UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 Washington,
D.C.  20549
 
 FORM
10-KSB
 
 (Mark
One)
 
 S
              ANNUAL
      REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
 
 For
      the fiscal year ended September 30,
2008
 
  ̈
              TRANSITION
      REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
 
 For
      the transition period from ______ to ______Commission
      File Number 000-32875
 
 ALLOY
STEEL INTERNATIONAL, INC.
 (Name of
small business issuer in its charter)
 
 Delaware
              
              98-0233941(State
      or other jurisdiction of incorporation or organization)
              
              (I.R.S.
      Employer Identification No.)42
      Mercantile WayP.O.
      Box 3087 Malaga D C 6945Western
      Australia(Address
      of principal executive offices)Issuer’s
      telephone number:  +61 (8) 9248 3188Securities
      registered under Section 12(b) of the Exchange Act:
              
              NoneSecurities
      registered under Section 12(g) of the Exchange Act:
              
              Common
      stock, $0.01 par value
 
 Check
whether the issuer is not required to file reports pursuant to Section 13 or
Section 15(d) of the Exchange Act.  ̈
 
 Check
whether the issuer (1) filed all reports required to be filed by Section 13 or
15(d) of the Exchange Act during the past 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90
days.  Yes:  S
No:   ̈
 
 Check if
there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of the Form 10-KSB
or any amendment to this Form 10-KSB S
 
 The
issuer’s revenues for the fiscal year ended September 30, 2008 was
$13,511,458.
 
 The
aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the common equity was
sold, or the average bid and asked price of such common equity, as of December
1, 2008 was $2,273,963.
 
 As of
December 1, 2008, the issuer had a total of 16,950,000 shares of common stock
outstanding.
 
 Transitional
Small Business Disclosure Format (check one):
 
 Yes  ̈No S
 
 Indicate
by check mark whether the registrant is a shell company (as defined by Rule
12b-2 of the Exchange Act).
 Yes:
 ̈No: S
  
 
  PART
I
  FORWARD-LOOKING
STATEMENTS
  Information
included or incorporated by reference in this filing may contain forward-looking
statements within the meaning of Section 27A of the Securities Act and
Section 21E of the Exchange Act.  This information may involve
known and unknown risks, uncertainties and other factors which may cause our
actual results, performance or achievements to be materially different from the
future results, performance or achievements expressed or implied by any
forward-looking statements.  Forward-looking statements, which involve
assumptions and describe our future plans, strategies and expectations, are
generally identifiable by use of the words “may,” “will,” “should,” “expect,”
“anticipate,” “estimate,” “believe,” “intend” or “project” or the negative of
these words or other variations on these words or comparable
terminology.
  This
filing contains forward-looking statements, including statements regarding,
among other things, (a)Alloy Steel’s projected sales and profitability, (b) Alloy Steel’s
growth strategies, (c) anticipated trends in Alloy Steel’s industry,
(d) Alloy Steel’s future financing plans and (e) Alloy Steel’s
anticipated needs for working capital. These statements may be found under
“Management’s Discussion and Analysis or Plan of Operation” and “Description of
Business,” as well as in this filing generally.  Actual events or
results may differ materially from those discussed in forward-looking statements
as a result of various factors.  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.  In addition to the
information expressly required to be included in this filing, Alloy Steel will
provide such further material information, if any, as may be necessary to make
the required statements, in light of the circumstances under which they are made
not misleading.
   Item
      1.
              Description
      of Business.
  Alloy
Steel International, Inc. was incorporated in Delaware in May
2000.  Our principal executive office is located at 42 Mercantile Way,
Malaga, Western Australia 6945.  Our telephone number is +61 (8) 9248
3188, our facsimile is +61 (8) 9248 3166.  Our Email is
info@alloysteel.net and our Internet address is www.alloysteel.net.
   Overview
of Business
  We
manufacture and distribute Arcoplate, a wear-resistant alloy overlay wear plate
produced through a patented process.  We believe that wear is the
largest single factor leading to production losses in the mining,
mineral-processing, and steel manufacturing industries. Consequently, wear
solutions are indispensable for these businesses.  The wearing of
metal parts is generally defined as a gradual decay or breakdown of the
metal.  This wear of equipment may be due to many causes and
accordingly, the selection of wear plate solutions can be a relatively complex
process.
  In order
to minimize the effects of wear, businesses have traditionally employed such
wear-combating materials as rubber compounds, ceramics, alloy castings, welded
overlay wear plates, and quenched and tempered carbon steel
plates.  We believe that each of these materials offer a limited
solution to the problem of wear.  While tungsten carbide is generally
recognized by the mining, mineral-processing and steel manufacturing industries
as the most wear-resistant material suitable for industrial use, because of its
high carbide content, we believe that the high costs associated with tungsten
carbide make it impractical for most businesses.  We believe that
Arcoplate provides industry with solutions to most wear-related problems at a
cost which is competitive with conventional welded overlay wear plates and
substantially lower than tungsten carbide.
  Arcoplate
  The
patented process by which we manufacture Arcoplate enables us to smoothly and
evenly apply an alloy overlay to a sheet of steel, creating a metallurgical bond
between the alloy and the steel backing plate that is resistant to wear caused
by impact and/or abrasion.    We believe that our Arcoplate
product line will substantially lower down time and the lost production
resulting from this down time.
  Conventional
welded wear plates have been used in the manufacturing, mining and construction
industries for more than half a century and they are characterized by several
functional limitations:
  ·
              the
      tendency to separate into chips or fragments when subjected to high
      impact;
  1
  ·
              uneven
      base metal dilution resulting in uneven alloy content;
  and
  ·
              rough
      surfaces which result in poor material
flow.
  We
believe Arcoplate has properties that allow it to overcome the limitations of
conventional welded wear plates.  Independent laboratory and field
tests, have shown that Arcoplate provides a wear-resistant barrier superior to
that provided by conventional single or multiple-layer wear plates. This is
because of its higher carbide content and smoother surface layer. Arcoplate wear
plate sheets also can withstand rolling and pressing, within specified
fabrication guidelines.
  The
claims with respect to the properties of Arcoplate, such as bond strength,
specific hardness, density, hardness, resonance and wear resistance, have been
subjected to studies and testing, by independent laboratories, universities and
other recognized testing facilities, including Aust-Amet Pty Ltd and Central
Power Research Institute of Bangalore India. Commercial fees were paid to
Aust-Amet Pty Ltd while no fees were paid to the Power Research Institute of
Bangalore and the National Research Council of Canada.
  Arcoplate
is designed for installation and use where structures and machinery suffer
“wear” and “hangup” problems. Common situations are:
  ·
              the
      mining of iron, gold, nickel, coal, copper and other
  ores;
  ·
              brick
      and cement works;
  ·
              power
      stations;
  ·
              the
      manufacture of ore feed bins, transfer chutes, dredging systems and
      conveyor side skirts;
  ·
              bulldozer
      arms and blades; and
  ·
              truck
      tray liners and bucket loader
liners.
  Arcoplate
is manufactured in a range of grades designed for specific
applications.  Our products are designed for ease of handling and can
be fabricated to suit our customers’ specific requirements of shape, size and
weight.  Sheets of Arcoplate can be welded together to cover large
surface areas.  We also provide technical consultation services to
customers and their design engineers.
  We
believe that our proprietary method of manufacturing Arcoplate results in a
product that has many technical advantages over conventional welded wear
plates.  Conventional welded wear plates are generally characterized
by structural weaknesses and limited wear resistance resulting from inefficient
production methods.  In order to achieve a wear-resistant, flat
surface, a conventional wear plate must be rolled and pressed after its layers
of hardfacing have been welded together.  This post-production rolling
and pressing can result in a weakened surface structure that cannot withstand
high impact conditions.  The Arcoplate process does not require
post-production rolling and pressing.  During the Arcoplate process,
the plate is coated with the desired alloy thickness in one application,
resulting in a uniform and, therefore, structurally sound
surface.  The Arcoplate process maintains a high carbide content in
the overlay, which makes the plate more wear resistant than conventional welded
wear plate.
  Arcoplate
products are currently distributed to customers in the United States, South
America, India, Indonesia, Singapore, South Africa, Japan, China, Canada,
Malaysia and other countries as well as being extensively used in the mining
industry in Australia.
   New
Arcoplate Mill
  After
being delayed by the inability to obtain supply of certain components in a
timely manner from overseas suppliers, the second Arcoplate mill has been
completed and scheduled to go into its testing phase.
  Subject
to the testing and fine tuning of the mill, it is expected that it will commence
commercial production in February 2009.
  2
  Sales
and Marketing Strategy
  The
company’s objective is to become an international market leader in
wear-resistant alloy steel products and to establish significant market share
and brand awareness for Arcoplate within the mining, mineral-processing and
steel industries. We believe that we can capitalize on our existing patented
process for producing Arcoplate through the direct manufacture and sale of
Arcoplate-based products to original equipment manufacturers and distributors
worldwide.  We are establishing market presence by visiting
international and domestic trade shows, presenting technical papers at industry
conferences, and appointing distributors who will be trained to present and
promote Arcoplate products as a solution for wear-related problems.
  In the
year ended September 30, 2008, two customers accounted individually for at least
31.9% of our annual sales.
  We
anticipate incurring increased expenditures in connection with our marketing
activities.  Our marketing activities are also expected to include
substantial engineering support to assist in the development of products for
specific customer requirements and certain markets.
  We are
marketing Arcoplate products to consultant engineering companies both
internationally and in Australia in order that they may ultimately incorporate
Arcoplate materials into their equipment and plant designs.  We will
offer the services of our own engineering department to assist these engineers
with design planning to optimize solutions for wear and material flow
situations.
  The
company, as disclosed earlier this year, entered into a joint venture to service
the burgeoning mining industry in Mongolia.  Mongolia has experienced
a large growth in companies preparing to mine for minerals in the
country.  This has resulted in all the major mining equipment
manufacturers being represented in the country and they have expressed a
positive requirement to have Arcoplate available to them.
   Intellectual
Property
  We
believe that protection of our licensed proprietary technology and know-how is
critical to the development of our business.  We have obtained patents
for process in United States, Mexico, Brazil, Canada, Japan, Burma, South Korea,
Australia, France, Germany, Great Britain, Greece, Italy, Belgium, Netherlands
and Sweden.  We cannot assure you that our existing patent rights, or
any other patent rights that may be granted, will be valid and enforceable or
provide us with meaningful protection from competitors.  We cannot
assure you that any pending patent application will issue as a patent, or that
any claim thereof will provide protection against infringement.  If
our present or future patent rights are ineffective in protecting us against
infringement, our marketing efforts and future revenues could be materially and
adversely affected.  In addition, if a competitor were to infringe our
patent rights, the costs of enforcing our patent rights may be substantial or
even prohibitive.
   Research
and Development
  We are
continually engaged in the development of new products and improvements to our
existing products.
   Manufacturing
and Supply
  The raw
materials we employ are principally steel and a proprietary alloy
compound.  We presently purchase steel plate and alloy materials from
various suppliers.  Four of our suppliers, M & J Metals Pty Ltd,
Bisley & Company Pty Ltd, UPE Australia and Metals & Powders Trading AB,
account for more than 60% of the raw material we require.  We also
rely heavily on the use of fluxes, compounds designed to remove impurities,
during the manufacturing process.  We purchase our requirements for
fluxes from various suppliers.  We cannot assure you that we will be
able to continue to obtain desired quantities of steel, alloy materials and
fluxes on a timely basis at reasonable prices and upon favorable
terms.  We monitor the quality of our products by frequent tests and
material certification, and maintain a strict internal quality control system to
monitor the quality of production.
  3
  Government
Regulation
  The
Arcoplate manufacturing plant is subject to many laws and regulations relating
to the protection of the environment.  These laws and regulations
impose requirements concerning, among other matters, the treatment, acceptance,
identification, storage, handling, transportation and disposal of industrial
by-products, hazardous and solid waste materials, waste water, air emissions,
noise emissions, soil contamination, electromagnetic radiation, surface and
groundwater pollution, employee health and safety, operating permit standards,
monitoring and spill containment requirements, zoning, and land
use.  We frequently examine ways to minimize any impact on the
environment and to effect cost savings relating to environmental
compliance.  Our management believes that we are in material
compliance with all applicable environmental laws and that our products and
processes do not present any unusual environmental concerns.
  Our
operations are also governed by laws and regulations relating to workplace
safety and health, principally under the Australian Occupational Safety and Health
Act (WA) 1984, which, among other requirements, establish employee
training, supervision and general safety standards.  Our management
believes that we are in material compliance with all applicable workplace safety
and health laws and that our products and processes do not present any unusual
safety concerns.
  We
require, and must comply with, various authorizations, permits and licenses to
conduct our operations.  Government agencies continually monitor our
compliance with authorization, permits and licenses and our facilities are
subject to periodic unannounced inspection by local, state and federal
authorities.  Violations of any permit or license, if not remedied,
could result in our incurring substantial fines, or suspension of our
operations.
   Competition
  The wear
plate solutions industry is highly competitive.  We compete and will
continue to compete in markets against larger multi-national companies, all of
which are well-established and may have substantially greater financial and
other resources than us.  Competitive market conditions could
adversely affect our profit levels if we were required to reduce product prices
to remain competitive.  We are, however, confident that the continuing
development of alloys and subsequently our product range will allow us to hold
and increase our presence in the market place.
   Employees
  We
employed 33 persons on a full-time basis as of December 1, 2008, including two
executive officers, eight administrative personnel, three marketing personnel
and 19 manufacturing personnel.  None of our employees are members of
a labor union.  We consider our relationship with our employees to be
good.
   Item
      2.
              Description
      of Property.
  Our
business is conducted from leased premises located at 42 Mercantile Way Malaga
Western Australia.
  This
lease is due for renegotiation prior to the end of June 2010.  The
lessor has indicated that a renewal will be granted.
   Item
      3.
              Legal
      Proceedings.
  There are
no material legal proceedings pending or, to our best knowledge, threatened
against us.
   Item
      4.
              Submission
      of Matters to a Vote of Security
Holders.
  We held
our Annual Meeting of Stockholders on August 6, 2008.
  4
  PART
II
   Item
      5.
              Market
      for Common Equity and Related Stockholders Matters and Small Business
      Issuer Purchases of Equity
Securities
  Our
common stock is traded on the Over the Counter Bulletin Board. The following
table sets forth the range of high and low bid quotations for our common stock
for each calendar quarter within the last two years.
  Bid
      Price Per ShareYear
      ended September 30, 2008
              
              High
              
              
              LowOctober
      1 – December 31, 2007
              
              $
              0.72
              
              
              $
              0.49January
      1 – March 31, 2008
              
              $
              1.97
              
              
              $
              1.22April
      1 – June 30, 2008
              
              $
              2.50
              
              
              $
              1.25July
      1 – September 30, 2008
              
              $
              2.76
              
              
              $
              1.35Year
      ended September 30, 2007
              
              High
              
              
              LowOctober
      1 – December 31, 2006
              
              $
              0.22
              
              
              $
              0.11January
      1 – March 31, 2007
              
              $
              0.60
              
              
              $
              0.11April
      1 – June 30, 2007
              
              $
              0.70
              
              
              $
              0.39July
      1 – September 30, 2007
              
              $
              0.85
              
              
              $
              0.30
  The above
prices were obtained from Nasdaq, Inc.  The quotations represent
inter-dealer quotations, without retail mark-up, markdown or commission, and may
not necessarily represent actual transactions.
  As of
December 1, 2008, there were approximately 131 holders of record of our common
stock.
  Our Board
of Directors may from time to time declare, and we may pay, dividends on our
outstanding shares in the manner and upon the terms and conditions provided by
law.  To date, we have not declared or paid any dividend.
  5
  Equity
Compensation Plans
  Number
      of securities to be issued upon exercise of outstanding options, warrants
      and rights
              Weighted-average
      exercise price of outstanding options, warrants and rights
              Number
      of securities remaining available for future issuance under equity
      compensation plans (excluding securities reflected in column
      (a))(a)
              (b)
              (c)Equity
      compensation plans approved by security holders (1)
              None
              None
              2,000,000Equity
      compensation plans not approved by security holders
              —
              —
              —Total
              None
              None
              2,000,000
 
 (1)
Includes our 2000 Stock Option Plan.
  Item
      6.
              Management's
      Discussion and Analysis or Plan of
Operation
  You
should read the following discussion and analysis of our financial condition and
results of operations in conjunction with our financial statements, the notes to
our financial statements and the other financial information contained elsewhere
in this filing.
   Overview
  We
manufacture and distribute Arcoplate, a wear-resistant alloy overlay wear plate,
through a patented production process. This patented process by which we
manufacture Arcoplate enables us to smoothly and evenly apply an alloy overlay
to a sheet of mild steel, creating a metallurgical bond between the alloy and
the steel backing plate that is resistant to wear caused by impact and/or
abrasion.  We believe that in the mining processing industries, wear
is the primary cause of down time, the period of time where machinery is not in
operation because of the necessity of repairs or refurbishment. We believe that
our Arcoplate product line will substantially lower down time and the resulting
lost production.
   Plan
of Operation
  We
intend to achieve market penetration through a multi-step process. In Australia,
we intend to combine targeted marketing with advertising in trade journals and
magazines. At the international level, we intend to establish market presence by
visiting international trade shows, presenting technical papers at industry
conferences, and appointing distributors who will be trained to present and
promote Arcoplate products as a solution for wear-related problems. Where
appropriate, we will commence our own operations or enter into joint ventures
with suitable parties in order to achieve market presence. We are presently
looking at the feasibility of licensing the production of Arcoplate in certain
countries and market areas.
   Results
of Operations
   Sales
  Alloy
Steel had sales of $13,511,458 for the year ended September 30, 2008, compared
to sales of $8,729,644 for the year ended September 30, 2007. These sales
consist solely of the sale of our Arcoplate product. Substantially all of our
sales during the periods were denominated in US dollars.  Sales
denominated in Australian dollars were converted into U.S. dollars at the
conversion rate of $0.90762 and $0.80867, representing the average foreign
exchange rate for the years ended September 30, 2008 and 2007
respectively.  The increase was due primarily to successful marketing
efforts mainly in the Australian market which led to securing some major supply
contracts for this year.
  6
  Costs
of Sales
  Alloy
Steel had cost of sales of $6,541,427 for the year ended September 30, 2008,
compared to cost of sales of $4,385,872 for the year ended September 30, 2007.
The gross profit amounted to $6,970,031 compared to $4,343,772 for the year
ended September 30, 2007. The gross profit percentage increased to 51.6% in 2008
from 49.8% in 2007 due to the adoption of more favorable pricing policies for
larger orders and tenders during the year.
   Selling,
General and Administrative Expenses
  Alloy
Steel had selling, general and administrative expenses of $3,359,311 for the
year ended September 30, 2008, compared to $2,320,778 in the year ended
September 30, 2007. The increase was primarily due to the increased marketing
and promotional activity of the company during the year ending September 30,
2008. The increase in travel and similar expenses mainly occurred due to the
costs in establishing operations in Indonesia and Mongolia.
   Income
(Loss) Before Income Tax Expense (Benefit)
  Our
income before tax expense was $3,670,143 for the year ended September 30, 2008,
compared to $1,963,452 for the year ended September 30, 2007.
   Income
Tax Expense (Benefit)
  Alloy
Steel had income tax expense of $1,164,368 for the year ended September 30, 2008
compared to $654,587 for the year ended September 30, 2007.  The
current year’s income tax expense relates to taxes payable in
Australia.
   Net
Income (Loss)
  We had a
net income of $2,507,912 or $0.15 per share, for the year ended September 30,
2008, compared to $1,308,865 or $0.08 per share for the year ended September 30,
2007.
   Liquidity
  For the
year ended September 30, 2008, net cash provided by operating activities was
$1,427,687.  The net income may be reconciled to this amount by an
adjustment for depreciation and amortization of $198,080, write down of assets
to fair values of $76,762, income received in forms other than cash of $3,105,
non-controlling shareholders interests in subsidiary loss of $2,137 and a
decrease in cash and cash equivalents attributable to changes in operating
assets and liabilities of $1,349,825, which consisted primarily of an increase
in inventory of $1,878,924, which was offset by a decrease in accounts
receivable and other current assets of $81,110, a decrease in accounts payable
and other current liabilities of $185,287 and an increase in tax payable of
$633,276.
  Future
cash flows from sales are anticipated to be sufficient to sustain the Company’s
operations. The Company is also reviewing available options to raise capital in
alternative markets, although it currently has no commitments to do
so.
  As of
September 30, 2008, we had a working capital surplus of $2,409,040.
  7
  The
Company is obligated under various contractual commitments over the next five
years. The following is a summary of the five-year commitments of the Company as
of September 30, 2008:
  Total
              
              
              Less
      Than
                1
      Year
              
              
              1-3
      Years
              
              
              4-5
      Years
              
              
              After
                5
      YearsContractual
      ObligationsLong
      term debt
              
              
              301,467
              
              
              
              75,739
              
              
              
              225,728
              
              
              
              -
              
              
              
              -Operating
      leases
              
              
              325,826
              
              
              
              186,186
              
              
              
              139,640
              
              
              
              -Total
      contractual obligations
              
              $
              627,923
              
              
              $
              261,925
              
              
              $
              365,368
              
              
              
              -
              
              
              
              -
 
 We
anticipate that the funding of our working capital needs will come primarily
from the cash generated from our operations.  To the extent that the
cash generated from our operations is insufficient to meet our working capital
needs or the purchase of machinery or equipment, then we will need to raise
capital from the sale of securities in private offerings or loans.  We
have no commitments for capital.  The sale of additional equity or
convertible debt securities could result in dilution to our
stockholders.  There can be no assurance that financing will be
available in amounts or on terms acceptable to us, if at all.
   Significant
Changes in Numbers of Employees
  We
anticipate hiring 2 additional manufacturing employees in the next 12
months.
   Critical
Accounting Policies
  We have
prepared our financial statements and related disclosures in conformity with
accounting principles generally accepted in the United States of America. This
has required us to make estimates, judgments, and assumptions that affected the
amounts we reported. Note 1 of the notes to consolidated financial statements
contains the significant principles that we used to prepare our consolidated
financial statements.
  We have
identified several critical accounting policies that require us to make
assumptions that were uncertain at the time of our estimates. Had we used
different estimates and assumptions, the amounts we recorded could have been
significantly different. Additionally, actual results that would have material
effect on our financial condition or results of operation could be based on
different assumptions or conditions. The critical accounting policies that were
affected by the estimates, assumptions, and judgments used in the preparation of
financial statements are listed below.
   Allowance
for Doubtful Accounts
  We do not
believe there is a need for a provision for doubtful accounts as of September
30, 2008.  The directors have reached this conclusion notwithstanding
the current economic climate by having regard to the company’s credit criteria
and quality of clients.
   Inventories
  Our
inventories are recorded at the lower of cost or net realizable market, with
cost based on a first-in, first-out basis. We periodically assess this inventory
for obsolescence and potential excess by reducing the difference between our
cost and the estimated market value of the inventory based on assumptions about
future demand and historical sales patterns. Our inventories consist of
materials and products that are subject to technological obsolescence and
competitive market conditions. If market conditions or future demand are less
favorable than our current expectations, additional inventory write downs or
reserves may be required, and that could have an adverse effect on our reported
results in the period the adjustments are made.
  8
  Long-Lived
Assets
  We review
our long-lived assets for potential impairment based on a review of projected
undiscounted cash flows associated with these assets. Long-lived assets are
included in impairment evaluations when events and circumstances exist that
indicate the carrying amount of these assets may not be recoverable. Measurement
of impairment losses for long-lived assets that we expect to hold and use is
based on the estimated fair value of the assets. We have recorded asset
impairment charges when the carrying value of certain assets was in excess of
their fair value. Should market conditions or the assumptions used by us in
determining the fair value of these assets change, or management change plans
for usage of certain assets, additional charges to operations may be required in
the period in which such conditions occur.
   RISK
FACTORS
  Alloy
Steel is subject to various risks that may materially harm our business,
financial condition and results of operations.  You should carefully consider the
risks and uncertainties described below and the other information in this filing
before deciding to purchase our common stock.  These are not the only
risks and uncertainties that we face.  If any of these risks or
uncertainties actually occurs, our business, financial condition or operating
results could be materially harmed.
   If
We Are Unable To Effectively Manage Our Plan of Expansion, We Will Not Achieve
Profitability.
  We plan
to expand all aspects of our operations.  As a result, we need to
expand our financial and management controls, reporting systems and
procedures.  We will also have to expand, train and manage our work
force for marketing, sales, engineering and technical support, product
development, and manage multiple relationships with various customers, vendors,
strategic partners and other third parties.  We will need to
continually expand and upgrade our technology and develop new
products.  If we are unable to manage our growth effectively, we may
be unable to handle our operations, control costs or otherwise function in a
profitable manner, or at all.
   If
We Are Unable To Protect Our Proprietary Technology, We Could Lose Our
Competitive Advantage.
  We
currently have only limited patent protection for our technology, and may be
unable to obtain even limited protection for our proprietary technology in
certain foreign countries.  Currently, we have patents in various
countries.  We cannot assure you that any granted patent or pending
patent application will provide protection against infringement.
   If
We Do Not Correctly Anticipate the Magnitude and Direction of Currency Exposure,
There Could Be A Material Adverse Impact On Our Prospects for
Profitability.
  All of
our production will take place overseas, and many of the raw materials and
supplies for our products will be purchased in foreign currencies.  In
addition, international sales will likely be denominated in local
currencies.  These factors may combine to expose us to currency gains
and losses in addition to gains and losses from our basic
operations.  The magnitude and direction of future currency exposure
cannot be predicted, nor can we assure you that we will be able to manage such
exposure to our benefit or to a neutral effect.
   Our
Business Would Be Materially and Adversely Affected If We Were Unable To Receive
Materials At Prices and On Terms Presently Made Available To Us By Our Principal
Suppliers.
  We
presently purchase our principal raw materials, steel and alloy compound
components, from a limited number of suppliers.  There are no written
contracts between us and our suppliers, and requirements are purchased using
individual purchase orders, with customary terms regarding payment, quality and
delivery.  Although we believe that alternatives are readily available
from other suppliers, we cannot assure you that we will be able to continue to
obtain desired quantities of materials on a timely basis at prices and on terms
deemed reasonable by us.  Our business would be materially and
adversely affected if we are unable to continue to receive materials at prices
and on terms comparable to those presently made available to us by our principal
suppliers.
  9
  Since
We Depend Heavily Upon Electrical Power for Our Operations, Any Increase In
Prices Would Adversely Affect Our Business and Profitability.
  We
consume a large amount of electrical power during production.  The
amount of electrical power consumed during the Arcoplate process represents
approximately 3% of our overall production costs.  There may be
fluctuations in the price of electricity due to changes in the regulation of
utility companies in Australia, and in other jurisdictions where we may engage
in production.  We cannot assure you that we will be able to continue
to obtain our energy supplies at current prices, and any material increase in
prices of electricity would adversely affect our business and
profitability.
   Our
Common Stock May Be Affected By Limited Trading Volume and May Fluctuate
Significantly.
  There has
been a limited public market for our common stock and there can be no assurance
that an active trading market for our common stock will develop.  As a
result, this could adversely affect our shareholders’ ability to sell our common
stock in short time periods, or possibly at all.  Our common stock has
experienced, and is likely to experience in the future, significant price and
volume fluctuations, which could adversely affect the market price of our common
stock without regard to our operating performance.  In addition, we
believe that factors such as quarterly fluctuations in our financial results and
changes in the overall economy or the condition of the financial markets could
cause the price of our common stock to fluctuate substantially.
   We
May Need To Raise Additional Capital To Finance Operations or
Expansion.
  We have
relied on significant external financing to fund our operations.  Such
financing has historically come from a combination of borrowings from and sale
of common stock to third parties and funds provided by certain officers and
directors.  We cannot assure you that financing whether from external
sources or related parties will be available if needed or on favorable
terms.  The sale of our common stock to raise capital may cause
dilution to our existing shareholders.  Our inability to obtain
adequate financing will result in the need to reduce or curtail our business
operations.  Any of these events would be materially harmful to our
business and may result in a lower stock price.
   We
Have A Limited Customer Base.
  At
present, our customer base consists primarily of companies involved in the
mining and dredging industries.  Our ability to operate depends on
increasing our customer base and achieving sufficient gross profit
margins.  We cannot assure you that we will be able to increase our
customer base or to operate profitably.  If any of our major customers
stop or delay its purchases of our products, our revenue and profitability would
be adversely affected.  For the year ended September 30, 2008, two
customers accounted for at least 31.9% of our annual sales.  We
anticipate that sales of our products to relatively few customers will continue
to account for a significant portion of our revenue.  If these
customers cancel or delay their purchase orders, our revenue may
decline.  We cannot assure you that our current customers will
continue to place orders with us, that orders by existing customers will
continue at the levels of previous periods or that we will be able to obtain
orders from new customers.  Although our financial performance depends
on large orders from key customers and resellers, we do not have binding
commitments from any of them.
   Our
Common Stock Is Deemed To Be “Penny Stock”, Which May Make It More Difficult for
Shareholders To Sell Their Shares Due To Suitability Requirements.
  Our
common stock is deemed to be “penny stock” as that term is defined in Rule
3a51-1 promulgated under the Securities Exchange Act of 1934.  Penny
stocks are stock:
  ·
              With
      a price of less than $5.00 per
share;
  10
  ·
              That
      are not traded on a “recognized” national
  exchange;
  ·
              Whose
      prices are not quoted on the Nasdaq automated quotation system (Nasdaq
      listed stock must still have a price of not less than $5.00 per share);
      or
  ·
              In
      issuers with net tangible assets less than $2.0 million (if the issuer has
      been in continuous operation for at least three years) or $5.0 million (if
      in continuous operation for less than three years), or with average
      revenues of less than $6.0 million for the last three
    years.
  Broker/dealers
dealing in penny stocks are required to provide potential investors with a
document disclosing the risks of penny stocks.  Moreover,
broker/dealers are required to determine whether an investment in a penny stock
is a suitable investment for a prospective investor.  These
requirements may reduce the potential market for our common stock by reducing
the number of potential investors.  This may make it more difficult
for our shareholders to resell shares to third parties or to otherwise dispose
of them.  This could cause our stock price to decline.
   We
Face Significant Competition Within Our Market.
  We expect
competition to persist and intensify in the future as new products and
manufacturers enter the market. The wear plate solutions industry is highly
competitive.
  Many of
our competitors are substantially larger than Alloy Steel and have significantly
greater financial, marketing, technical and manufacturing resources with more
established distribution channels.  These competitors may be able to
respond more quickly to new or emerging technologies and changes in customer
requirements or devote greater resources to the development, promotion and sale
of their products than we can.  Furthermore, some of our competitors
may make strategic acquisitions or establish cooperative relationships to
increase their ability to rapidly gain market share by addressing the needs of
our prospective customers.  These competitors may enter our existing
or future markets with solutions that may be less expensive, provide higher
performance or additional features or be introduced earlier than our
solutions.  If any technology is more reliable, resistant, and less
expensive or has other advantages over our technology, then the demand for our
products and services would decrease, which would seriously harm our
business.
  We expect
our competitors to continue to improve the performance of their current products
and introduce new products and technologies as industry standards and customer
requirements evolve.  These new products and technologies could
supplant or provide lower cost alternatives to our products.  To be
competitive, we must continue to invest resources in research and development,
sales and marketing, and customer support.
  Increased
competition is likely to result in price reductions, reduced gross margins,
longer sales cycles, and loss of market share, any of which would seriously harm
our business and results of operations.
   We
Have Limited Marketing and Sales Capability.
  Because
of our previous limited working capital, we have not had the resources to fully
implement our marketing and sales strategy.  In order to increase our
revenues, we are in the process of further implementing a marketing and sales
force with technical expertise and marketing capability.  There can be
no assurance that we will be able to:
  ·
              Establish
      and develop such a sales force;
  ·
              Gain
      market acceptance for our products;
  ·
              Obtain
      and retain qualified sales personnel on acceptable terms;
    and
  ·
              Meet
      our proposed marketing schedules or
plans.
  To the
extent that we arrange with third parties to market our products, the success of
such marketing will depend on the efforts of these third parties.
  11
  Item
      7.
              Financial
      Statements.
  Our
audited consolidated financial statements for the year ended September 30, 2008
appear following Item 14 of this report and are incorporated herein by
reference.
   Item
      8.
              Changes
      In and Disagreements with Accountants on Accounting and Financial
      Disclosure.
  None.
   Item
      8A.
              Controls
      and Procedures
  (a)
              Evaluation
      of disclosure controls and
procedures
  Management
is responsible for establishing and maintaining adequate internal control over
the financial reporting function of the company.
  Based on
their evaluation of our disclosure controls and procedures (as defined in Rule
13a-15 (e) under the Securities Exchange Act of 1934 (the “Exchange Act”)), our
principal executive officer and principal financial officer have
concluded  that as of the end of the period covered by this Annual
Report on Form 10-KSB such disclosure controls and procedures are effective to
ensure that information required to be disclosed in reports that we file or
submit under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in Securities and Exchange Commission rules
and forms.
  This
annual report does not include an attestation report of the company's registered
public accounting firm regarding internal control over financial reporting.
Management's report was not subject to attestation by the company's registered
public accounting firm pursuant to temporary rules of the Securities and
Exchange Commission that permit the company to provide only management's report
in this annual report.
  (b)
              Changes
      in internal control over financial
reporting.
  During
the last quarter of the year under report, there was no change in our internal
control over financial reporting that has materially affected, or is reasonably
likely to materially affect, our internal control over financial
reporting.
   Item
      8B.
              Other
      Information
  None.
  12
  PART
III
   Item.
      9
              Directors,
      Executive Officers, Promoters and Control Persons; Compliance with Section
      16(a) of the Exchange Act
  Our
present directors and executive officers are as follows:
  Name
              
              Age
              
              PositionGene
      Kostecki
              
              63
              
              President,
      Chief Executive Officer and a DirectorAlan
      C. Winduss
              
              67
              
              Chief
      Financial Officer, Secretary and a
Director
  The
following is a brief summary of the background of each executive officer and
director:
  Gene Kostecki has served as a
director and as our President and Chief Executive Officer since June 2000. From
July 1995 to July 1997, Mr. Kostecki served as Managing Director of the Collier
Unit Trust, an engineering business and distributor based in Western
Australia.  He acts as our President and Chief Executive Officer on a
full-time basis.
  Alan C. Winduss has served as
a director and as our Chief Financial Officer and Secretary since June 2000.
From July 1979 to the present, Mr. Winduss has served as director of Winduss
& Associates Pty Ltd, an accounting firm in Western Australia, which
specializes in commercial accounting, corporate finance and
management.  He intends to devote approximately 60% of his time to his
duties as one of our executive officers.
   Board
Composition
  Our Board
of Directors currently consists of two directors.  At each annual
meeting of our stockholders, all of our directors are elected to serve from the
time of election and qualification until the next annual meeting following
election.  In addition, our bylaws provide that the maximum authorized
number of directors may be changed by resolution of the stockholders or by
resolution of the board of directors.
  Each
officer is elected by, and serves at the discretion of, our board of
directors.  There are no family relationships among any of our
directors or officers or key employees with the exception of our General Manager
(Operations), Mr Steven Kostecki, who is the son of Mr Gene Kostecki
(CEO).
   Control
by Officers and Directors
  Our
directors and executive officers own approximately 74.0% of the outstanding
shares of our common stock.  Accordingly, these stockholders possess
substantial control over our operations.  This control may allow them
to amend corporate filings, elect all of our board of directors, and
substantially control all matters requiring approval by our stockholders,
including approval of significant corporate transactions.
   Compliance
With Section 16(a) of the Exchange Act
  Section
16(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”),
requires our directors and executive officers, and persons who beneficially own
more than ten percent of a registered class of our equity securities, to file
with the Securities and Exchange Commission (the “Commission”) initial reports
of ownership and reports of changes in ownership of our common stock and other
equity securities.  Officers, directors, and persons who beneficially
own more than ten percent of a registered class of our equity securities are
required by the regulations of the Commission to furnish us with copies of all
Section 16(a) forms they file.  To our knowledge, based solely on
review of the copies of such reports furnished to us, during the fiscal year
ended September 30, 2008, our officers, directors, and greater than ten percent
beneficial owners complied with all Sections 16(a) filing requirements
applicable to them.
  13
  Item
      10.
              Executive
      Compensation.
  The
following table sets forth the annual cash compensation for services rendered by
our Chief Executive Officer for the fiscal year ended September 30, 2008. No
other executive officer earned or secured more than $100,000 in salary and bonus
for services rendered during the fiscal year ended September 30,
2008:
  SUMMARY
      COMPENSATION TABLEAnnual
      CompensationName
      and Position
              
              Year
              
              Salary
              
              
              Bonus
              
              
              Long-Term
      Compensation
              
              
              All
      Other CompensationGene
      Kostecki
              
              2008
              
              $
              125,000
              
              
              $
              0
              
              
              
              —
              
              
              
              —President
      and Chief
              
              2007
              
              $
              150,000
              
              
              $
              0
              
              
              
              —
              
              
              
              —Executive
      Officer
              
              2006
              
              $
              150,000
              
              
              $
              0
              
              
              
              —
              
              
              
              —
  Stock
Option Plan
  In May
2000, we adopted the 2000 Stock Option Plan.  The purpose of the plan
is to enable us to attract, retain and motivate key employees, directors, and
consultants, by providing them with stock options.  Options granted
under the plan may be either incentive stock options, as defined in Section 422A
of the Internal Revenue Code of 1986, or non-qualified stock
options.  We have reserved 2,000,000 shares of common stock for
issuance under the plan.  As of December 1 2008, no options had been
granted pursuant to the plan.
  Our Board
of Directors will administer the plan.  Our Board has the power to
determine the terms of any options granted under the plan, including the
exercise price, the number of shares subject to the option, and conditions of
exercise.  Options granted under the plan are generally not
transferable, and each option is generally exercisable during the lifetime of
the holder only by the holder.  The exercise price of all incentive
stock options granted under the plan must be at least equal to the fair market
value of the shares of common stock on the date of the grant.  With
respect to any participant who owns stock possessing more than 10% of the voting
power of all classes of our stock, the exercise price of any incentive stock
option granted must be equal to at least 110% of the fair market value on the
grant date.  Our Board of Directors approves the terms of each
option.  These terms are reflected in a written stock option
agreement.
   Employment
Agreements
  There are
current employment agreements in place with Mr. Gene Kostecki, our President and
Chief Executive Officer, and Mr. Alan Winduss, our Chief Financial Officer and
Secretary.
   Limitations
of Liability and Indemnification of Directors and Officers
  Our
certificate of incorporation and bylaws limit the liability of directors and
officers to the maximum extent permitted by Delaware law.  We will
indemnify any person who was or is a party, or is threatened to be made a party
to, an action, suit or proceeding, whether civil, criminal, administrative or
investigative, if that person is or was a director, officer, employee or agent
of ours or serves or served any other enterprise at our request.
  In
addition, our certificate of incorporation provides that, generally, a director
shall not be personally liable to us or our stockholders for monetary damages
for breach of the director’s fiduciary duty.  However, in accordance
with Delaware law, a director will not be indemnified for a breach of its duty
of loyalty, acts or omissions not in good faith or involving intentional
misconduct or a knowing violation or any transaction from which the director
derived improper personal benefit.
  14
  Item
      11.
              Security
      Ownership of Certain Beneficial Owners and
  Management.
  The
following table sets forth, as of December 1 2008, the number and percentage of
outstanding shares of common stock beneficially owned by:
  ·
              each
      person who we know beneficially owns more than 5% of the outstanding
      shares of our common stock;
  ·
              each
      of our executive officers and directors;
and
  ·
              all
      of our officers and directors as a
group.
  Except as
otherwise noted, the persons named in this table, based upon information
provided by these persons, have sole voting and investment power with respect to
all shares of common stock owned by them.  The number of shares of
common stock outstanding used in calculating the percentage for each listed
person includes the shares of common stock underlying options or warrants held
by such person that are exercisable within 60 days of December 1, 2008, but
excludes shares of common stock underlying options or warrants held by any other
person.  Unless otherwise indicated, the address of each beneficial
owner is c/o Alloy Steel, 42 Mercantile Way Malaga, P.O. Box 3087 Malaga D C
6945, Western Australia.
  Name
      of Beneficial Owner
              
              Number
                  of
      Shares
              
              
              Percentage
      of Common Stock Beneficially OwnedGene
      Kostecki
              
              
              10,598,000
              
              
              
              62.5
              %Alan
      C. Winduss
              
              
              1,893,250
              
              
              
              11.2
              %All
      officers and directors as a group (two persons)
              
              
              12,491,250
              
              
              
              74.0
              %
   Item
      12.
              Certain
      Relationships and Related
Transactions.
  Messrs.
Gene Kostecki and Alan Winduss are both directors of Alloy Steel International,
Inc. and its subsidiary, Alloy Steel Australia (Int) Pty Ltd.
  Mr.
Winduss is a director of a public accounting firm Winduss & Associates Pty
Ltd, which provides accounting and secretarial services to Alloy Steel’s
subsidiary, Alloy Steel Australia (Int.) Pty Ltd.  These services are
provided at normal commercial rates and conditions.  The cost of these
services are recovered under the fees paid by Mr. Winduss’ consulting
agreement.
  Alloy
Steel Australia (Int.) Pty Ltd. paid rent of $206,000, for commercial premises
it occupied during the year, to Raglan Securities Pty Ltd., a company controlled
by Gene Kostecki.
  The
license granted to use the Alloy process provides for royalty payments to
Kenside Investments, Ltd., in an amount equal to 2% of our net sales of
Arcoplate products.  Our Chief Executive Officer, director and
principal shareholder, Gene Kostecki controls Kenside Investments,
Ltd.
  15
 Item
      13.
                Exhibits
 Exhibit
      No.
              
              Description3.1
              
              Certificate
      of Incorporation*3.2
              
              By-laws*4.1
              
              Specimen
      Certificate*10.1
              
              2000
      Stock Option Plan*10.2
              
              License
      Agreement, dated May 4, 2000, between Alloy Steel and Kenside Investments,
      Ltd.*10.3
              
              Employment
      Agreement, dated October 2, 2000, between Alloy Steel and Gene
      Kostecki*10.4
              
              Employment
      Agreement, dated October 2, 2000, between Alloy Steel and Alan
      Winduss*10.5
              
              Consulting
      Agreement, dated October 2, 2000, between Alloy Steel and Berryhill
      Investments, Ltd.*10.6
              
              Consulting
      Agreement, dated October 2, 2000, between Alloy Steel and Chartreuse
      Nominees Pty. Ltd.*10.7
              
              Amended
      and Restated Consulting Agreement, dated October 2, 2000, between Alloy
      Steel and Persia Consulting Group, Inc.*10.8
              
              Consulting
      Agreement, dated October 2, 2000, between Alloy Steel and Ragstar
      Investments, Ltd.*10.9
              
              Consulting
      Agreement, dated October 2, 2000, between Alloy Steel and Alan Winduss
      Pty. Ltd.*10.10
              
              Consulting
      Agreement, dated October 2, 2000, between Alloy Steel and Ames Nominees
      Pty. Ltd.*10.11
              
              Lease
      Agreement, dated July 1, 2000, between Alloy Steel and Raglan Securities
      Pty. Ltd.*10.12
              
              Asset
      Purchase Agreement, dated October 2, 2000 between Alloy Steel and Collier
      Unit Trust*10.13
              
              Equipment
      Purchase Agreement, dated October 2, 2000, between Alloy Steel and Collier
      Unit Trust*10.14
              
              Asset
      Purchase Agreement, dated October 2, 2000, by and among Alloy Steel and
      Gene Kostecki and Alan Winduss*10.15
              
              Amendment
      dated July 1, 2004, to Employment Agreement between Alloy Steel and Gene
      Kostecki*10.16
              
              Amendment
      dated July 1, 2004, to Employment Agreement between Alloy Steel and Alan
      Winduss*31.1
              
              Certification
      of the Chief Executive Officer required by Rule 13a-14(a) or Rule
      15d-14(a)**31.2
              
              Certification
      of the Chief Financial Officer required by Rule 13a-14(a) or Rule
      15d-14(a)**32.1
              
              Certification
      of the Chief Executive Officer required by Rule 13a-14(b) or Rule
      15d-14(b) and 18 U.S.C. 1350**32.2
              
              Certification
      of the Chief Financial Officer required by Rule 13a-14(b) or Rule
      15d-14(b) and 18 U.S.C. 1350**99.1
              
              Letter
      of Authority from the Former Accountant to use the 2007 Report of the
      Independent Registered Public Accounting
Firm**
 
 *
              
              Previously
      filed. See Exhibit Index.**
              
              Filed
      herewith.
 
 Item
      14.
              Principal
      Accountant Fees and Services.
  The Board
of Directors reviewed all services performed for the company by Grant Thornton
(WA) Partnership and UHY Haines Norton, our independent auditors, for the fiscal
year ended September 30, 2008, within and outside the scope of their quarterly
and annual auditing function. The company replaced Grant Thornton (WA)
Partnership as independent auditors with UHY Haines Norton in January
2008.
  2008
              
              
              2007Audit
      Fees
              
              
              51,744
              
              
              
              14,870Audit-Related
      Fees
              
              
              -
              
              
              
              -Tax
      Fees
              
              
              -
              
              
              
              -All
      Other Fees
              
              
              -
              
              
              
              -
 
  The fees
labeled Audit-Related Fees above principally involved the auditing of the annual
financial statements of the company and the economic entity and review of the
audit of the overseas operating entity, together with the review of quarterly
financial statements as lodged with regulatory authorities.
  16
  SIGNATURES
  
 In
accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
 
 Dated:
      December 23, 2008
              
              ALLOY
      STEEL INTERNATIONAL, INC.(Registrant)By:
              /s/ Gene KosteckiGene
      KosteckiPresident
      and Chief Executive Officer
 
 In
accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
 
 /s/ Gene Kosetcki
              
              Director
      and
                President
      and Chief Executive Officer (Principal Executive Officer)
              
              December
      23, 2008Gene
      Kostecki/s/ Alan Winduss
              
              Director
      and
                Chief
      Financial Officer and Secretary (Principal Financial and Accounting
      Officer)
              
              December
      23, 2008Alan
      C. Winduss
  17
  Alloy
Steel International, Inc.
 
 Annual
Report on Form 10-KSB for the
 Year
Ended September 30, 2008
 
 EXHIBIT
INDEX
 
 Exhibit
      No.
              
              Description3.1
              
              Certificate
      of Incorporation [Incorporated by reference to Exhibit 3.1 to our
      Registration Statement on Form SB-2, SEC File No. 333-49146, filed on
      November 2, 2000, as amended (the “Registration
    Statement”).]3.2
              
              By-laws
      [Incorporated by reference to Exhibit 3.2 to the Registration
      Statement.]4.1
              
              Specimen
      Certificate [Incorporated by reference to Exhibit 4.1 to the Registration
      Statement.]10.1
              
              2000
      Stock Option Plan [Incorporated by reference to Exhibit 10.1 to the
      Registration Statement.]10.2
              
              License
      Agreement, dated May 4, 2000, between Alloy Steel and Kenside Investments,
      Ltd. [Incorporated by reference to Exhibit 10.2 to the Registration
      Statement.]10.3
              
              Employment
      Agreement, dated October 2, 2000, between Alloy Steel and Gene Kostecki
      [Incorporated by reference to Exhibit 10.3 to the Registration
      Statement.]10.4
              
              Employment
      Agreement, dated October 2, 2000, between Alloy Steel and Alan Winduss
      [Incorporated by reference to Exhibit 10.4 to the Registration
      Statement.]10.5
              
              Consulting
      Agreement, dated October 2, 2000, between Alloy Steel and Berryhill
      Investments, Ltd. [Incorporated by reference to Exhibit 10.5 to the
      Registration Statement.]10.6
              
              Consulting
      Agreement, dated October 2, 2000, between Alloy Steel and Chartreuse
      Nominees Pty. Ltd. [Incorporated by reference to Exhibit 10.6 to the
      Registration Statement.]10.7
              
              Amended
      and Restated Consulting Agreement, dated October 2, 2000, between Alloy
      Steel and Persia Consulting Group, Inc. [Incorporated by reference to
      Exhibit 10.7 to the Registration Statement.]10.8
              
              Consulting
      Agreement, dated October 2, 2000, between Alloy Steel and Ragstar
      Investments, Ltd. [Incorporated by reference to Exhibit 10.8 to the
      Registration Statement.]10.9
              
              Consulting
      Agreement, dated October 2, 2000, between Alloy Steel and Alan Winduss
      Pty. Ltd. [Incorporated by reference to Exhibit 10.9 to the Registration
      Statement.]10.10
              
              Consulting
      Agreement, dated October 2, 2000, between Alloy Steel and Ames Nominees
      Pty. Ltd. [Incorporated by reference to Exhibit 10.10 to the Registration
      Statement.]10.11
              
              Lease
      Agreement, dated July 1, 2000, between Alloy Steel and Raglan Securities
      Pty. Ltd. [Incorporated by reference to Exhibit 10.11 to the Registration
      Statement.]10.12
              
              Asset
      Purchase Agreement, dated October 2, 2000 between Alloy Steel and Collier
      Unit Trust [Incorporated by reference to Exhibit 10.12 to the Registration
      Statement.]10.13
              
              Equipment
      Purchase Agreement, dated October 2, 2000, between Alloy Steel and Collier
      Unit Trust [Incorporated by reference to Exhibit 10.13 to the Registration
      Statement.]10.14
              
              Asset
      Purchase Agreement, dated October 2, 2000, by and among Alloy Steel and
      Gene Kostecki and Alan Winduss [Incorporated by reference to Exhibit 10.14
      to the Registration Statement.]10.15
              
              Amendment
      dated July 1, 2004, to Employment Agreement between Alloy Steel and Gene
      Kostecki.10.16
              
              Amendment
      dated July 1, 2004, to Employment Agreement between Alloy Steel and Alan
      Winduss.31.1
              
              Certification
      of the Chief Executive Officer required by Rule 13a-14(a) or Rule
      15d-14(a)31.2
              
              Certification
      of the Chief Financial Officer required by Rule 13a-14(a) or Rule
      15d-14(a)32.1
              
              Certification
      of the Chief Executive Officer required by Rule 13a-14(b) or Rule
      15d-14(b) and 18 U.S.C. 135032.2
              
              Certification
      of the Chief Financial Officer required by Rule 13a-14(b) or Rule
      15d-14(b) and 18 U.S.C. 135099.1
              
              Letter
      of Authority from the Former Accountant to use the 2007 Report of the
      Independent Registered Public Accounting
Firm
  18
  ALLOY
STEEL INTERNATIONAL, INC.
 AND
CONTROLLED ENTITIES
 
 CONSOLIDATED
FINANCIAL STATEMENTS
 AND
 REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 SEPTEMBER
30, 2008
  
  ALLOY
STEEL INTERNATIONAL, INC. AND CONTROLLED ENTITIES
 
 
 INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
 (ITEM
7)
 
 
 Report
      of Independent Registered Public Accounting Firm
              
              F-2Report
      of the Former Independent Registered Public Accounting
Firm
              
              F-3Consolidated
      Financial StatementsConsolidated
      Balance Sheet September 30, 2008
              
              F-4Consolidated
      Statements of Operations Years ended September 30, 2008 and
      2007
              
              F-5Consolidated
      Statements of Stockholders' Equity Years ended September 30, 2008 and
      2007
              
              F-6Consolidated
      Statements of Cash Flows Years ended September 30, 2008 and
      2007
              
              F-7Notes
      to Consolidated Financial Statements
              
              F-8
      – 15
  F-1
  Report of Independent Registered Public Accounting
Firm
 
 
 To the
Board of Directors and Stockholders
 of Alloy
Steel International Inc
 
 We have
audited the accompanying consolidated balance sheet of Alloy Steel International
Inc and Controlled Entities (the “Company) as of September 30 2008, and the
related consolidated statement of operations, stockholders' equity and cash
flows for the year then ended.  These consolidated financial
statements are the responsibility of the Company’s management.  Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
 
 We
conducted our audit in accordance with the standrards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial
statements. The Company is not required to have, nor were we engaged to
perform, an audit of its internal control over financial reporting. Our audit
included consideration of internal control over financial reporting as a basis
of designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the Company's
internal control over financial reporting. Accordingly, we express no such
opinion. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial presentation.  We believe that our audit provides a
reasonable basis for our opinion.
 
 In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of the Company as
of September 30 2008, and the results of its operations and its
cash flows for the year then ended, in conformity with accounting principles
generally accepted in the United States of America.
 
 /s/
      UHY HAINES NORTONCHARTERED
      ACCOUNTANTS
 
 
 Perth,
Australia
 December
23, 2008
  F-2
  Report
of Independent Registered Public Accounting Firm
  
 
 To the
Board of Directors and Stockholders of
 Alloy
Steel International, Inc.
 
 We have
audited the accompanying consolidated balance sheet of Alloy Steel
International, Inc. and Subsidiary (the “Company”) as of September 30 2007, and
the related consolidated statements of operations, stockholders’ equity and cash
flows for each of the years ended in the two year period September 30,
2007.  These consolidated financial statements are the responsibility
of the Company’s management.  Our responsibility is to express an
opinion on these consolidated financial statements based on our
audits.
 
 
 We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the consolidated financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial
statements.  The Company is not required to have, nor were we engaged
to perform, an audit of its internal control over financial
reporting.  Our audit included consideration of internal control over
financial reporting as a basis of designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting.  Accordingly, we express no such opinion.  An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation.  We believe that our audits provide a
reasonable basis for our opinion.
 
 In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of the Company as of September
30, 2007, and the results of its operations and its cash flows for each of the
years ended in a two year period September 30, 2007, in conformity with
accounting principles generally accepted in the United States of
America.
 
 
 /s/
      Grant Thornton (WA) Partnership
 
 
 Perth,
Australia
 January
14, 2008
  F-3
  ALLOY
STEEL INTERNATIONAL, INC. AND CONTROLLED ENTITIES
 
 CONSOLIDATED
BALANCE SHEET
 September
30, 2008
 
 
 ASSETSCurrent
      assetsCash
      and cash equivalents
              
              $
              664,054Accounts
      receivable
              
              
              2,290,147Inventories
              
              
              2,365,049Prepaid
      expenses and other current assets
              
              
              70,161Total
      current assets
              
              
              5,389,411Investments
              
              
              173,422Property and equipment,
      net
              
              
              2,976,290Other
      assetsOtherDeferred
      tax assets
              
              
              -Intangibles
              
              
              17,863Total
      other assets
              
              
              17,863$
              8,556,986LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      liabilitiesNotes
      payable, current portion
              
              $
              75,739Notes
      payable, officers, current portion
              
              
              -Accrued
      officers' salaries
              
              
              14,998Royalties
      payable, related party
              
              
              763,176Loan
      payable, related partyCurrent
      tax payable
              
              
              1,100,129Accounts
      payable and other current liabilities
              
              
              1,026,329Total
      current liabilities
              
              
              2,980,371Long-term
      liabilitiesNotes
      payable, less current portion
              
              
              225,728Notes
      payable, officers, less current portionEmployee
      entitlement provisions
              
              
              9,402Deferred
      tax liabilities
              
              
              19,342Total
      long-term liabilities
              
              
              254,472Commitments
      and contingenciesStockholders'
      equityPreferred
      stock, $.01 par value, authorized 3,000,000shares; issued and outstanding
      - none
              
              
              -Common
      stock, $.01 par value, authorized  50,000,000shares; issued and
      outstanding 16,950,000 shares
              
              
              169,500Capital
      in excess of par value
              
              
              1,773,382Accumulated
      income
              
              
              2,838,409Accumulated
      other comprehensive income
              
              
              538,986Non
      Controlling Interest
              
              
              1,866Total
      stockholders' equity
              
              
              5,322,143$
              8,556,986
 
 See
accompanying notes to consolidated financial statements.
  F-4
  ALLOY
STEEL INTERNATIONAL, INC. AND CONTROLLED ENTITIES
 
 CONSOLIDATED
STATEMENTS OF OPERATIONS
 Years
Ended September 30, 2008 and 2007
 
 
 Sep-08
              
              
              Sep-07Sales
              
              $
              13,511,458
              
              
              $
              8,729,644Cost
      of sales
              
              
              6,541,427
              
              
              
              4,385,872Gross
      profit
              
              
              6,970,031
              
              
              
              4,343,772Selling,
      general and administrative expenses
              
              
              3,359,311
              
              
              
              2,320,778Profit
      (Loss) from operations
              
              
              3,610,720
              
              
              
              2,022,994Other
      income (expense)Interest
      income
              
              
              64,424
              
              
              
              15,436Interest
      expense
              
              
              (20,938
              )
              
              
              (26,900
              )Dividend
      income
              
              
              6,387
              
              
              
              -Insurance
      recovery
              
              
              56,119
              
              
              
              21,544Sundry
      Income
              
              
              30,154
              
              
              
              20,890Writedown
      of intangible assets
              
              
              -
              
              
              
              (90,512
              )Writedown
      for fair value adjustment
              
              
              (76,762
              )
              
              
              -Profit
      on disposal of property and equipment
              
              
              39
              
              
              
              -59,423
              
              
              
              (59,542
              )Income
      (loss) before income tax (expense) benefit
              
              
              3,670,143
              
              
              
              1,963,452Income
      tax (expense) benefit
              
              
              (1,164,368
              )
              
              
              (654,587
              )Net
      income (loss)
              
              
              2,505,775
              
              
              
              1,308,865Net
      (income) loss attributable to non controlling interests
              
              
              2,137
              
              
              
              -Net
      income (loss) attributable to stockholders
              
              $
              2,507,912
              
              
              $
              1,308,865Basic
      and diluted income (loss) per common share
              
              $
              0.15
              
              
              $
              0.08Weighted
      average number of common shares used in computing basic and diluted income
      (loss) per common share
              
              
              16,950,000
              
              
              
              16,950,000
 
 See
accompanying notes to consolidated financial statements.
  F-5
  ALLOY
STEEL INTERNATIONAL, INC. AND CONTROLLED ENTITIES
 
 CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY
 Years
Ended September 30, 2008 and 2007
 Capital in excess of par
    value
                
                
                Accumulated Income
                
                
                Comprehensive Income
                
                
                Accumulated Other Comprehensive
      Income
                
                
                Non controlling Interests
                
                
                Total Stockholders' EquityCommon StockShares
                
                
                AmountBalances,
      September 30,  2006
                
                
                16,950,000
                
                
                $
                169,500
                
                
                $
                1,773,382
                
                
                $
                (978,368
                )
                
                
                
                
                $
                538,189
                
                
                $
                
                
                
                $
                1,502,703Net
      Loss
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                1,308,865
                
                
                $
                1,308,865
                
                
                
                
                
                
                
                
                
                
                
                1,308,865Other
      comprehensive income, foreign currency translation
    adjustment
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                548,442
                
                
                
                548,442
                
                
                
                
                
                
                
                548,442Total
      comprehensive income - Year ended September 30, 2007
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                $
                1,857,307Balances,
      September 30, 2007
                
                
                16,950,000
                
                
                
                169,500
                
                
                
                1,773,382
                
                
                
                330,497
                
                
                
                
                
                
                
                1,086,631
                
                
                
                
                
                
                
                3,360,010Net
      Income
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                2,507,912
                
                
                $
                2,507,912
                
                
                
                
                
                
                
                
                
                
                
                2,507,912Other
      comprehensive income, foreign currency translation
    adjustment
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (547,645
                )
                
                
                (547,645
                )
                
                
                
                
                
                
                (547,645
                )Total
      comprehensive income - Year ended September 30, 2008
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                $
                1,960,267Non
      controlling interest in subsidiaryIssued
      capital in subsidiary
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                4,000Accumulated
      income (loss)
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (2,137
                )Accumulated
      comprehensive income
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                3
                
                
                
                1,866Balances,
      September 30, 2008
                
                
                16,950,000
                
                
                $
                169,500
                
                
                $
                1,773,382
                
                
                $
                2,838,409
                
                
                
                
                
                
                $
                538,986
                
                
                $
                1,866
                
                
                $
                5,322,143
 See
accompanying notes to consolidated financial statements.
  F-6
  ALLOY
STEEL INTERNATIONAL, INC. AND CONTROLLED ENTITIES
 
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 Years
ended September 30, 2008 and 2007
 
 
 Sep-08
              
              
              Sep-07Cash
      flows from operating activitiesNet
      income (loss)
              
              $
              2,507,912
              
              
              $
              1,308,865Adjustments
      to reconcile net income (loss) to net cash provided by (used in) operating
      activities:Depreciation
              
              
              198,080
              
              
              
              168,548Write
      down of intangible assets and other assets
              
              
              76,762
              
              
              
              90,512Profit
      on disposal of property and equipment
              
              
              (39
              )
              
              
              -Dividends
      reinvested directly to investments
              
              
              (3,066
              )
              
              
              -Loss
      attributable to non controlling interests
              
              
              (2,137
              )
              
              
              -Increase
      (decrease) in cash and cash equivalents attributable to changes in
      operating assets and liabilities:Accounts
      receivable
              
              
              14,844
              
              
              
              (1,701,798
              )Inventories
              
              
              (1,878,924
              )
              
              
              (80,682
              )Income
      taxes receivable
              
              
              
              
              
              
              -Prepaid
      expenses and other current assets
              
              
              66,266
              
              
              
              (96,150
              )Accrued
      officer's salaries
              
              
              (315,080
              )
              
              
              20,680Accounts
      payable and other current liabilities
              
              
              129,793
              
              
              
              726,837Income
      taxes payable
              
              
              633,276
              
              
              
              732,940Net
      cash provided by operating activities
              
              
              1,427,687
              
              
              
              1,169,752Cash
      flows from investing activitiesPurchase
      of property and equipment
              
              
              (644,903
              )
              
              
              (505,492
              )Acquisition
      of interest in subsidiary
              
              
              (17,863
              )
              
              
              -Purchase
      of investments
              
              
              (253,197
              )
              
              
              -Net
      cash used in investing activities
              
              
              (915,963
              )
              
              
              (505,492
              )Cash
      flows from financing activitiesRepayment
      on notes and loans payable
              
              
              (296,305
              )
              
              
              (377,946
              )Proceeds
      from capital issued to non controlling interests
              
              
              4,000
              
              
              
              -Net
      cash used in financing activities
              
              
              (292,305
              )
              
              
              (377,946
              )Effect
      of foreign exchange rate changes on cash and cash
    equivalents
              
              
              (39,660
              )
              
              
              179,026Net
      increase (decrease) in cash and cash equivalents
              
              
              179,759
              
              
              
              465,340Cash and cash
      equivalents, beginning of year
              
              
              484,295
              
              
              
              18,955Cash and cash
      equivalents, end of year
              
              $
              664,054
              
              
              $
              484,295Supplemental disclosures of
      cash flow information,cash paid during the
      years for:Income
      taxes
              
              $
              531,093
              
              
              $
              (75,866
              )Interest
              
              $
              (22,849
              )
              
              $
              26,900Supplemental
      disclosures of non-cash investing and financing
activities,Equipment
      acquired under notes payable
              
              $
              142,369
              
              
              $
              28,197
 
 See
accompanying notes to consolidated financial statements.
  F-7
  ALLOY
STEEL INTERNATIONAL, INC. AND CONTROLLED ENTITIES
 
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 1.
              Nature
      of operations
 
 Alloy
Steel International, Inc. (ASII), its wholly-owned subsidiary, Alloy Steel
Australia (Int.) Pty Limited (ASAI) and majority owned subsidiary Alloy Steel
Mongolia LLC (ASM) (collectively the "Company") manufacture and distribute
Arcoplate, a wear-resistant fused-alloy steel plate, to customers throughout the
world.
 
 
 2.
              Summary
      of significant accounting policies
 
 Basis of
Presentation
  The
Company adheres to accounting principles generally accepted in the United States
of America. The Company's consolidated financial statements are denominated in
United States dollars.
  Principles
of Consolidation
 The
consolidated financial statements include the accounts of ASII, ASAI and ASM.
All material intercompany balances and transactions have been eliminated in
consolidation.
  Revenue
Recognition
 The
Company recognizes revenues when products are shipped and title passes to
customers. Provisions are established, as appropriate, for uncollectible
accounts, returns and allowances and warranties in connection with
sales.
  Cash
and Cash Equivalents
  The
Company considers all highly-liquid debt instruments purchased with maturities
of three months or less to be cash equivalents.
 Accounts
Receivable
  The
Company carries its accounts receivable at cost less an allowance for doubtful
accounts. On a periodic basis, the Company evaluates its receivables and
establishes an allowance for doubtful accounts, based on the history of past
write-offs and collections and current credit conditions. Accounts are written
off as uncollectible once the Company has exhausted its collection
efforts.
 Fair
Value of Financial Instruments
 The fair
value of the Company's assets and liabilities which qualify as financial
instruments under Statement of Financial Accounting Standards (“SFAS”) No. 107,
“Disclosures About Fair Value of Financial Instruments,” approximates the
carrying amounts presented in the accompanying consolidated balance
sheet.
  Inventories
 Inventories
are valued at the lower of cost or net realizable value. Cost is determined
principally on the first-in, first-out method.
  F-8
  ALLOY
STEEL INTERNATIONAL, INC. AND CONTROLLED ENTITIES
 
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 
 2.
              Summary
      of significant accounting policies
(continued)
 
 Impairment
of Long-Lived Assets
 
 The
Company periodically assesses the recoverability of the carrying amounts of
long-lived assets, including intangible assets.  A loss is recognized
when expected undiscounted future cash flows are less than the carrying amount
of the asset.  The impairment loss is the difference by which the
carrying amount of the asset exceeds its fair value.
 
 Property
and Equipment
 
 Property
and equipment are stated at cost less accumulated
depreciation.  Depreciation is computed using both the straight-line
and declining value method over the estimated useful lives of the assets as
follows:
 
 EstimatedAsset
              
              Useful
      LivesPlant
      and equipment
              
              5-20
      yearsFurniture
      and fixtures
              
              5-7
      yearsVehicles
              
              3-5
      yearsOffice
      and computer equipment
              
              3-5
      years
 
 Maintenance
and repairs are charged to operations, while betterments and improvements are
capitalized.
 
 Intangibles
  Intangibles
include intellectual property rights of $90,512, which have been amortized in
full in the current year as there is currently an indefinite period that exists
before the Company will be able to develop and commercially exploit the property
rights, and goodwill on consolidation of ASM of $17,863.
 
 Advertising
 
 Advertising
costs are charged to operations as incurred and were approximately $14,000 and
$11,000 for the years ended September 30, 2008 and 2007,
respectively.
 
 Income
Taxes
 
 The
Company complies with SFAS No. 109, "Accounting for Income Taxes", which
requires an asset and liability approach to financial reporting for income
taxes.  Deferred income tax assets and liabilities are computed for
differences between the financial statement and tax bases of assets and
liabilities that will result in future taxable or deductible amounts, based on
enacted tax laws and rates applicable to the periods in which the differences
are expected to affect taxable income.  Valuation allowances are
established, when necessary, to reduce deferred income tax assets to the amount
expected to be realized.
 
 The
Company provides reserves for potential payments of tax to various tax
authorities related to uncertain tax positions and other issues. Prior to 2008,
these reserves were recorded when management determined that it was probable
that a loss would be incurred related to these matters and the amount of the
loss was reasonably determinable. In 2008, the Company adopted
Financial Accounting Standards Board (“FASB”) Interpretation No. 48, “Accounting
for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109”
(“FIN No. 48”).  As a result, reserves recorded subsequent to adoption
are based on a determination of whether and how much of a tax benefit taken
in its tax filings or positions is more likely than not to be realized,
assuming that the matter in question will be raised by the tax authorities.
Potential interest and penalties associated with such uncertain tax positions
are recorded as a component of income tax expense. At adoption date, the
Company made a comprehensive review of its uncertain tax
positions. The Company believes appropriate provisions for outstanding
issues have been made.
  F-9
  ALLOY
STEEL INTERNATIONAL, INC. AND CONTROLLED ENTITIES
 
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 
 2.
              Summary
      of significant accounting policies
(continued)
 
 Income
(Loss) Per Common Share
 
 SFAS No.
128, "Earnings Per Share", requires dual presentation of basic and diluted
income (loss) per share for all periods presented.  Basic income
(loss) per share excludes dilution and is computed by dividing net income (loss)
available to common stockholders by the weighted-average number of common shares
outstanding during the period.  Diluted earnings per share reflects
the potential dilution that could occur if securities or other contracts to
issue common stock were exercised or converted into common stock or resulted in
the issuance of common stock that then shared in the earnings of the
Company.   Diluted income (loss) per common share was the same as
basic income (loss) per common share since there were no common stock
equivalents outstanding for both years presented.
 
 Use
of Estimates
  The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America 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 consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period.  Actual results could differ
from those estimates.
 
 New
Accounting Pronouncements
 
 In
September 2006, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value
Measurements”.  This statement generally clarifies the manner in which
an entity is required to measure the fair value of its assets and liabilities,
emphasizing that fair value is a market-based measurement and not an
entity-specific measurement.  This statement is effective for
accounting changes made in the fiscal years beginning after November 15,
2007.  Adoption of the provisions of the Statement is not expected to
have a material effect on the operations or financial position of the
Company.
 
 In
February 2007, the FASB issued FASB Statement NO. 159, The Fair Value Option for Financial
Asset and Financial Liabilities, Including an amendment of FASB Statement No.
115. Under this statement, entities will be permitted to measure many
financial instruments and certain other assets and liabilities at fair value on
an instrument-by-instrument basis (the fair value option).  By
electing the fair value measurement attribute for certain assets and
liabilities, entities will be able to mitigate potential “mismatches” that arise
under the current mixed measurement attribute model.  Entities will
also be able to offset changes in the fair values of a derivative instrument and
its related hedged item by selecting the fair value option for the hedged
item.  SFAS No. 159 will become effective for fiscal years beginning
after November 15, 2007.  The Company is currently evaluating the
effect that the adoption of this statement will have on the consolidated
financial statements.
 
 Foreign
Currency Translation
  Assets
and liabilities of the Company’s wholly-owned subsidiary are translated into
U.S. dollars at year-end exchange rates, revenues and expenses and cash flows
are translated at average rates prevailing during the year.  Resulting
translation adjustments are recorded as a component of accumulated other
comprehensive income.
  F-10
  ALLOY
STEEL INTERNATIONAL, INC. AND CONTROLLED ENTITIES
 
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 Summary
of significant accounting policies (continued)
 
 
 3.
              Inventories
 
 Inventories
consist of the following at September 30, 2008:
 
 Raw
      materials
              
              $
              1,564,030Work
      in progress
              
              
              35,573Finished
      goods
              
              
              765,446$
              2,365,049
 
 
 4.
              Prepaid
      expenses and other current assets
 
 Prepaid
expenses and other current assets consist of the following at September 30,
2008:
 
 Prepaid
      expenses
              
              $
              63,992Goods
      & services tax receivable
              
              
              3,509Deposit
      paid to suppliers
              
              
              2,660$
              70,161
 
 
 5.
              Property
      and equipment
 
 Property
and equipment consists of the following at September 30, 2008:
  Leasehold
      Land
              
              $
              23,123Less
      accumulated amortization
              
              
              2,35220,771Plant
      and equipment
              
              $
              3,586,645Furniture
      and fixtures
              
              
              40,603Vehicles
              
              
              261,772Leasehold
      Improvements
              
              
              31,480Office
      and computer equipment
              
              
              147,0854,067,585Less
      accumulated depreciation
              
              
              1,112,066$
              2,955,519$
              2,976,290
 
 
 Depreciation
and amortization expense for the years ended September 30, 2008 and 2007 was
approximately $199,000 and $170,000, respectively. At September 30, 2008,
property and equipment included approximately $430,000 and accumulated
depreciation included approximately $77,000 related to assets acquired under
notes payable.
   6.
              Intangible
      Asset
 
 Goodwill
      on consolidation
              
              $
              17,863
  F-11
  ALLOY
STEEL INTERNATIONAL, INC. AND CONTROLLED ENTITIES
 
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 
 7.
              Notes
      payable
 
 Notes
payable at September 30, 2008 consists of the following:
 
 Note
      payable (a)
              
              
              12,377Note
      payable (b)
              
              
              130,472Note
      payable (c)
              
              
              15,306Note
      payable (d)
              
              
              42,672Note
      payable (e)
              
              
              100,640301,467Less
      current portion
              
              
              75,739$
              255,728
 
 
 (a)
              The
      note is payable in monthly installments of $353 including interest at a
      rate of 7.61% per annum, with a final payment in March 2010. The note is
      collateralized by the underlying equipment and is guaranteed by the
      officers of the Company.
 
 (b)
              The
      note is payable in monthly installments of $4,158 including interest at a
      rate of 7.25% per annum, with a final balloon payment in November 2010.
      The note is collateralized by the underlying equipment and is guaranteed
      by the officers of the Company.
 
 (c)
              The
      note is payable in monthly installments of $640 including interest at a
      rate of 7.61% per annum, with a final balloon payment in February 2010.
      The note is collateralized by the underlying equipment and is guaranteed
      by the officers of the Company.
 
 (d)
              The
      note is payable in monthly installments of $905 including interest at a
      rate of 9.22% per annum, with a final payment in March
      2012.  The note is collateralized by the underlying equipment
      and is guaranteed by the officers of the
  company.
 
 (e)
              The
      note is payable in monthly installments of $2,094 including interest at a
      rate of 9.65% per annum, with a final payment in June 2012.  The
      note is collateralized by the underlying equipment and is guaranteed by
      the officers of the company.
 
 Aggregate
annual principal payments for each of the following years are as
follows:
  Year
      ending September 30,2009
              
              
              75,7392010
              
              
              88,5532011
              
              
              71,3922012
              
              
              65,783$
              301,467
  F-12
  ALLOY
STEEL INTERNATIONAL, INC. AND CONTROLLED ENTITIES
 
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 
 8.
              Income
      taxes
 
 Income
(loss) before income tax expense (benefit) for the years ended September 30,
2008 and 2007 were derived in the following jurisdictions:
 
 2008
              
              
              2007Australia
              
              
              3,865,354
              
              
              
              2,181,961Mongolia
              
              
              (3,206
              )
              
              
              -US
              
              
              (189,868
              )
              
              
              (218,509
              )3,672,280
              
              
              
              1,963,452
 
 
 The
components of income tax expense (benefit) are as follows for the years ended
September 30, 2008 and 2007:
 
 2008
              
              
              2007CurrentForeign
              
              
              1,100,129
              
              
              
              480,960DeferredForeign
              
              
              64,239
              
              
              
              173,6211,164,368
              
              
              
              654,581
 
 As of
September 30, 2008, the Company had US net operating loss carryforwards of
approximately $1,932,000 expiring through 2025.
 
 The
components of the deferred tax assets and liabilities consist of the following
at September 30, 2008 and 2007:
 
 2008
              
              
              2007Deferred
      tax assetsNet
      operating loss carryforwards
              
              
              676,333
              
              
              
              609,879Other
              
              
              92,894
              
              
              
              42,854769,227
              
              
              
              652,733Less
      valuation allowance
              
              
              (676,333
              )
              
              
              (609,879
              )92,894
              
              
              
              42,854Deferred
      tax liabilitiesOther
              
              
              (112,236
              )
              
              
              (81,149
              )Deferred
      tax assets (liabilities), net
              
              
              (19,342
              )
              
              
              (38,295
              )
 
 
 SFAS No.
109, requires that the Company record a valuation allowance when it is more
likely than not that some portion or all of the deferred income tax asset will
not be realized.  The change in the valuation allowance amounted to
approximately $66,000 and $45,000 for the years ended September 30, 2008 and
2007, respectively.  The ultimate realization of this deferred income
tax asset depends on the Company's ability to generate sufficient taxable income
in future years
 
 The
Company also has certain foreign tax credits available for future
use.
  F-13
  ALLOY
STEEL INTERNATIONAL, INC. AND CONTROLLED ENTITIES
 
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
  8.
              Income taxes (continued)
 
 The
effective tax rate in 2008 and 2007 differs from the U.S. federal statutory rate
as follows:
 
 2008
                  
                  
                  2007U.S.
      federal statutory rate
                  
                  
                  35
                  %
                  
                  
                  35
                  %Change
      in valuation allowance
                  
                  
                  2
                  %
                  
                  
                  2
                  %Benefit
      of lower foreign effective tax rates/Other
                  
                  
                  (5
                  %)
                  
                  
                  (4
                  %)Effective
      tax rate
                  
                  
                  32
                  %
                  
                  
                  33
                  %
 
 
 9.
              Stock
      options
 
 During
2000, the Company's Board of Directors (the Committee) adopted, and the
stockholders approved, the 2000 stock option plan (the Plan) pursuant to which
500,000 shares of common stock were reserved for issuance upon the exercise of
options granted to key employees, members of the Committee and consultants of
the Company.  Options under the Plan may be incentive stock options,
nonqualified stock options, or any combination thereof, and the Committee may
grant options at an exercise price which is not less than the fair market value
on the date such options are granted. The Plan further provides that the maximum
period in which stock options may be exercised will be determined by the
Committee, except that they may not be exercisable after ten years from the date
of grant or five years from the date of grant for any person owning more than
ten percent of the voting power of all classes of the Company's
stock.  For the years ending September 30, 2008 and 2007, there were
no stock options granted or outstanding stock options.
 
 
 10.
              Business
      Combination
 
 The
Company acquired a 60% controlling and equity interest in Alloy Steel Mongolia
LLC (ASM), a company incorporated in Mongolia, to conduct a joint venture
operation with Geomandal LLC, an unrelated company incorporated in Mongolia to
provide services to the mining industry in Mongolia
 
 The
Company’s costs in acquiring the interest in the newly formed company totalled
$23,863.  As ASM was newly incorporated at the time of the Company
acquiring its interest, ASM had no assets or liabilities.
 
 
 11.
              Commitments
      and contingencies
 
 Operating
Lease
  The
Company leases its office and manufacturing space from a related party for
approximately $205,000 per annum plus certain expenses (as defined in the
agreement).  The lease expires on June 30, 2010.
 
 Rent
expense for the years ended September 30, 2008 and 2007 was approximately
$205,000 and $160,000 respectively.
  F-14
  ALLOY
STEEL INTERNATIONAL, INC. AND CONTROLLED ENTITIES
 
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 11.
              Commitments
      and contingencies (continued)
 
 Royalty
Agreements
 
 The
Company has a licensing agreement with a related party of which relates to the
sale of all products sold in the United States of America.  Under the
terms of the agreement, the Company is required to pay royalties of 2% on the
net sales of these products, calculated at the end of each
quarter.  The agreement expires in 2025 and has three ten-year renewal
options to extend unless written notice of non-renewal is given by either party
within 120 days prior to its expiration.  At September 30, 2008,
approximately $763,000 was payable under this agreement and is included in
accounts payable and other current liabilities.
 
 Royalty
expense was approximately $260,000 and $176,000 for the years ended September
30, 2008 and 2007, respectively.
 
 Employment
Agreements
 
 The
Company has employment agreements with two of its executives, who are principal
stockholders, requiring the payment of a minimum annual base compensation of
approximately $80,000 and $150,000, adjusted semi-annually for increases
approved by the Board of Directors, but not less than the base year amount, plus
incentive compensation based on the executives’ performance and the Company's
success.  Approximately $218,000 and $170,000 has been expensed under
these agreements in each of the years ended September 30, 2008 and 2007
respectively, and is included in selling, general and administrative
expenses.
   12.
              Major
      customers, suppliers and geographic
information
 
 The
Company had revenues from two customers and one customer for each of the years
ended September 30, 2008 and 2007, of approximately $4,303,000 and $4,048,000
respectively.  Accounts receivable due from the respective customers
were approximately $1,592,000 and $1,425,000 at September 30, 2008 and
2007.
  2008
              
              
              2007Customer
      A
              
              
              10.2
              %
              
              
              10.6
              %Customer
      B
              
              
              21.6
              %
              
              
              35.7
              %
  For the
years ended September 30, 2008 and 2007, the Company purchased approximately 41%
and 39% of its inventories from two suppliers, respectively.
 
 For the
years ended September 30, 2008 and 2007, revenues were derived from the
following:
 
 2008
              
              
              2007Australia
              
              
              70
              %
              
              
              72
              %Americas
              
              
              13
              %
              
              
              14
              %Other
              
              
              17
              %
              
              
              14
              %100
              %
              
              
              100
              %
   F-15