our products as a result of higher
metal prices relative to the comparable 2009 periods. We generally pass the cost
of price changes in raw materials to our customers and set the base price for
our products. The increase of PRC segment sales was also due to the inclusion of
Jinchuan, which contributed $13.4 million of net sales in the first six months
of 2010.




The US
segment experienced a significant recovery in net sales, resulting in an
increase of 53.9% for the six months ended June 30, 2010 relative to the
comparable 2009 period. The increase in US segment net sales for the six months
ended June 30, 2010 compared to the prior year period is primarily the result of
a 22.2% increase in metric tons shipped and a 26.6% increase in the average
selling price. In line with the trend we began to see during the first quarter
of 2010, the increase was the result of improving market conditions primarily in
the Americas and Europe.





Metric
tons sold increased 0.4% over the same period one year earlier primarily due to
the strong volume recovery of 22.2% in metric tons sold from our US segment
partially offset by a 5.5% decrease in our PRC segment.


- 38
-


Net
Sales by Industry





The
following table presents the breakdown of combined net sales in
millions by industry:





Net SalesSixMonths Ended June 30,2010
                                                
                                                
                                                2009(In millions, except percentage)
                                                
                                                Amount
                                                
                                                
                                                % of Net
                                                  Sales
                                                
                                                
                                                Amount
                                                
                                                
                                                % of Net
                                                  Sales
                                                
                                                
                                                Dollar
                                                  Change
                                                
                                                
                                                % ChangeTelecommunication
                                                
                                                $
                                                53.1
                                                
                                                
                                                
                                                41.3
                                                %
                                                
                                                $
                                                37.7
                                                
                                                
                                                
                                                45.1
                                                %
                                                
                                                $
                                                15.4
                                                
                                                
                                                
                                                40.8
                                                %Utility
                                                
                                                
                                                67.8
                                                
                                                
                                                
                                                52.7
                                                %
                                                
                                                
                                                41.0
                                                
                                                
                                                
                                                49.0
                                                %
                                                
                                                
                                                26.8
                                                
                                                
                                                
                                                65.4
                                                %Transportation
                                                
                                                
                                                1.7
                                                
                                                
                                                
                                                1.0
                                                %
                                                
                                                
                                                0.8
                                                
                                                
                                                
                                                1.0
                                                %
                                                
                                                
                                                0.9
                                                
                                                
                                                
                                                112.5
                                                %Other
                                                
                                                
                                                6.0
                                                
                                                
                                                
                                                5.0
                                                %
                                                
                                                
                                                4.1
                                                
                                                
                                                
                                                4.9
                                                %
                                                
                                                
                                                1.9
                                                
                                                
                                                
                                                46.3
                                                %Total
      net sales
                                                
                                                $
                                                128.6
                                                
                                                
                                                
                                                100.0
                                                %
                                                
                                                $
                                                83.6
                                                
                                                
                                                
                                                100.0
                                                %
                                                
                                                $
                                                45.0
                                                
                                                
                                                
                                                53.8
                                                %





The
following table presents the breakdown of metric tons shipped to customers by
industry:





Net SalesSixMonths Ended June 30,2010
                    
                    
                    2009Tonnage
                    
                    
                    % of Net
                      Sales
                    
                    
                    Tonnage
                    
                    
                    % of Net
                      Sales
                    
                    
                    Tonnage
                      Change
                    
                    % ChangeTelecommunication
                    
                    
                    9,234
                    
                    
                    
                    48.4
                    %
                    
                    
                    8,762
                    
                    
                    
                    46.1
                    %
                    
                    
                    472
                    
                    
                    
                    5.4
                    %Utility*
                    
                    
                    8,221
                    
                    
                    
                    43.1
                    %
                    
                    
                    8,915
                    
                    
                    
                    46.9
                    %
                    
                    
                    -694
                    
                    
                    
                    -7.8
                    %Transportation
                    
                    
                    221
                    
                    
                    
                    1.2
                    %
                    
                    
                    124
                    
                    
                    
                    0.7
                    %
                    
                    
                    97
                    
                    
                    
                    78.2
                    %Other
                    
                    
                    1,398
                    
                    
                    
                    7.3
                    %
                    
                    
                    1,200
                    
                    
                    
                    6.3
                    %
                    
                    
                    198
                    
                    
                    
                    16.5
                    %Total
      sales volume *
                    
                    
                    19,074
                    
                    
                    
                    100.0
                    %
                    
                    
                    19,001
                    
                    
                    
                    100.0
                    %
                    
                    
                    73
                    
                    
                    
                    0.4
                    %




*
Does not include volume contributed by the Jinchuan acquisition which is
measured by meters.





During
the six months ended June 30, 2010, our copper-clad sales to the
telecommunication markets increased by 472 metric tons, or 5.4%, compared to the
same period in 2009 driven by increased demand with our US segment and partially
offset by a slight decline in our PRC segment.





Utility
sales of copper-clad products in volume decreased by 694 metric tons, or 7.8%,
in the second quarter 2010 compared to the similar period in 2009.
The 65.4% increase in net sales in dollar amount to the utility markets was
primarily attributable to higher average selling prices and the inclusion
of the Jinchuan acquisition which contributed $13.4 million in
sales.





Capacity
and Metric Tons Sold





The
following table summarizes installed cladding capacities and output for the six
months ended June 30, 2010:





Six Months Ended June 30, 2010PRC
                
                
                US(MT)
                
                Capacity
                
                
                Sold
                
                
                Capacity
                
                
                SoldCCA
                
                
                20,000
                
                
                
                13,840
                
                
                
                6,124
                
                
                
                1,661CCS
                
                
                4,100
                
                
                
                32
                
                
                
                8,547
                
                
                
                3,225Total
                
                
                24,100
                
                
                
                13,872
                
                
                
                14,739
                
                
                
                4,886





Net
Sales by Product Mix





Metric Tons SoldSix Months Ended June 30,2010
                                                            
                                                            
                                                            2009(MT)
                                                            
                                                            Tonnage
                                                            
                                                            
                                                            % of Net
                                                              Sales
                                                            
                                                            
                                                            Tonnage
                                                            
                                                            
                                                            % of Net
                                                              Sales
                                                            
                                                            
                                                            Tonnage
                                                              Change
                                                            
                                                            
                                                            %ChangeCCA
                                                            
                                                            
                                                            15,501
                                                            
                                                            
                                                            
                                                            81.3
                                                            %
                                                            
                                                            
                                                            15,631
                                                            
                                                            
                                                            
                                                            82.3
                                                            %
                                                            
                                                            
                                                            -130
                                                            
                                                            
                                                            
                                                            -0.8
                                                            %CCS
                                                            
                                                            
                                                            3,257
                                                            
                                                            
                                                            
                                                            17.1
                                                            %
                                                            
                                                            
                                                            3,064
                                                            
                                                            
                                                            
                                                            16.1
                                                            %
                                                            
                                                            
                                                            193
                                                            
                                                            
                                                            
                                                            6.3
                                                            %Others
                                                            
                                                            
                                                            316
                                                            
                                                            
                                                            
                                                            1.6
                                                            %
                                                            
                                                            
                                                            306
                                                            
                                                            
                                                            
                                                            1.6
                                                            %
                                                            
                                                            
                                                            10
                                                            
                                                            
                                                            
                                                            -3.3
                                                            %Total
      sales volume
                                                            
                                                            
                                                            19,074
                                                            
                                                            
                                                            
                                                            100.0
                                                            %
                                                            
                                                            
                                                            19,001
                                                            
                                                            
                                                            
                                                            100.0
                                                            %
                                                            
                                                            
                                                            73
                                                            
                                                            
                                                            
                                                            0.4
                                                            %





The sales
of CCA in volume from our PRC segment decreased by 5.6%, or 817 metric tons in
the first half year of 2010 compared to the same period in 2009 due primarily to
a slowdown of China’s 3G build-out. However, the sales of CCA and CCS in volume
from our US segment increased by 70.5%, or 687 metric tons, and 5.8%, or 180
metric tons, in the first half year of 2010 compared to the same period in 2009,
respectively. This increase is primarily due to strengthening of global
demand.


- 39
-


Gross
Profit and Gross Margin





Six Months Ended June 30,
                
                
                Change(in millions, except percentage)
                
                2010
                
                
                2009
                
                
                Dollar
                
                
                %Gross
      Profit
                
                $
                37.4
                
                
                $
                22.4
                
                
                $
                15.0
                
                
                
                67.0
                %Gross
      margin
                
                
                29.1
                %
                
                
                26.8
                %
                
                
                
                
                
                
                2.3
                %




Gross
profit increased $15.0 million or 67.0% for the six months ended June 30,
2010 compared to the comparable period in 2009. As a percentage of net sales,
gross margin increased from 26.8% in the first half year of 2009 to 29.1% in the
same period of 2010, primarily due to a better product mix and improved pricing
discipline within wire and cable industry.





Selling
Expenses





Six Months Ended June 30,
                
                
                Change(in millions, except percentage)
                
                2010
                
                
                2009
                
                
                Dollar
                
                
                %Selling
      Expenses
                
                $
                2.6
                
                
                $
                2.3
                
                
                $
                0.3
                
                
                
                13.0
                %as
      a percentage of net sales
                
                
                2.0
                %
                
                
                2.7
                %
                
                
                
                
                
                
                -0.7
                %




Selling
expenses increased $0.3 million or 13.0% for the six months ended June 30,
2010 compared to the comparable period in 2009. As a percentage of net sales,
selling expenses decreased from 2.7% in the first half year of 2009 to 2.0% in
the same period of 2010, primarily due to the strong sales growth.





General
and Administrative Expenses





Six Months Ended June 30,
                
                
                Change(in millions, except percentage)
                
                2010
                
                
                2009
                
                
                Dollar
                
                
                %General
      and Administrative Costs
                
                $
                7.9
                
                
                $
                6.2
                
                
                $
                1.7
                
                
                
                27.4
                %as
      a percentage of net sales
                
                
                6.1
                %
                
                
                7.4
                %
                
                
                
                
                
                
                -1.3
                %




General
and administrative expenses increased $1.7 million or 27.4% for the six
months ended June 30, 2010 compared to the same period in 2009 primarily
resulting from expenses related to the acquisitions of Jinchuan and Hongtai. As
a percentage of net sales, general and administrative expenses decreased from
7.4% in the first half year of 2009 to 6.1% in the same period of 2010,
primarily due to the strong sales growth and cost savings
initiatives.




Operating
Income





The
following table sets forth operating income by segment:





SixMonths Ended June 30,2010
                                            
                                            
                                            2009(in millions, except percentage)
                                            
                                            Amount
                                            
                                            
                                            % of
                                              operating
                                              income
                                            
                                            
                                            Amount
                                            
                                            
                                            % of
                                              operating
                                              income
                                            
                                            
                                            Dollar
                                              Change
                                            
                                            
                                            % ChangePRC
                                            
                                            $
                                            27.8
                                            
                                            
                                            
                                            103.3
                                            %
                                            
                                            $
                                            17.4
                                            
                                            
                                            
                                            125.2
                                            %
                                            
                                            $
                                            10.4
                                            
                                            
                                            
                                            59.8
                                            %US
                                            
                                            $
                                            1.2
                                            
                                            
                                            
                                            4.4
                                            %
                                            
                                            $
                                            (1.4
                                            )
                                            
                                            
                                            -10.1
                                            %
                                            
                                            $
                                            2.6
                                            
                                            
                                            
                                            185.7
                                            %Corporate
                                            
                                            $
                                            (2.1
                                            )
                                            
                                            
                                            -7.7
                                            %
                                            
                                            $
                                            (2.1
                                            )
                                            
                                            
                                            -15.1
                                            %
                                            
                                            $
                                            -
                                            
                                            
                                            
                                            -
                                            %Total
      operating income
                                            
                                            $
                                            26.9
                                            
                                            
                                            
                                            100.0
                                            %
                                            
                                            $
                                            13.9
                                            
                                            
                                            
                                            100.0
                                            %
                                            
                                            $
                                            13.0
                                            
                                            
                                            
                                            93.5
                                            %




Operating
income in the six months ended June 30, 2010 increased approximately $13.0
million, or 93.5%, compared to the same period in 2009, which was primarily due
to higher sales and cost savings.





The
operating income in the PRC segment increased approximately $10.4
million, or 59.8%, in the six months ended June 30, 2010, when compared to the
same period in 2009, primarily due to a strong sales growth and the inclusions
of income from acquisitions made in 2010.





The
operating income in the US segment increased approximately $2.6 million in the
six months ended June 30, 2010, when compared to the same period in 2009,
primarily, as a result of 53.9% increase in terms of sales.





Other
Income (Expense)





Interest
Income (Expense)





Six Months Ended June 30,
                
                
                Change(in millions, except percentage)
                
                2010
                
                
                2009
                
                
                Dollar
                
                
                %Interest Income
                
                $
                0.4
                
                
                $
                0.2
                
                
                $
                0.2
                
                
                
                100.0
                %Interest
      Expense
                
                $
                (0.5
                )
                
                $
                (3.0
                )
                
                $
                2.5
                
                
                
                -83.3
                %Net
      Interest Expense
                
                $
                (0.1
                )
                
                $
                (2.8
                )
                
                $
                2.7
                
                
                
                -96.4
                %as
      a percentage of net sales
                
                
                -0.1
                %
                
                
                -3.3
                %
                
                
                
                
                
                
                3.2
                %




- 40
-


Net
interest expense was $0.1 million in the six months ended June 30, 2010 compared
to $2.8 million in the same period of 2009. The change is primarily the result
of the repayment of the Company’s short term bank loans in 2009 and the
repurchase and retirement of the Company’s Senior Secured Convertible Notes and
Senior Secured Floating Rate Notes Due 2012 in the fourth quarter of 2009 and
the first quarter of 2010, respectively.




Tax





Profit
before tax for Dalian was $33.1 million for the six months ended June 30, 2010,
with profit from Fayetteville and Telford before tax of $1.0
million.  Loss at the Fushi Copperweld parent company level was $12.1
million primarily due to interest expense and loss on extinguishment of high
yield notes, loss on the unwinding of derivative instruments as well as
professional fees and outside service expenses. On a consolidated basis, profit
before tax was $22.0 million and we recognized a net tax expense of $1.2
million.





Six
      Months Ended June 30, 2010(in millions)
                
                Dalian
                
                
                Fayetteville &
                  Telford
                
                
                Parent Company
                
                
                ConsolidatedProfit
      (loss) before income tax
                
                
                33.1
                
                
                
                1.0
                
                
                
                (12.1
                )
                
                
                22.0Income
      tax expense (credit)
                
                
                4.7
                
                
                
                -
                
                
                
                (3.5
                )
                
                
                1.2Profit
      after income tax
                
                
                28.4
                
                
                
                1.0
                
                
                
                (8.6
                )
                
                
                20.8





The
amount of taxable income that the US companies must generate in order to recover
the $15,248,484 deferred tax asset balance at June 30, 2010, is approximately
$44.8 million in the next 20 years.  As of June 30, 2010, the
accumulated pretax loss was $50.9 million, of which $48.5 million is
incurred by the parent company, Fushi Copperweld, and only $2.4 million incurred
by our operations at the our Fayetteville facility. The parent company does not
generate revenues and its expenses have historically primarily included interest
expenses on the High Yield Notes, stock-based compensation, changes in fair
value of derivative liabilities related to Convertible Notes conversion options,
hedge and warrants, as well as professional fees and outside service
expenses.





Net
Income





Six Months Ended June 30,
                    
                    
                    Change(in millions,
      except percentage)
                    
                    2010
                    
                    
                    2009
                    
                    
                    Dollar
                    
                    
                    %Income
      Before Taxes
                    
                    $
                    22.0
                    
                    
                    $
                    4.6
                    
                    
                    $
                    17.4
                    
                    
                    
                    378.3
                    %(Benefit)
      Provision for Income Taxes
                    
                    $
                    1.2
                    
                    
                    $
                    (0.1
                    )
                    
                    $
                    1.3
                    
                    
                    
                    -1300.0
                    %Net
      Income After Taxes
                    
                    $
                    20.8
                    
                    
                    $
                    4.7
                    
                    
                    $
                    16.1
                    
                    
                    
                    342.6
                    %as
      a percentage of net sales
                    
                    
                    16.2
                    %
                    
                    
                    5.6
                    %
                    
                    
                    
                    
                    
                    
                    10.6
                    %




Net
income was $20.8 million in the six months ended June 30, 2010 compared to
$4.7 million in the same period in 2009, representing an increase of
342.6%. As a percentage of net sales, net income increased from 5.6% in the
first half year of 2009 to 16.2% in the same period of 2010. The increase can be
attributed to higher revenues, increased margins, acquisition gains and fewer
expenses tied to changes in derivative liabilities.





Earnings
Per Share





Six Months Ended June 30,2010
                                  
                                  
                                  2009Unaudited
                                  
                                  
                                  UnauditedNet
      Income for Basic Earnings Per Share
                                  
                                  $
                                  20,810,569
                                  
                                  
                                  $
                                  4,663,617Basic
      Weighted Average Number of Shares
                                  
                                  
                                  36,016,078
                                  
                                  
                                  
                                  27,696,388Net
      Income per Share - Basic
                                  
                                  $
                                  0.58
                                  
                                  
                                  $
                                  0.17Net
      Income for Diluted Earnings Per Share
                                  
                                  $
                                  20,810,569
                                  
                                  
                                  $
                                  4,663,617Diluted
      Weighted Average Number of Shares
                                  
                                  
                                  36,633,668
                                  
                                  
                                  
                                  28,054,226Net
      Income per Share - Diluted
                                  
                                  $
                                  0.57
                                  
                                  
                                  $
                                  0.17




Basic and diluted earnings per share
(EPS)for the six months
ended June 30, 2010, were $0.58and $0.57, compared to $0.17 and $0.17 for the
same period last year.





Selected
Balance Sheet Data at June 30, 2010 (unaudited) and the year ended December 31,
2009:





Selected Balance Sheet DataJune 30, 2010
                    
                    
                    December 31, 2009
                    
                    
                    Change(in millions,
      except percentage)
                    
                    Unaudited
                    
                    
                    
                    
                    
                    Dollar
                    
                    
                    %Cash
                    
                    $
                    73.8
                    
                    
                    $
                    60.6
                    
                    
                    $
                    13.2
                    
                    
                    
                    21.8
                    %Accounts
      Receivable, net
                    
                    $
                    64.1
                    
                    
                    $
                    67.3
                    
                    
                    $
                    (3.2
                    )
                    
                    
                    -4.8
                    %PP&E
      (a)
                    
                    $
                    131.0
                    
                    
                    $
                    117.4
                    
                    
                    $
                    13.6
                    
                    
                    
                    11.6
                    %Total
      Assets
                    
                    $
                    348.1
                    
                    
                    $
                    294.7
                    
                    
                    $
                    53.4
                    
                    
                    
                    18.1
                    %Short
      Term Debt
                    
                    $
                    -
                    
                    
                    $
                    14.0
                    
                    
                    $
                    (14.0
                    )
                    
                    
                    -100.0
                    %Long
      Term Debt
                    
                    $
                    0.1
                    
                    
                    $
                    32.7
                    
                    
                    $
                    (32.6
                    )
                    
                    
                    -99.7
                    %Shareholders'
      Equity
                    
                    $
                    326.4
                    
                    
                    $
                    237.0
                    
                    
                    $
                    89.4
                    
                    
                    
                    37.7
                    %


- 41
-


For
breakdown of plant and equipment, please refer to footnote Note–5 for
details.





Our
financial condition continues to improve as measured by an increase of 37.7% in
shareholders’ equity during the six months of 2010 compared to December 31,
2009. Cash increased 21.8% during the period primarily due to the net proceeds
from our public offering consummated in February 2010, and the strong sales,
which were partially offset by repayment of $25.0 million of our long term
loans. Accounts receivable decreased 4.8% as a result of collection of long-time
outstanding receivables. We repurchased and cancelled the Senior Secured
Floating Rate Notes Due 2012 in March 2010, resulting in a long-term liability
of $0.1 million as at June 30, 2010.





LIQUIDITY
AND CAPITAL RESOURCES





We have
historically financed our operations and capital expenditures principally
through private placements of debt and equity, bank loans, and cash provided by
operations. Significant factors affecting our cash liquidity include (1) cash
provided by operating activities, (2) cash used for capital expenditures,
and (3) our available credit facilities and other borrowing arrangements. At
June 30, 2010, the majority of our liquid assets were held in RMB denominations
deposited in banks within the PRC. The PRC has strict rules for converting RMB
to other currencies and for movement of funds from the PRC to other countries.
Consequently, we used funds from our public offering in the first quarter to
recapitalize our non-PRC operations and plan on securing new working
capital lines for non-PRC operations as necessary as our sales increases
and our working capital needs grow.





Under PRC
Company Law and relevant rules and regulations, our PRC subsidiaries may pay
dividends only out of their retained earnings/net profit, if any, calculated
according to PRC accounting principles determined in accordance with PRC
accounting standards, and only after accumulated losses from preceding years
have been fully covered and the following appropriations have been
made:





a)
appropriations to the statutory surplus reserve equivalent to 10% of its net
profits less any accumulated losses, as determined under PRC GAAP; no further
appropriations to the statutory surplus reserve are required once this reserve
reaches an amount equal to 50% of its respective registered
capital;





b)
appropriations to a discretionary surplus reserve as approved by the
shareholders in shareholders' meeting.




As is
customary in the industry, we provide payment terms to most of our customers
that exceed terms that we receive from our suppliers. Therefore, the Company’s
liquidity needs have generally consisted of working capital necessary to finance
receivables and raw material inventory. Capital expenditures have historically
been necessary to expand the production capacity of the Company’s manufacturing
operations.





We
recognize revenue according to the shipment date to ensure that revenues are
recorded in the proper period. Every sales transaction has a formal written
customer order that identifies the price and quantities of the product and
payment terms.





In
summary, our cash flows were:





Six Months Ended June 30,(in millions)
                
                2010
                
                
                2009Net
      cash provided by operating activities
                
                $
                10.0
                
                
                $
                4.5Net
      cash used in investing activities
                
                $
                (14.0
                )
                
                $
                (5.3
                )Net
      cash provided by (used in) financing activities
                
                $
                16.7
                
                
                $
                (14.9
                )Effect
      of exchange rate on cash
                
                $
                0.6
                
                
                $
                (0.0
                )Cash
      and cash equivalents at beginning of period
                
                $
                60.6
                
                
                $
                65.6Cash
      and cash equivalents at end of period
                
                $
                73.8
                
                
                $
                49.9




For the
six months ended June 30, 2010, net cash provided by operating activities was
$10.0 million, an increase of $5.5 million compared to the same period in 2009,
reflecting a significant improvement in operating cash flow year over
year.  The favorable change is primarily attributable to an increase
in net income of $16.1 million and a $16.4 million decrease in accounts
receivables, partially offset by a $28.0 million increase in current advance to
suppliers.





For the
six months ended June 30, 2010, net cash used in investing activities was $14.0
million, and was primarily attributable to the $5.075 million of acquisition
costs associated with Jinchuan, the $1.3 million of acquisition costs associated
with Hongtai, and the $5.65 million payment for the unwinding of a cross
currency hedge.





For the
six months ended June 30, 2010, net cash provided by financing activities was of
$16.7 million, which was primarily attributable to the net proceeds of $56.4
million from stock issuance during the first quarter of 2010, partially offset
by a $35.6 million payment to retire our Senior Secured Floating Rate Notes Due
2012 and the
repayment of the revolving credit line at our US operations in the first quarter
of 2010.





At June
30, 2010, our cash balance was $73.8 million compared to $49.9 million at June
30, 2009 and $60.6 million at December 31, 2009.


- 42
-


Days
sales outstanding (DSO) has decreased from 117 days at December 31, 2009, to
92 days at June 30, 2010, while days payable outstanding (DPO) decreased to
11 days as of June 30, 2010, from 20 days at December 31,
2009.





The
decrease in DSO is primarily attributable to increased efforts to step-up our
collection efforts. Meanwhile, we continued our policy on extending credit terms
to certain credible customers that have long-standing business relationships
with us in order to capture increased market share. We believe that our ability
to extend credit terms puts pressure on our smaller competitors whose limited
capital resources have become further strained due to the global economic crisis
and who are unable to make such adjustments for customers.  We write
off receivables specifically based on the facts we obtain about the customers’
ability to pay. The Company has established appropriate procedures to
facilitate collection.





Standard
Customer and Supplier Payment Terms (days) as below:





Year ended December 31, 2009
              
              Six months ended June 30, 2010Customer
      Payment Term
              
              Payment
      in advance up to 120 days
              
              Payment
      in advance up to 120 daysSupplier
      Payment Term
              
              Payment
      in advance up to 30 days
              
              Payment
      in advance up to 30 days





Aging
Analysis of accounts receivable:





June 30, 2010
                  
                  
                  December 31, 2009(Unaudited)1-30
      days
                  
                  $
                  25,415,494
                  
                  
                  $
                  19,055,52031-60
      days
                  
                  
                  23,218,708
                  
                  
                  
                  17,199,48561-90
      days
                  
                  
                  14,909,704
                  
                  
                  
                  15,029,89991-180
      days
                  
                  
                  1,541,431
                  
                  
                  
                  12,776,229180-365
      days
                  
                  
                  251
                  
                  
                  
                  4,027,988Over
      365 days
                  
                  
                  4,463
                  
                  
                  
                  220,163Bad
      debts allowance
                  
                  
                  (1,031,398
                  )
                  
                  
                  (1,024,684
                  )Total
                  
                  $
                  64,058,653
                  
                  
                  $
                  67,284,600





Inventory
turnover days increased from 25 days at December 31, 2009 to 33 days at June 30,
2010. Advance to supplier’s turnover days has increased from 24 days at December
31, 2009, to 33 days at June 30, 2010. The Company’s principal raw materials
consist of aluminum and steel rods and copper strips. Changes in the price of
copper, which has an established history of volatility, directly affects the
prices of the Company’s products and influence the demand for products. The
Company’s decision to make advanced purchases of raw materials is mainly based
upon (1) the current and projected future market price of raw materials, (2) the
demand and supply situation in the raw materials market, and (3) the forecasted
demand of products. The increased investment in both inventory and advance
to suppliers during second quarter of 2010 was primarily due to the projected
increased demand of our products.





COMMITMENTS
AND CONTINGENCIES





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





Contractual
Obligations





Set out
below are our contractual obligations at June 30, 2010:





Contractual obligations
                  
                  Total
                  
                  
                  Payment due by
                    less than 1 year
                  
                  
                  2–3 years
                  
                  
                  4-5 years
                  
                  
                  More than 5
                    yearsContigent
      second installment payment for Jinchuan acquisition *
                  
                  $
                  5,075,000
                  
                  
                  $
                  5,075,000
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  -Capital-lease
      obligation
                  
                  
                  187,276
                  
                  
                  
                  76,557
                  
                  
                  
                  110,719
                  
                  
                  
                  -
                  
                  
                  
                  -Total
                  
                  $
                  5,262,276
                  
                  
                  $
                  5,151,557
                  
                  
                  $
                  110,719
                  
                  
                  $
                  -
                  
                  
                  $
                  -





Assumption:





*
On January 21, 2010, the Company’s PRC subsidiary, Fushi International (Dalian)
Bimetallic Cable Co., Ltd. entered into an agreement to purchase 100% of the
equity interest of Dalian Jinchuan Electric Cable Co., Ltd. (“Jinchuan”), a
Chinese manufacturer of electric wire and electric cables, from Jinchuan’s
shareholders. The total purchase price for the acquisition will be $10.15
million in cash. The purchase price shall be paid in two equal installments of
$5,075,000. The initial installment was paid upon the closing of the
acquisition, February 5, 2010. If certain net income targets are achieved by
Jinchuan for the fiscal year ended 2010, as confirmed by an audit to be
performed by the Company’s auditors, the balance of the purchase price shall be
paid to the Jinchuan shareholders. If Jinchuan fails to achieve the net income
targets for 2010, the balance of the purchase price payable shall be reduced
proportionally at the rate of 2.91 times the p/e ratio of the audited net income
for 2010. The potential undiscounted amount of all future payments that Fushi
International could be required to pay under the contingent consideration
arrangement is between $0 to $5,075,000. The fair value of the contingent
consideration arrangement of $5,075,000 was estimated by applying the income
approach. That measure is based on significant inputs determined by management
that are not observable in the market, which ASC Topic 820 refers to as Level 3
inputs. Key assumptions include (a) the combined impact of upgrading plans of
national power grid systems in PRC and the synergies from acquisition of
Jinchuan will enhance Jinchuan’s revenue by 21% compared with 2009 and (b) the
synergies from acquisition of Jinchuan will further reduce Jinchuan’s cost by 2%
compared with 2009. As of June 30, 2010, and through the issuance of these
consolidated financial statements, management believed that Jinchuan was able to
meet such net income targets for 2010 to recognize the full amount of the
contingent conisderation.


- 43
-


Legal
Proceedings





We know
of no material, existing or pending legal proceedings against us, nor are we
involved in any material proceeding or pending litigation. There are no
proceedings in which any of our directors, officers or affiliates, or any
registered or beneficial stockholder, is an adverse party or has a material
interest adverse to our company.





Off-Balance
Sheet Arrangements





We have
not engaged in any off-balance sheet transactions.




Critical
Accounting Policies





Please
refer to footnote Note 2 – Summary of Significant Accounting
Policies.





Recent
Accounting Pronouncements





Please
refer to footnote, Recently issued accounting pronouncements under Note 2 –
Summary of Significant Accounting Policies.





Item
3. Quantitative and Qualitative Disclosures about Market Risks





Commodity
Price Risk





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





We are
primarily exposed to price risk related to our purchase of copper used in the
manufacturing of our products. Our copper price management strategy involves the
use of natural techniques, where possible, such as purchasing copper for future
delivery at fixed prices. We did not have any commodity price derivatives or
hedging arrangements outstanding at June 30, 2010, and did not employ any
commodity price derivatives during the three months ended June 30,
2010.




Foreign
Exchange Risk





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





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





We
recognized a foreign currency translation loss adjustment of $1,765,575 and
$39,957 for the six months ended June 30, 2010 and 2009, respectively. For
the three months ended June 30, 2010 and 2009, we recognized a foreign currency
translation loss adjustment of $1,890,314 and $433,866,
respectively.





Credit
Risk





We have
not experienced significant credit risk, as most of our customers are long-term
customers with excellent payment records. We review our accounts receivable on a
regular basis to determine if the allowance for doubtful accounts is adequate at
each quarter-end. We have not seen any major customer’s accounts receivable
experienced any material write-off of accounts receivable in the
past.


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-


Inflation
Risk





In recent
years, China has not experienced significant inflation, and thus inflation has
not had a material impact on our results of operations. According to the
National Bureau of Statistics of China (NBS) (www.stats.gov.cn), the change in
Consumer Price Index (CPI) in China was 4.7%, 5.9% and -0.7% in 2007, 2008 and
2009, respectively. Inflationary factors, such as increases in the cost of our
products and overhead costs, could impair our operating results. Although we do
not believe that inflation has had a material impact on our financial
position or results of operations to date, a high rate of inflation may have an
adverse effect on our ability to maintain current levels of gross margin and
selling, general and administrative expenses as a percentage of sales revenue if
the selling prices of our products do not increase with these increased
costs.





Item
4. Controls and Procedures





(a)
Evaluation of Disclosure Controls and Procedures





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





Under the
supervision and with the participation of our management, including our
principal executive officer and interim principal financial officer, the Company
conducted an evaluation of the effectiveness of the design and operation of our
disclosure controls and procedures as of the end of the period covered by this
report.   Based on this evaluation, our principal executive
officer and interim principal financial officer concluded that as of June 30,
2010, our disclosure controls and procedures were effective.





(b)
Changes in internal controls.





There
were no changes in our internal controls over financial reporting (as defined in
Rule 13a-15(f) and 15d-15(f) under the Exchange Act of 1934) during the three
months ended June 30, 2010 that have materially affected, or are reasonably
likely to materially affect, the Company’s internal control over financial
reporting.





PART
II.  OTHER INFORMATION





Item
1.  Legal Proceedings





None.





Item
1A. Risk Factors




The
following is an additional risk factor relating to our business
operations since the filing of our Annual Report on Form 10-K for the year ended
December 31, 2009.




There
may be unknown risks inherent in our acquisition of Jinchuan, which could have a
significant impact on our financial results.





There may
be risks associated with the acquisition of Jinchuan, though not expected or
anticipated, that may not yet be apparent.  For the first quarter of 2010,
Jinchuan contributed approximately 9% to net sales of our PRC segment.  Any
discovery of adverse information concerning Jinchuan since the acquisition,
depending upon the nature of such information, could have an adverse impact on
the growth opportunities in the utilities market, which we believe are
presented to us by Jinchuan’s business,  and the results of operations for
our PRC segment. While we are entitled to seek indemnification in certain
circumstances, successfully asserting indemnification or enforcing such
indemnification could be costly and time consuming or may not be successful at
all.





There
may be unknown risks inherent in our acquisition of Hongtai, which could have a
significant impact on our financial results.





There may
be risks associated with the acquisition of Hongtai, though not expected or
anticipated, that may not yet be apparent. Any discovery of adverse
information concerning Hongtai since the acquisition, depending upon the nature
of such information, could have an adverse impact on growth opportunities,
which we believe are presented to us by Hongtai’s business and
assets,  and the results of operations for our PRC segment. While we are
entitled to seek indemnification in certain circumstances, successfully
asserting indemnification or enforcing such indemnification could be costly
and time consuming or may not be successful at all.





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




On June
29, 2010, in connection with the acquisition of Hongtai, we issued 263,158
restricted shares of common stock. We relied upon the exemptions from
registration afforded by Regulation S and Section 4(2) of the Securities
Act.




Item
3.  Defaults Upon Senior Securities




None.


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-


Item
5.  Other Information





None.





Item
6.  Exhibits





Exhibit
                    No.
                  
                  Document Description10.1*
                  
                  Separation
      Agreement effective as of June 30, 2010 between Fushi Copperweld, Inc. and
      J. Dwight Berry.31.1
                  
                  Certification
      of the Principal Executive Officer pursuant to Rule 13A-14(A)/15D-14(A) of
      the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of
      the Sarbanes-Oxley Act of 2002.31.2
                  
                  Certification
      of the Principal Accounting and Financial Officer pursuant to Rule
      13A-14(A)/15D-14(A) of the Securities Exchange Act of 1934, as adopted
      pursuant to Section 302 of the Sarbanes-Oxley Act of
  2002.32.1
                  
                  Certification
      of the Principal Executive Officer and of the Principal Accounting and
      Financial Officer pursuant to 18 U.S.C. 1350 (Section 906 of the
      Sarbanes-Oxley Act of 2002).99.1
                  
                  Condensed
      Parent-Only Financial Statements of Fushi Copperweld, Inc. under Schedule
      I of Article 5-04 of Regulation
S-X.





*
Management contract or compensatory plan or arrangement


- 46
-


SIGNATURES





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




FUSHI
      COPPERWELD, INC.Date:
      August 9, 2010
                By:
                /s/
      Wenbing Christopher WangName:
      Wenbing Christopher WangTitle:
      President and Interim Chief Financial Officer
                  (Interim
      Principal Accounting and Financial
Officer)




- 47
-


Exhibit
Index





Exhibit
                  No.
                
                Document Description10.1*
                
                Separation
      Agreement effective as of June 30, 2010 between Fushi Copperweld, Inc. and
      J. Dwight Berry.31.1
                
                Certification
      of the Principal Executive Officer pursuant to Rule 13A-14(A)/15D-14(A) of
      the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of
      the Sarbanes-Oxley Act of 2002.31.2
                
                Certification
      of the Principal Accounting and Financial Officer pursuant to Rule
      13A-14(A)/15D-14(A) of the Securities Exchange Act of 1934, as adopted
      pursuant to Section 302 of the Sarbanes-Oxley Act of
  2002.32.1
                
                Certification
      of the Principal Executive Officer and of the Principal Accounting and
      Financial Officer pursuant to 18 U.S.C. 1350 (Section 906 of the
      Sarbanes-Oxley Act of 2002).99.1
                
                Condensed
      Parent-Only Financial Statements of Fushi Copperweld, Inc. under Schedule
      I of Article 5-04 of Regulation
S-X.







- 48
-