UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 WASHINGTON,
D.C. 20549




FORM
10-Q




Quarterly
report under Section 13 or 15(d) of the Securities Exchange Act of
1934





For
the quarterly period ended June 30, 2009





Commission
File Number 001-33717





General
Steel Holdings, Inc.


(Exact
name of registrant as specified in its charter)





Nevada
              (State
      or other Jurisdiction of
              Incorporation
      or Organization)
            
            412079252
              (I.R.S.
      Employer Identification No.)





Room 2315, Kun Tai International
Mansion Building,


Yi
No 12, Chao Yang Men Wai Ave.


Chao
Yang District, Beijing, China 100020


(Address
of Principal Executive Office, Including Zip Code)





+86(10)58797346


(Registrant's
Telephone Number, Including Area Code)




Indicate by check mark whether the
registrant: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the 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 x No  ̈




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




Indicate by check mark whether the
Registrant is a large accelerated filer, an accelerated filer, or a
non-accelerated filer. See definition of "accelerated filer and large
accelerated filer" in Rule 12b-2 of the Exchange Act (Check
one).




Large
      accelerated filer  ̈
            
            Accelerated
      filer x
            
            Non-accelerated
      filer  ̈
            
            Smaller
      reporting company  ̈





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




As of August 7th, 2009, 44,755,397 shares of
common stock, par value $0.001 per share, were
issued and outstanding.





Table
of Contents




PagePart
      I: FINANCIAL INFORMATION:Item
      1.
                      
                      Financial
      Statements.
                      3Consolidated
      Balance Sheets as of June 30, 2009 (Unaudited) and December 31,
      2008
                      3Consolidated
      Statements of Income and Other Comprehensive Income for the Three and six
      Months Ended June 30, 2009 and 2008 (Unaudited)
                      4Consolidated
      Statements of  Changes In Equity (Unaudited)
                      5Consolidated
      Statements of Cash Flows for the Three and Six Months Ended June 30, 2009
      and 2008 (Unaudited)
                      6Notes
      to Consolidated Financial Statements (Unaudited)
                      7Item
      2.
                      
                      Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations.
                      42Item
      3.
                      
                      Quantitative
      and Qualitative Disclosures About Market Risks.
                      70Item
      4.
                      
                      Controls
      and Procedures
                      70Part
      II. OTHER INFORMATIONItem
      1.
                      
                      Legal
      Proceedings.
                      72Item
      1A.
                      
                      Risk
      Factors
                      72Item
      2.
                      
                      Unregistered
      Sales of Equity Securities and Use of Proceeds
                      82Item
      3.
                      
                      Defaults
      on Senior Securities
                      82Item
      4.
                      
                      Submission
      of Matters to a Vote of Security Holders
                      82Item
      5.
                      
                      Other
      Information
                      82Item
      6.
                      
                      Exhibits
                      82Signatures
                      
                      
                      83




2




PART
I – FINANCIAL INFORMATION





ITEM
1. FINANCIAL STATEMENTS





(Moore
Stephens Wurth Frazer and Torbet, LLP provides)


GENERAL STEEL HOLDINGS INC. AND SUBSIDIARIES
 
 CONSOLIDATED
BALANCE SHEETS
 AS OF
JUNE 30, 2009 AND DECEMBER 31, 2008
 
 June
      30
                                                                                
                                                                                
                                                                                December
      31,2009
                                                                                
                                                                                
                                                                                2008UnauditedASSETSCURRENT
      ASSETS:Cash
                                                                                
                                                                                $
                                                                                63,930,960
                                                                                
                                                                                
                                                                                $
                                                                                14,895,442Restricted
      cash
                                                                                
                                                                                
                                                                                200,216,250
                                                                                
                                                                                
                                                                                
                                                                                130,700,335Notes
      receivable
                                                                                
                                                                                
                                                                                33,243,064
                                                                                
                                                                                
                                                                                
                                                                                38,207,312Accounts
      receivable, net of allowance for doubtful accounts of
    $601,754and
      $401,109 as of June 30, 2009 and December 31, 2008,
      respectively
                                                                                
                                                                                
                                                                                16,037,008
                                                                                
                                                                                
                                                                                
                                                                                8,329,040Other
      receivables, net of allowance for doubtful accounts of
      $563,963and
      $563,616 as of June 30, 2009 and December 31, 2008,
      respectively
                                                                                
                                                                                
                                                                                5,551,193
                                                                                
                                                                                
                                                                                
                                                                                5,099,469Other
      receivables - related parties
                                                                                
                                                                                
                                                                                15,467,140
                                                                                
                                                                                
                                                                                
                                                                                523,024Dividend
      receivable
                                                                                
                                                                                
                                                                                4,950,550
                                                                                
                                                                                
                                                                                
                                                                                630,481Inventories
                                                                                
                                                                                
                                                                                143,713,281
                                                                                
                                                                                
                                                                                
                                                                                59,548,915Advances
      on inventory purchases
                                                                                
                                                                                
                                                                                35,823,700
                                                                                
                                                                                
                                                                                
                                                                                47,153,869Advances
      on inventory purchases - related parties
                                                                                
                                                                                
                                                                                15,699,234
                                                                                
                                                                                
                                                                                
                                                                                2,374,637Prepaid
      expenses - current
                                                                                
                                                                                
                                                                                356,728
                                                                                
                                                                                
                                                                                
                                                                                494,370Deferred
      tax assets
                                                                                
                                                                                
                                                                                5,312,504
                                                                                
                                                                                
                                                                                
                                                                                7,487,380Total
      current assets
                                                                                
                                                                                
                                                                                540,301,612
                                                                                
                                                                                
                                                                                
                                                                                315,444,274PLANT
      AND EQUIPMENT, net
                                                                                
                                                                                
                                                                                538,475,953
                                                                                
                                                                                
                                                                                
                                                                                491,705,028OTHER
      ASSETS:Advances
      on equipment purchases
                                                                                
                                                                                
                                                                                5,889,360
                                                                                
                                                                                
                                                                                
                                                                                8,965,382Investment
      in unconsolidated subsidiaries
                                                                                
                                                                                
                                                                                18,909,182
                                                                                
                                                                                
                                                                                
                                                                                13,959,432Prepaid
      expenses - non current
                                                                                
                                                                                
                                                                                1,099,045
                                                                                
                                                                                
                                                                                
                                                                                1,195,073Prepaid
      expenses related party - non current
                                                                                
                                                                                
                                                                                184,590
                                                                                
                                                                                
                                                                                
                                                                                211,248Long
      term other receivables
                                                                                
                                                                                
                                                                                3,651,182
                                                                                
                                                                                
                                                                                
                                                                                4,872,584Intangible
      assets, net of accumulated amortization
                                                                                
                                                                                
                                                                                24,216,780
                                                                                
                                                                                
                                                                                
                                                                                24,555,655Note
      issuance cost
                                                                                
                                                                                
                                                                                1,449,664
                                                                                
                                                                                
                                                                                
                                                                                4,217,974Plant
      and equipment to be disposed
                                                                                
                                                                                
                                                                                1,244,461
                                                                                
                                                                                
                                                                                
                                                                                586,508Total
      other assets
                                                                                
                                                                                
                                                                                56,644,264
                                                                                
                                                                                
                                                                                
                                                                                58,563,856Total
      assets
                                                                                
                                                                                $
                                                                                1,135,421,829
                                                                                
                                                                                
                                                                                $
                                                                                865,713,158LIABILITIES
      AND SHAREHOLDERS' EQUITYCURRENT
      LIABILITIES:Short
      term notes payable
                                                                                
                                                                                $
                                                                                274,013,600
                                                                                
                                                                                
                                                                                $
                                                                                206,040,150Accounts
      payable
                                                                                
                                                                                
                                                                                208,631,197
                                                                                
                                                                                
                                                                                
                                                                                149,239,317Accounts
      payable - related parties
                                                                                
                                                                                
                                                                                30,583,551
                                                                                
                                                                                
                                                                                
                                                                                15,326,524Short
      term loans - bank
                                                                                
                                                                                
                                                                                97,196,890
                                                                                
                                                                                
                                                                                
                                                                                67,840,256Short
      term loans - others
                                                                                
                                                                                
                                                                                101,360,240
                                                                                
                                                                                
                                                                                
                                                                                87,833,706Short
      term loans - related parties
                                                                                
                                                                                
                                                                                7,339,650
                                                                                
                                                                                
                                                                                
                                                                                7,349,670Other
      payables
                                                                                
                                                                                
                                                                                19,715,682
                                                                                
                                                                                
                                                                                
                                                                                3,182,661Other
      payables - related parties
                                                                                
                                                                                
                                                                                16,419,308
                                                                                
                                                                                
                                                                                
                                                                                677,013Accrued
      liabilities
                                                                                
                                                                                
                                                                                10,854,900
                                                                                
                                                                                
                                                                                
                                                                                7,779,488Customer
      deposits
                                                                                
                                                                                
                                                                                157,061,121
                                                                                
                                                                                
                                                                                
                                                                                141,101,584Customer
      deposits - related parties
                                                                                
                                                                                
                                                                                3,946,437
                                                                                
                                                                                
                                                                                
                                                                                7,216,319Deposits
      due to sales representatives
                                                                                
                                                                                
                                                                                40,056,218
                                                                                
                                                                                
                                                                                
                                                                                8,149,279Taxes
      payable
                                                                                
                                                                                
                                                                                1,149,824
                                                                                
                                                                                
                                                                                
                                                                                13,916,636Distribution
      payable to former shareholders
                                                                                
                                                                                
                                                                                19,193,149
                                                                                
                                                                                
                                                                                
                                                                                18,765,209Total
      current liabilities
                                                                                
                                                                                
                                                                                987,521,767
                                                                                
                                                                                
                                                                                
                                                                                734,417,812CONVERTIBLE
      NOTES PAYABLE, net of debt discount of $8,500,381 and$26,094,942
      as of June 30, 2009 and December 31, 2008, respectively
                                                                                
                                                                                
                                                                                3,049,619
                                                                                
                                                                                
                                                                                
                                                                                7,155,058DERIVATIVE
      LIABILITIES
                                                                                
                                                                                
                                                                                11,053,276
                                                                                
                                                                                
                                                                                
                                                                                9,903,010COMMITMENT
      AND CONTINGENCIESTotal
      liabilities
                                                                                
                                                                                
                                                                                1,001,624,662
                                                                                
                                                                                
                                                                                
                                                                                751,475,880EQUITY:Preferred
      stock, $0.001 par value, 50,000,000 shares authorized, 3,092,899
      sharesissued
      and outstanding
                                                                                
                                                                                
                                                                                3,093
                                                                                
                                                                                
                                                                                
                                                                                3,093Common
      Stock, $0.001 par value, 200,000,000 shares authorized, 43,301,428
      and36,128,833
      shares issued and outstanding as of June 30, 2009 and December 31, 2008,
      respectively
                                                                                
                                                                                
                                                                                43,301
                                                                                
                                                                                
                                                                                
                                                                                36,129Paid-in-capital
                                                                                
                                                                                
                                                                                69,812,604
                                                                                
                                                                                
                                                                                
                                                                                37,128,641Retained
      earnings (deficits)
                                                                                
                                                                                
                                                                                (14,622,511
                                                                                )
                                                                                
                                                                                
                                                                                10,091,829Statutory
      reserves
                                                                                
                                                                                
                                                                                5,162,401
                                                                                
                                                                                
                                                                                
                                                                                4,902,641Contribution
      receivable
                                                                                
                                                                                
                                                                                -
                                                                                
                                                                                
                                                                                
                                                                                (959,700
                                                                                )Accumulated
      other comprehensive income
                                                                                
                                                                                
                                                                                8,393,270
                                                                                
                                                                                
                                                                                
                                                                                8,407,359Total
      equity
                                                                                
                                                                                
                                                                                68,792,158
                                                                                
                                                                                
                                                                                
                                                                                59,609,992NONCONTROLLING
      INTERESTS
                                                                                
                                                                                
                                                                                65,005,009
                                                                                
                                                                                
                                                                                
                                                                                54,627,286Total
      equity
                                                                                
                                                                                
                                                                                133,797,167
                                                                                
                                                                                
                                                                                
                                                                                114,237,278Total
      liabilities and equity
                                                                                
                                                                                $
                                                                                1,135,421,829
                                                                                
                                                                                
                                                                                $
                                                                                865,713,158
 
 The
accompanying notes are an integral part of these statements.
 
 3
 
 GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 CONSOLIDATED
STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME
 (UNAUDITED)
 
 Three
      months ended June 30,
                                                                  
                                                                  
                                                                  Six
      months ended June 30,2009
                                                                  
                                                                  
                                                                  2008
                                                                  
                                                                  
                                                                  2009
                                                                  
                                                                  
                                                                  2008REVENUES
                                                                  
                                                                  $
                                                                  324,460,829
                                                                  
                                                                  
                                                                  $
                                                                  277,514,917
                                                                  
                                                                  
                                                                  $
                                                                  586,875,245
                                                                  
                                                                  
                                                                  $
                                                                  456,007,084REVENUES
      - RELATED PARTIES
                                                                  
                                                                  
                                                                  84,486,318
                                                                  
                                                                  
                                                                  
                                                                  109,514,019
                                                                  
                                                                  
                                                                  
                                                                  144,865,798
                                                                  
                                                                  
                                                                  
                                                                  222,587,851TOTAL
      REVENUES
                                                                  
                                                                  
                                                                  408,947,147
                                                                  
                                                                  
                                                                  
                                                                  387,028,936
                                                                  
                                                                  
                                                                  
                                                                  731,741,043
                                                                  
                                                                  
                                                                  
                                                                  678,594,935COST
      OF SALES
                                                                  
                                                                  
                                                                  301,849,136
                                                                  
                                                                  
                                                                  
                                                                  259,734,698
                                                                  
                                                                  
                                                                  
                                                                  553,851,240
                                                                  
                                                                  
                                                                  
                                                                  426,449,361COST
      OF SALES - RELATED PARTIES
                                                                  
                                                                  
                                                                  84,599,318
                                                                  
                                                                  
                                                                  
                                                                  104,425,433
                                                                  
                                                                  
                                                                  
                                                                  142,468,991
                                                                  
                                                                  
                                                                  
                                                                  216,294,654TOTAL
      COST OF SALES
                                                                  
                                                                  
                                                                  386,448,454
                                                                  
                                                                  
                                                                  
                                                                  364,160,131
                                                                  
                                                                  
                                                                  
                                                                  696,320,231
                                                                  
                                                                  
                                                                  
                                                                  642,744,015GROSS
      PROFIT
                                                                  
                                                                  
                                                                  22,498,693
                                                                  
                                                                  
                                                                  
                                                                  22,868,805
                                                                  
                                                                  
                                                                  
                                                                  35,420,812
                                                                  
                                                                  
                                                                  
                                                                  35,850,920SELLING,
      GENERAL AND ADMINISTRATIVE EXPENSES
                                                                  
                                                                  
                                                                  9,564,057
                                                                  
                                                                  
                                                                  
                                                                  9,503,221
                                                                  
                                                                  
                                                                  
                                                                  18,732,318
                                                                  
                                                                  
                                                                  
                                                                  16,036,042INCOME
      FROM OPERATIONS
                                                                  
                                                                  
                                                                  12,934,636
                                                                  
                                                                  
                                                                  
                                                                  13,365,584
                                                                  
                                                                  
                                                                  
                                                                  16,688,494
                                                                  
                                                                  
                                                                  
                                                                  19,814,878OTHER
      EXPENSE, NETInterest
      income
                                                                  
                                                                  
                                                                  763,764
                                                                  
                                                                  
                                                                  
                                                                  877,099
                                                                  
                                                                  
                                                                  
                                                                  1,642,397
                                                                  
                                                                  
                                                                  
                                                                  1,457,417Finance/interest
      expense
                                                                  
                                                                  
                                                                  (4,854,138
                                                                  )
                                                                  
                                                                  
                                                                  (6,289,868
                                                                  )
                                                                  
                                                                  
                                                                  (7,792,916
                                                                  )
                                                                  
                                                                  
                                                                  (12,276,375
                                                                  )Convertible
      note make whole interest
                                                                  
                                                                  
                                                                  (6,454,683
                                                                  )
                                                                  
                                                                  
                                                                  -
                                                                  
                                                                  
                                                                  
                                                                  (6,454,683
                                                                  )
                                                                  
                                                                  
                                                                  -Change
      in fair value of derivative liabilities
                                                                  
                                                                  
                                                                  (26,726,167
                                                                  )
                                                                  
                                                                  
                                                                  (27,786,632
                                                                  )
                                                                  
                                                                  
                                                                  (22,611,599
                                                                  )
                                                                  
                                                                  
                                                                  (25,115,869
                                                                  )Gain
      from debt extinguishment
                                                                  
                                                                  
                                                                  -
                                                                  
                                                                  
                                                                  
                                                                  -
                                                                  
                                                                  
                                                                  
                                                                  2,930,200
                                                                  
                                                                  
                                                                  
                                                                  -Government
      grant
                                                                  
                                                                  
                                                                  -
                                                                  
                                                                  
                                                                  
                                                                  -
                                                                  
                                                                  
                                                                  
                                                                  3,519,890
                                                                  
                                                                  
                                                                  
                                                                  -Income
      from equity investments
                                                                  
                                                                  
                                                                  2,752,664
                                                                  
                                                                  
                                                                  
                                                                  -
                                                                  
                                                                  
                                                                  
                                                                  2,698,032
                                                                  
                                                                  
                                                                  
                                                                  -Other
      non-operating income, net
                                                                  
                                                                  
                                                                  142,348
                                                                  
                                                                  
                                                                  
                                                                  649,871
                                                                  
                                                                  
                                                                  
                                                                  652,564
                                                                  
                                                                  
                                                                  
                                                                  1,019,142Total
      other expense, net
                                                                  
                                                                  
                                                                  (34,376,212
                                                                  )
                                                                  
                                                                  
                                                                  (32,549,530
                                                                  )
                                                                  
                                                                  
                                                                  (25,416,115
                                                                  )
                                                                  
                                                                  
                                                                  (34,915,685
                                                                  )LOSS
      BEFORE PROVISION FOR INCOME TAXESAND
      NONCONTROLLING INTEREST
                                                                  
                                                                  
                                                                  (21,441,576
                                                                  )
                                                                  
                                                                  
                                                                  (19,183,946
                                                                  )
                                                                  
                                                                  
                                                                  (8,727,621
                                                                  )
                                                                  
                                                                  
                                                                  (15,100,807
                                                                  )PROVISION
      FOR INCOME TAXESCurrent
                                                                  
                                                                  
                                                                  3,229,810
                                                                  
                                                                  
                                                                  
                                                                  1,292,890
                                                                  
                                                                  
                                                                  
                                                                  3,394,031
                                                                  
                                                                  
                                                                  
                                                                  1,959,246Deferred
                                                                  
                                                                  
                                                                  (1,221,850
                                                                  )
                                                                  
                                                                  
                                                                  (206,100
                                                                  )
                                                                  
                                                                  
                                                                  -
                                                                  
                                                                  
                                                                  
                                                                  (422,633
                                                                  )Total
      provision for income taxes
                                                                  
                                                                  
                                                                  2,007,960
                                                                  
                                                                  
                                                                  
                                                                  1,086,790
                                                                  
                                                                  
                                                                  
                                                                  3,394,031
                                                                  
                                                                  
                                                                  
                                                                  1,536,613NET
      LOSS BEFORE NONCONTROLLING INTEREST
                                                                  
                                                                  
                                                                  (23,449,536
                                                                  )
                                                                  
                                                                  
                                                                  (20,270,736
                                                                  )
                                                                  
                                                                  
                                                                  (12,121,652
                                                                  )
                                                                  
                                                                  
                                                                  (16,637,420
                                                                  )Less:
      Net income attributable to noncontrolling interest
                                                                  
                                                                  
                                                                  8,339,676
                                                                  
                                                                  
                                                                  
                                                                  4,000,490
                                                                  
                                                                  
                                                                  
                                                                  12,332,928
                                                                  
                                                                  
                                                                  
                                                                  5,445,346NET
      LOSS ATTRIBUTABLE TO CONTROLLING INTEREST
                                                                  
                                                                  
                                                                  (31,789,212
                                                                  )
                                                                  
                                                                  
                                                                  (24,271,226
                                                                  )
                                                                  
                                                                  
                                                                  (24,454,580
                                                                  )
                                                                  
                                                                  
                                                                  (22,082,766
                                                                  )OTHER
      COMPREHENSIVE INCOME (LOSS) :Foreign
      currency translation adjustments
                                                                  
                                                                  
                                                                  162,842
                                                                  
                                                                  
                                                                  
                                                                  4,841,277
                                                                  
                                                                  
                                                                  
                                                                  (14,089
                                                                  )
                                                                  
                                                                  
                                                                  6,457,227Comprehensive
      (loss) income attributable to noncontrolling interest
                                                                  
                                                                  
                                                                  (1,031,639
                                                                  )
                                                                  
                                                                  
                                                                  1,498,426
                                                                  
                                                                  
                                                                  
                                                                  (1,106,385
                                                                  )
                                                                  
                                                                  
                                                                  4,205,415COMPREHENSIVE
      LOSS
                                                                  
                                                                  $
                                                                  (32,658,009
                                                                  )
                                                                  
                                                                  $
                                                                  (17,931,523
                                                                  )
                                                                  
                                                                  $
                                                                  (25,575,054
                                                                  )
                                                                  
                                                                  $
                                                                  (11,420,124
                                                                  )WEIGHTED
      AVERAGE NUMBER OF SHARESBasic
                                                                  
                                                                  
                                                                  39,533,099
                                                                  
                                                                  
                                                                  
                                                                  34,928,576
                                                                  
                                                                  
                                                                  
                                                                  37,918,177
                                                                  
                                                                  
                                                                  
                                                                  34,883,740Diluted
                                                                  
                                                                  
                                                                  39,533,099
                                                                  
                                                                  
                                                                  
                                                                  34,928,576
                                                                  
                                                                  
                                                                  
                                                                  37,918,177
                                                                  
                                                                  
                                                                  
                                                                  34,883,740LOSS
      PER SHAREBasic
                                                                  
                                                                  $
                                                                  (0.804
                                                                  )
                                                                  
                                                                  $
                                                                  (0.69
                                                                  )
                                                                  
                                                                  $
                                                                  (0.645
                                                                  )
                                                                  
                                                                  $
                                                                  (0.63
                                                                  )Diluted
                                                                  
                                                                  $
                                                                  (0.804
                                                                  )
                                                                  
                                                                  $
                                                                  (0.69
                                                                  )
                                                                  
                                                                  $
                                                                  (0.645
                                                                  )
                                                                  
                                                                  $
                                                                  (0.63
                                                                  )
 
 The
accompanying notes are an integral part of these statements.
 
 4
 
 GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 CONSOLIDATED
STATEMENTS OF CHANGES IN EQUITY
 
 AccumulatedPreferred
      stock
                                  
                                  
                                  Common
      stock
                                  
                                  
                                  
                                  
                                  
                                  Retained
      earnings
                                  
                                  
                                  
                                  
                                  
                                  otherPaid-in
                                  
                                  
                                  Statutory
                                  
                                  
                                  
                                  
                                  
                                  Contribution
                                  
                                  
                                  comprehensive
                                  
                                  
                                  NoncontrollingShares
                                  
                                  
                                  Par
      value
                                  
                                  
                                  Shares
                                  
                                  
                                  Par
      value
                                  
                                  
                                  capital
                                  
                                  
                                  reserves
                                  
                                  
                                  Unrestricted
                                  
                                  
                                  receivable
                                  
                                  
                                  income
                                  
                                  
                                  interest
                                  
                                  
                                  TotalsBALANCE,
      January 1, 2008
                                  
                                  
                                  3,092,899
                                  
                                  
                                  $
                                  3,093
                                  
                                  
                                  
                                  34,634,765
                                  
                                  
                                  $
                                  34,635
                                  
                                  
                                  $
                                  23,429,153
                                  
                                  
                                  $
                                  3,632,325
                                  
                                  
                                  $
                                  22,686,590
                                  
                                  
                                  $
                                  (959,700
                                  )
                                  
                                  $
                                  3,285,278
                                  
                                  
                                  $
                                  43,322,066
                                  
                                  
                                  $
                                  95,433,440Net
      loss
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  (22,082,766
                                  )
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  5,445,346
                                  
                                  
                                  
                                  (16,637,420
                                  )Acquired
      noncontrolling interest
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  15,767,571
                                  
                                  
                                  
                                  15,767,571Adjustment
      to statutory reserve
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  648,363
                                  
                                  
                                  
                                  (648,363
                                  )
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  -Common
      stock issued for compensation, $7.16
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  76,600
                                  
                                  
                                  
                                  77
                                  
                                  
                                  
                                  548,379
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  548,456Common
      stock issued for compensation, $10.43
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  150,000
                                  
                                  
                                  
                                  150
                                  
                                  
                                  
                                  1,564,350
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  1,564,500Common
      stock issued for compensation, $6.66
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  87,400
                                  
                                  
                                  
                                  87
                                  
                                  
                                  
                                  581,997
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  582,084Common
      stock transferred by CEO for compensation, $6.91
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  69,100
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  69,100Foreign
      currency translation adjustments
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  6,457,227
                                  
                                  
                                  
                                  4,205,415
                                  
                                  
                                  
                                  10,662,642BALANCE,June
      30, 2008, unaudited
                                  
                                  
                                  3,092,899
                                  
                                  
                                  $
                                  3,093
                                  
                                  
                                  
                                  34,948,765
                                  
                                  
                                  $
                                  34,949
                                  
                                  
                                  $
                                  26,192,979
                                  
                                  
                                  $
                                  4,280,688
                                  
                                  
                                  $
                                  (44,539
                                  )
                                  
                                  $
                                  (959,700
                                  )
                                  
                                  $
                                  9,742,505
                                  
                                  
                                  $
                                  68,740,398
                                  
                                  
                                  $
                                  107,990,373Net
      income
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  10,758,321
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  (13,987,183
                                  )
                                  
                                  
                                  (3,228,862
                                  )Acquired
      noncontrolling interest
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  127,915
                                  
                                  
                                  
                                  127,915Adjustment
      to statutory reserve
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  621,953
                                  
                                  
                                  
                                  (621,953
                                  )
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  -Common
      stock issued for compensation, $10.29
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  90,254
                                  
                                  
                                  
                                  90
                                  
                                  
                                  
                                  928,582
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  928,672Common
      stock issued for consulting fee, $3.6
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  100,000
                                  
                                  
                                  
                                  100
                                  
                                  
                                  
                                  359,900
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  360,000Common
      stock issued for public relations, $3.6
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  25,000
                                  
                                  
                                  
                                  25
                                  
                                  
                                  
                                  89,975
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  90,000Common
      stock issued for compensation, $3.5
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  87,550
                                  
                                  
                                  
                                  88
                                  
                                  
                                  
                                  306,337
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  306,425Common
      stock transferred by CEO for compensation, $6.91
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  138,200
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  138,200Common
      stock issued at $5/share
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  140,000
                                  
                                  
                                  
                                  140
                                  
                                  
                                  
                                  699,860
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  700,000Notes
      converted to common stock
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  541,299
                                  
                                  
                                  
                                  541
                                  
                                  
                                  
                                  6,102,691
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  6,103,232Make
      whole shares issued on notes conversion
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  195,965
                                  
                                  
                                  
                                  196
                                  
                                  
                                  
                                  2,310,117
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  2,310,313Foreign
      currency translation adjustments
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  (1,335,146
                                  )
                                  
                                  
                                  (253,844
                                  )
                                  
                                  
                                  (1,588,990
                                  )BALANCE,
      December 31, 2008
                                  
                                  
                                  3,092,899
                                  
                                  
                                  $
                                  3,093
                                  
                                  
                                  
                                  36,128,833
                                  
                                  
                                  $
                                  36,129
                                  
                                  
                                  $
                                  37,128,641
                                  
                                  
                                  $
                                  4,902,641
                                  
                                  
                                  $
                                  10,091,829
                                  
                                  
                                  $
                                  (959,700
                                  )
                                  
                                  $
                                  8,407,359
                                  
                                  
                                  $
                                  54,627,286
                                  
                                  
                                  $
                                  114,237,278Net
      Loss
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  (24,454,580
                                  )
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  12,332,928
                                  
                                  
                                  
                                  (12,121,652
                                  )Disposal
      of subsidiaries
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  (292,820
                                  )
                                  
                                  
                                  (292,820
                                  )Distribution
      of dividend to noncontrolling shareholders
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  (556,000
                                  )
                                  
                                  
                                  (556,000
                                  )Adjustment
      to statutory reserve
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  259,760
                                  
                                  
                                  
                                  (259,760
                                  )
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  -Common
      stock issued for compensation, $1.85
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  109,250
                                  
                                  
                                  
                                  109
                                  
                                  
                                  
                                  202,003
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  202,112Common
      stock issued for compensation, $2.77
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  106,750
                                  
                                  
                                  
                                  107
                                  
                                  
                                  
                                  295,591
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  295,698Common
      stock issued for interest payment, $3.66
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  152,240
                                  
                                  
                                  
                                  152
                                  
                                  
                                  
                                  557,709
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  557,861Common
      stock issued for repayment of debt, $6.00
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  300,000
                                  
                                  
                                  
                                  300
                                  
                                  
                                  
                                  1,799,700
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  1,800,000Notes
      converted to common stock
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  5,104,596
                                  
                                  
                                  
                                  5,105
                                  
                                  
                                  
                                  24,125,324
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  24,130,429Make
      whole shares issued on notes conversion
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  1,399,759
                                  
                                  
                                  
                                  1,399
                                  
                                  
                                  
                                  5,565,436
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  5,566,835Common
      stock transferred by CEO for compensation, $6.91
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  138,200
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  138,200Reduction
      of Registered Capital
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  959,700
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  959,700Foreign
      currency translation adjustments
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  (14,089
                                  )
                                  
                                  
                                  (1,106,385
                                  )
                                  
                                  
                                  (1,120,474
                                  )BALANCE,
      June 30, 2009, unaudited
                                  
                                  
                                  3,092,899
                                  
                                  
                                  $
                                  3,093
                                  
                                  
                                  
                                  43,301,428
                                  
                                  
                                  $
                                  43,301
                                  
                                  
                                  $
                                  69,812,604
                                  
                                  
                                  $
                                  5,162,401
                                  
                                  
                                  $
                                  (14,622,511
                                  )
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  8,393,270
                                  
                                  
                                  $
                                  65,005,009
                                  
                                  
                                  $
                                  133,797,167
 
 The
accompanying notes are an integral part of these statements.
 
 5
 
 GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 FOR THE
SIX MONTHS ENDED JUNE 30
 (UNAUDITED)
 
 2009
                                              
                                              
                                              2008CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income attributable to controlling interest
                                              
                                              $
                                              (24,454,580
                                              )
                                              
                                              $
                                              (22,082,766
                                              )Net
      income attributable to noncontrolling interest
                                              
                                              
                                              12,332,928
                                              
                                              
                                              
                                              5,445,346Consolidated
      net income
                                              
                                              
                                              (12,121,652
                                              )
                                              
                                              
                                              (16,637,420
                                              )Adjustments
      to reconcile net income to cashprovided
      by (used in) operating activities:Depreciation
                                              
                                              
                                              13,073,512
                                              
                                              
                                              
                                              8,868,941Amortization
                                              
                                              
                                              404,564
                                              
                                              
                                              
                                              444,670Debt
      waiver
                                              
                                              
                                              (2,930,200
                                              )
                                              
                                              
                                              -(Gain)
      Loss on disposal of equipment
                                              
                                              
                                              (3,431,337
                                              )
                                              
                                              
                                              -Stock
      issued for services and compensation
                                              
                                              
                                              636,010
                                              
                                              
                                              
                                              1,199,640Income
      from investment
                                              
                                              
                                              (2,698,500
                                              )
                                              
                                              
                                              -Amortization
      of deferred note issuance cost
                                              
                                              
                                              43,282
                                              
                                              
                                              
                                              20,429Amortization
      of discount on convertible notes
                                              
                                              
                                              -
                                              
                                              
                                              
                                              1,626,184Change
      in fair value of derivative instrument
                                              
                                              
                                              22,611,599
                                              
                                              
                                              
                                              25,115,869Convertible
      note make whole interest
                                              
                                              
                                              6,454,683
                                              
                                              
                                              
                                              -Deferred
      tax assets
                                              
                                              
                                              2,165,702
                                              
                                              
                                              
                                              (422,633
                                              )Changes
      in operating assets and liabilitiesAccounts
      receivable
                                              
                                              
                                              (7,924,301
                                              )
                                              
                                              
                                              (13,657,403
                                              )Accounts
      receivable - related parties
                                              
                                              
                                              -
                                              
                                              
                                              
                                              (21,068,625
                                              )Notes
      receivable
                                              
                                              
                                              4,914,506
                                              
                                              
                                              
                                              (13,961,703
                                              )Notes
      receivable - restricted
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -Other
      receivables
                                              
                                              
                                              (618,596
                                              )
                                              
                                              
                                              (1,219,841
                                              )Other
      receivables - related parties
                                              
                                              
                                              (14,992,788
                                              )
                                              
                                              
                                              1,471,397Loan
      receivable
                                              
                                              
                                              -
                                              
                                              
                                              
                                              1,276,560Inventories
                                              
                                              
                                              (84,204,445
                                              )
                                              
                                              
                                              (44,931,442
                                              )Advances
      on inventory purchases
                                              
                                              
                                              11,271,266
                                              
                                              
                                              
                                              33,110,981Advances
      on inventory purchases - related parties
                                              
                                              
                                              (13,021,451
                                              )
                                              
                                              
                                              (8,517,117
                                              )Prepaid
      expense - current
                                              
                                              
                                              126,940
                                              
                                              
                                              
                                              (245,115
                                              )Prepaid
      expense - non current
                                              
                                              
                                              91,871
                                              
                                              
                                              
                                              11,443Prepaid
      expense - non current - related parties
                                              
                                              
                                              38,207
                                              
                                              
                                              
                                              (82,388
                                              )Accounts
      payable
                                              
                                              
                                              59,067,210
                                              
                                              
                                              
                                              1,188,213Accounts
      payable - related parties
                                              
                                              
                                              15,283,470
                                              
                                              
                                              
                                              1,440,412Other
      payables
                                              
                                              
                                              16,545,247
                                              
                                              
                                              
                                              (2,250,089
                                              )Other
      payable - related parties
                                              
                                              
                                              15,748,520
                                              
                                              
                                              
                                              (1,208,217
                                              )Dividend
      payable
                                              
                                              
                                              440,230
                                              
                                              
                                              
                                              (391,165
                                              )Accrued
      liabilities
                                              
                                              
                                              2,198,275
                                              
                                              
                                              
                                              2,598,366Customer
      deposits
                                              
                                              
                                              16,159,621
                                              
                                              
                                              
                                              90,831,063Customer
      deposits - related parties
                                              
                                              
                                              (3,574,353
                                              )
                                              
                                              
                                              (3,998,027
                                              )Taxes
      payable
                                              
                                              
                                              (12,768,702
                                              )
                                              
                                              
                                              (4,147,173
                                              )Net
      cash provided by operating activities
                                              
                                              
                                              28,988,390
                                              
                                              
                                              
                                              36,465,810CASH
      FLOWS FROM INVESTING ACTIVITIES:Acquired
      long term investment
                                              
                                              
                                              (6,592,500
                                              )
                                              
                                              
                                              -Cash
      acquired from subsidiary
                                              
                                              
                                              -
                                              
                                              
                                              
                                              1,256,385Deposits
      due to sales representatives
                                              
                                              
                                              31,933,299
                                              
                                              
                                              
                                              (1,053,871
                                              )Proceeds
      from short term investment
                                              
                                              
                                              -
                                              
                                              
                                              
                                              2,340,360Long
      term other receivables
                                              
                                              
                                              1,215,339
                                              
                                              
                                              
                                              -Advance
      on equipment purchases
                                              
                                              
                                              3,065,263
                                              
                                              
                                              
                                              674,550Cash
      proceeds from sale of equipment
                                              
                                              
                                              4,413,964
                                              
                                              
                                              
                                              -Equipment
      purchases
                                              
                                              
                                              (60,289,090
                                              )
                                              
                                              
                                              (93,010,998
                                              )Intangible
      assets purchases
                                              
                                              
                                              (99,020
                                              )
                                              
                                              
                                              (186,623
                                              )Payment
      to original shareholders
                                              
                                              
                                              -
                                              
                                              
                                              
                                              (7,092,000
                                              )Net
      cash used in investing activities
                                              
                                              
                                              (26,352,745
                                              )
                                              
                                              
                                              (97,072,197
                                              )CASH
      FLOWS FROM FINANCING ACTIVITIES:Restricted
      cash
                                              
                                              
                                              (69,727,403
                                              )
                                              
                                              
                                              (55,759,041
                                              )Notes
      receivable - restricted
                                              
                                              
                                              -
                                              
                                              
                                              
                                              12,947,333Borrowings
      on short term loans - bank
                                              
                                              
                                              72,815,976
                                              
                                              
                                              
                                              27,141,084Payments
      on short term loans - bank
                                              
                                              
                                              (43,352,782
                                              )
                                              
                                              
                                              (41,610,454
                                              )Borrowings
      on short term loans - related parties
                                              
                                              
                                              -
                                              
                                              
                                              
                                              7,106,184Payments
      on short term loans - related parties
                                              
                                              
                                              2,931,400
                                              
                                              
                                              
                                              -Borrowings
      on short term loan - others
                                              
                                              
                                              79,354,464
                                              
                                              
                                              
                                              42,641,359Payments
      on short term loans - others
                                              
                                              
                                              (63,899,468
                                              )
                                              
                                              
                                              (33,772,944
                                              )Borrowings
      on short term notes payable
                                              
                                              
                                              371,613,578
                                              
                                              
                                              
                                              109,642,320Payments
      on short term notes payable
                                              
                                              
                                              (303,326,615
                                              )
                                              
                                              
                                              (26,325,504
                                              )Net
      cash provided by financing activities
                                              
                                              
                                              46,409,150
                                              
                                              
                                              
                                              42,010,337EFFECTS
      OF EXCHANGE RATE CHANGE IN CASH
                                              
                                              
                                              (9,277
                                              )
                                              
                                              
                                              1,792,862INCREASE
      (DECREASE) IN CASH
                                              
                                              
                                              49,035,518
                                              
                                              
                                              
                                              (16,803,188
                                              )CASH,
      beginning of period
                                              
                                              
                                              14,895,442
                                              
                                              
                                              
                                              43,713,346CASH,
      end of period
                                              
                                              $
                                              63,930,960
                                              
                                              
                                              $
                                              26,910,158
 
 The
accompanying notes are an integral part of these statements.
 
 6


GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 June 30,
2009
 Unaudited
 
 Note
1 – Background
 
 General
Steel Holdings, Inc. (the “Company”) was incorporated on August 5, 2002 in the
state of Nevada. The Company through its 100% owned subsidiary, General Steel
Investment operates a portfolio of Chinese steel companies serving various
industries. The Company presently has four production subsidiaries: Daqiuzhuang
Metal, Baotou Steel – General Steel Special Steel Pipe Joint Venture Co., Ltd.,
(“Baotou Steel Pipe Joint Venture”), Shaanxi Longmen Iron and Steel Co., Ltd.
(“Longmen Joint Venture”), and Maoming Hengda Steel Group Co., Ltd. The
Company’s main products include rebar, hot-rolled carbon and silicon sheets and
spiral-weld pipes.
 
 Daqiuzhuang
Metal was established on August 18, 2000 in Jinghai county, Tianjin city, Hebei
province, the People’s Republic of China (PRC). The Company is a Chinese
registered limited liability which engages in the manufacturing of hot rolled
carbon and silicon steel sheets. Daqiuzhuang Metal changed its legal name to
General Steel (China) Co., Ltd. on May 14, 2009.
 
 Baotou
Steel Pipe Joint Venture is located in Kundulun District, Baotou city, Inner
Mongolia, China. It produces and sells spiral welded steel pipes and primarily
serves customers in the oil, gas and petrochemical markets.
 
 Yangpu
Investment and Qiu Steel Investment are Chinese registered limited liability
companies formed to acquire other businesses.
 
 Longmen
Joint Venture is located in Hancheng city, Shaanxi province, China. Longmen
Joint Venture is the largest integrated steel producer in Shaanxi province that
uses iron ore and coke as primary raw materials for steel production. Longmen
Joint Venture produces pig iron, crude steel, reinforced bars and high-speed
wire. Longmen Joint Venture is also engaged in several other business
activities, most of which are related to steel manufacturing. These include the
production of coke and the production of iron ore pellets from taconite,
transportation services and real estate and hotel operations. These operations
primarily serve regional customers in the construction industry.
 
 On
January 14, 2008, the Company, through Longmen Joint Venture, completed its
acquisition of a controlling interest in Hancheng Tongxing Metallurgy Co., Ltd.
(“Tongxing”). The joint venture contributed its land use right of 217,487 square
meters (approximately 53 acres) with appraised value of approximately $4.1
million (RMB 30 million). Pursuant to the agreement, the land will be converted
into shares valued at approximately $3.1 million (RMB 23 million), providing the
Joint Venture stake of 22.76% ownership in Tongxing and making it Tongxing’s
largest and controlling shareholder. The parties agreed to make the effective
date of the transaction January 1, 2008. The acquisition is accounted for as
acquisition under common control. See more detail in Note 17 – Business
combinations.
 
 On June
25, 2008, the Company and Tianjin Qiu Steel Investment (“Qiu Steel Investment”)
entered into an equity purchase agreement (the “Purchase Agreement”) with
Maoming Hengda Steel Group Limited (the “Maoming”), in which the Company
contributed $7.1 million (RMB 50 million) through its subsidiary, Qiu Steel, to
Maoming original shareholders in exchange for 99% of the equity of Maoming. The
acquisition was completed and became effective June 30, 2008. See Note 17 –
Business combinations.  Maoming is a steel products processor located
in Maoming city, Guangdong province, in China’s southern coastal region.
Production capacity at the facility is 1.8 million tons annually, with the
majority of production focused on high-speed wire, an industrial steel product
used in construction.
  7
  GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 June 30,
2009
 Unaudited
  On August
11, 2008, the Company through its subsidiary, Longmen Joint Venture, completed
its acquisition of a controlling interest in Beijing Hua Tian Yu Long
International Steel Trade Co., Ltd. The Longmen Joint Venture paid $128,265 (RMB
876,731.71) for 50% equity based on the appraisal value on June 30,
2008.
 
 Note
2 – Summary of significant accounting policies
 
 Basis of
presentation
 
 The
consolidated financial statements of the Company reflect the activities of the
following directly and indirectly owned subsidiaries:
 
 PercentageSubsidiary
                        
                        Of
      OwnershipGeneral
      Steel Investment Co., Ltd.
                        
                        British
      Virgin
                          Islands
                        
                        
                        100.0
                        %General
      Steel (China) Co., Ltd.
                        
                        P.R.C.
                        
                        
                        100.0
                        %Baotou
      Steel – General Steel Special Steel Pipe Joint Venture Co.,
      Ltd.
                        
                        P.R.C.
                        
                        
                        80.0
                        %Yangpu
      Shengtong Investment Co., Ltd.
                        
                        P.R.C.
                        
                        
                        99.1
                        %Qiu
      Steel Investment Co., Ltd.
                        
                        P.R.C.
                        
                        
                        98.7
                        %Shaanxi
      Longmen Iron and Steel Co. Ltd.
                        
                        P.R.C.
                        
                        
                        60.0
                        %Maoming
      Hengda Steel Group Co., Ltd.
                        
                        P.R.C.
                        
                        
                        99.0
                        %
 
 The
accompanying financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America and
include the accounts of all directly and indirectly owned subsidiaries listed
above. All material intercompany transactions and balances have been eliminated
in consolidation.
 
 Use of
estimates
 
 The
preparation of financial statements in conformity with generally accepted
accounting principles of the United States of America requires management to
make estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Significant accounting estimates reflected in
the Company’s financial statements include the fair value of financial
instruments, the useful lives of and impairment for property, plant and
equipment, and potential losses on uncollectible receivables. Actual results
could differ from these estimates.
 
 Management
has included all adjustments, consisting only of normal recurring adjustments,
considered necessary to give a fair presentation of operating results for the
periods presented. Interim results are not necessarily indicative of results for
a full year. The information included in this Form 10-Q should be read in
conjunction with information included in the 2008 annual report filed on Form
10-K.
 
 Concentration of
risks
 
 The
Company's operations are carried out in the PRC. Accordingly, the Company's
business, financial condition and results of operations may be influenced by the
political, economic and legal environment in the PRC, and by the general state
of the PRC's economy. The Company's operations in the PRC are subject to
specific considerations and significant risks not typically associated with
companies in North America and Western Europe. The Company's results may be
adversely affected by changes in governmental policies with respect to laws and
regulations, anti-inflationary measures, currency conversion and remittance
abroad, and rates and methods of taxation, among other things.
  8
  GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 June 30,
2009
 Unaudited
  Cash
includes cash on hand and demand deposits in accounts maintained with state
owned banks within the People’s Republic of China, Hong Kong and the United
States. Total cash (including restricted cash balances) in these banks on June
30, 2009 and December 31, 2008 amounted to $264,147,210 and $145,595,777,
respectively, none of which are covered by insurance. The Company has not
experienced any losses in such accounts and believes it is not exposed to any
risks on its cash in bank accounts.
 
 The
Company had five major customers, which represented approximately 13%, and 33.7%
of the Company’s total sales for the three months ended June 30, 2009 and 2008,
respectively, and approximately 21%, and 42.1% of the Company’s total sales for
the six months ended June 30, 2009 and 2008, respectively. Five customers
accounted for 0% and 58.7% of total accounts receivable as of June 30, 2009 and
2008, respectively.
 
 The
purchase of raw materials from five major suppliers represent approximately 32%
and 29% of Company’s total purchase for the three months ended June 30,
2009 and 2008, respectively, and 41% and 44% of the Company’s total purchase for
the six months ended June 30, 2009 and 2008. Five vendors accounted for
20.5% and 1.4% of total accounts payable as of June 30, 2009 and 2008,
respectively.
 
 Revenue
recognition
 
 The
Company's revenue recognition policies are in accordance with Staff Accounting
Bulletin (“SAB”) 104. Sales revenue is recognized at the date of shipment to
customers when a formal arrangement exists, the price is fixed or determinable,
the delivery is completed, no other significant obligations of the Company exist
and collectability is reasonably assured. Payments received before all of the
relevant criteria for revenue recognition are recorded as customer deposits.
Sales revenue represents the invoiced value of goods, net of value-added tax
(VAT). All of the Company’s products sold in the PRC are subject to a Chinese
value-added tax at a rate of 13% to 17% of the gross sales price. This VAT may
be offset by VAT paid by the Company on raw materials and other materials
included in the cost of producing the finished product.
 
 Foreign currency translation
and other comprehensive income
 
 The
reporting currency of the Company is the US dollar. The Company uses the local
currency, Renminbi (RMB), as its functional currency. Assets and liabilities are
translated at the unified exchange rate as quoted by the People’s Bank of China
at the end of the period. Translation adjustments resulting from this process
are included in accumulated other comprehensive income in the statement of
shareholders’ equity. Transaction gains and losses that arise from exchange rate
fluctuations on transactions denominated in a currency other than the functional
currency are included in the results of operations as incurred.
 
 Translation
adjustments resulting included in accumulated other comprehensive income
amounted to $8,393,270 and $8,407,359 as of June 30, 2009, and December 31,
2008, respectively. The balance sheet amounts, with the exception of equity at
June 30, 2009 and December 31, 2008 were translated at 6.83 RMB and 6.82 RMB to
$1.00, respectively. The equity accounts were stated at their historical rate.
The average translation rates applied to income statement accounts for the six
months ended June 30, 2009 and 2008 were 6.82 RMB, 7.16 RMB, respectively. Cash
flows are also translated at average translation rates for the period,
therefore, amounts reported on the statement of cash flows will not necessarily
agree with changes in the corresponding balances on the balance
sheet.
  9
  GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 June 30,
2009
 Unaudited
  Financial
instruments
 
 SFAS 107,
“Disclosures about Fair Value of Financial Instruments” defines financial
instruments and requires disclosure of the fair value of financial instruments
held by the Company. The Company considers the carrying amount of cash, accounts
receivable, other receivables, accounts payable and accrued liabilities, to
approximate their fair values because of the short period of time between the
origination of such instruments and their expected realization. For short term
loans and notes payable, the Company concluded the carrying values are a
reasonable estimate of fair value because of the short period of time between
the origination and repayment and their stated interest rate approximates
current rates available.
 
 The
Company also analyzes all financial instruments with features of both
liabilities and equity under SFAS 150, “Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity,” SFAS No 133,
“Accounting for Derivative Instruments and Hedging Activities” and EITF 00-19,
“Accounting for Derivative Financial Instruments Indexed to, and Potentially
Settled in, a Company’s Own Stock.” Additionally, the Company analyzes
registration rights agreements associated with any equity instruments issued to
determine if penalties triggered for late filing should be accrued under FSP
EITF 00-19-2, “Accounting for Registration Payment Arrangements.”
 
 In
December 2007, the Company issued convertible notes totaling $40,000,000
(“Notes”) and 1,154,958 warrants. Both the warrants and the conversion option
embedded in the Notes meet the definition of a derivative instrument in SFAS
133. Therefore these instruments are accounted for as derivative liabilities and
marked-to-market each reporting period. The change in the value of the
derivative liabilities is charged against or credited to income.
 
 The
Company adopted SFAS 157, “Fair Value Measurements” on January 1, 2008. SFAS 157
defines fair value, establishes a three-level valuation hierarchy for
disclosures of fair value measurement and enhances disclosures requirements for
fair value measures. The three levels are defined as follow:
 
 ·
              Level
      1   inputs to the valuation methodology are quoted prices
      (unadjusted) for identical assets or liabilities in active
      markets.
 
 ·
              Level
      2   inputs to the valuation methodology include quoted
      prices for similar assets and liabilities in active markets, and inputs
      that are observable for the assets or liability, either directly or
      indirectly, for substantially the full term of the financial
      instruments.
 
 ·
              Level
      3   inputs to the valuation methodology are unobservable
      and significant to the fair value.
 
 The
Company’s investment in unconsolidated subsidiaries amounted to
$18,909,182 as of June 30, 2009. Since there is no quoted or observable
market price for the fair value of similar long term investment, the Company
then used the level 3 inputs for its valuation methodology. The determination of
the fair value was based on the capital investment that the Company contributed
and income from investment. The carrying value of the long term investments
approximated the fair value as of June 30, 2009.
  10
  GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 June 30,
2009
 Unaudited
  In 2007,
the conversion option on the $40 million Notes, as well as the 1,154,958
warrants issued in conjunction with the Notes are carried at fair value. The
fair value was determined using the Cox Rubenstein Binomial Model, defined in
SFAS 157 as level 2 inputs, and recorded the change in earnings. As a result,
the derivative liability is carried on the balance sheet at its fair
value.
  As of
June 30, 2009, the outstanding principal amounted to $11,550,000, and the
carrying value of the convertible note amounted to $3,049,619. The Company used
Level 3 inputs for its valuation methodology for the convertible note, and their
fair values are determined using cash flows discounted at relevant market
interest rates in effect at the period close since there is no observable market
price. The embedded warrants and conversion feature are valued by using
level 2 inputs to the Binomial Model and determined that the fair value
amounted to approximately $11.05 million due to the increase in the Company’s
common stock price.
 
 Carrying
      Value as of
                        June
      30, 2009
                      
                      Fair
      Value Measurements at June 30, 2009
                        Using
      Fair Value HierarchyLevel 1
                      
                      Level 2
                      
                      
                      Level 3Long
      term investments
                      
                      $
                      18,909,182
                      
                      
                      
                      
                      
                      
                      $
                      18,909,182Derivative
      liabilities
                      
                      $
                      11,053,276
                      
                      
                      
                      $
                      11,053,276Convertible
      notes payable
                      
                      $
                      3,049,619
                      
                      
                      
                      
                      
                      
                      
                      $
                      2,831,993
 
 Except
for the investments and derivative liabilities, the Company did not identify any
other assets or liabilities that are required to be presented on the balance
sheet at fair value in accordance with SFAS 157.
  11
  GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 June 30,
2009
 Unaudited
  Level 3
Valuation Reconciliation:
  Derivative LiabilitiesBalance,
      December 31, 2008
                            
                            $
                            9,903,010Current
      period gain (loss)
                            
                            
                            1,150,266Transferred
      out of Level 3 Valuation
                            
                            
                            -11,053,276Balance,
      June 30, 2009
                            
                            $
                            -
  Convertible NotesBalance,
      December 31, 2008
                            
                            $
                            7,155,058Current
      period effective interest charges on notes
                            
                            
                            1,847,709Current
      period cash payments made for principal
                            
                            
                            -557,861Current
      period note converted carrying value
                            
                            
                            -5,395,287Balance,
      June 30, 2009
                            
                            $
                            3,049,619
  Long term
                              InvestmentBalance,
      December 31, 2008
                            
                            $
                            13,959,432Current
      period investment
                            
                            
                            6,592,500Distribution
      of previous year dividend
                            
                            
                            -1,662,147Current
      period investment gain (loss)
                            
                            
                            -1,570Foreign
      currency exchange gain (loss)
                            
                            
                            20,967Balance,
      June 30, 2009
                            
                            $
                            18,909,182
 
 Cash and cash
equivalents
 
 Cash and
cash equivalents include cash on hand and demand deposits in banks with original
maturities of less than three months.
 
 Restricted
cash
 
 The
Company has notes payable outstanding with various banks and is required to keep
certain amounts on deposit that are subject to withdrawal
restrictions.
 
 Receivables and allowance
for doubtful accounts
 
 Receivables
include trade accounts due from the customers and other receivables from cash
advances to employees, related parties or third parties.  An allowance
for doubtful account is established and recorded based on managements’
assessment of potential losses based on the credit history and relationship with
the customers. Management reviews its receivable on a regular basis to determine
if the bad debt allowance is adequate, and adjusts the allowance when necessary.
Delinquent account balances are written-off against allowance for doubtful
accounts after management has determined that the likelihood of collection is
not probable.
  12
  GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 June 30,
2009
 Unaudited
  Notes
receivable
 
 Notes
receivable represent trade accounts receivable due from various customers where
the customers’ banks have guaranteed the payment of the receivables. The notes
are non-interest bearing and normally paid within three to six months. The
Company has the ability to submit request for payment to the customer’s bank
earlier than the scheduled payment date, but will incur an interest charge and a
processing fee. The Company had $33,243,064 and $38,207,312 of notes receivable
outstanding as of June 30, 2009 and December 31, 2008,
respectively.
 
 Inventories
 
 Inventories
are stated at the lower of cost or market using weighted average method.
Management reviews inventories for obsolescence and cost in excess of net
realizable value at least annually and records a reserve against the inventory
and additional cost of goods sold when the carrying value exceeds net realizable
value.
 
 Shipping and
handling
 
 Shipping
and handling for raw materials purchased are included in cost of goods sold.
Shipping and handling cost incurred to ship finished products to customers are
included in selling expenses. Shipping and handling expenses for finished goods
for the three months ended June 30, 2009 and 2008 amounted to $1,043,743 and
$919,220 respectively. Shipping and handling for the six months ended June 30,
2009 and 2008 amounted to $1,606,041 and $1,622,292, respectively.
 
 Intangible
assets
 
 All land
in the People’s Republic of China is owned by the government. However, the
government grants “land use rights”.  Daqiuzhuang Metal acquired land
use rights during the years ended 2000 and 2003 for a total of $3,167,483. These
land use rights are for 50 years and expire in 2050 and 2053. However,
Daqiuzhuang Metal's initial business license had a ten-year term. Therefore,
management elected to amortize the land use rights over the ten-year business
term. Daqiuzhuang Metal became a Sino-Foreign Joint Venture in 2004, and
obtained a new business license for twenty years; however, the Company decided
to continue amortizing the land use rights over the original ten-year business
term.
 
 Longmen
Group contributed land use rights for a total amount of $19,823,885 to the
Longmen Joint Venture. The land use rights are for 50 years and expire in 2048
to 2052.
 
 Maoming
has land use rights amounted to $2,037,560 for 50 years and expire in
2054.
 
 Entity
                            
                            Original
      Cost
                            
                            Years
      of ExpirationDaqiuzhuang
      Metal
                            
                            $
                            3,167,483
                            
                            2050
      & 2053Longmen
      Joint Venture
                            
                            $
                            19,823,885
                            
                            2048
      & 2052Maoming
      Hengda Steel Group Co., Ltd
                            
                            $
                            2,037,560
                            
                            2054
 
 Intangible
assets of the Company are reviewed at least annually, more often when
circumstances require to determine whether their carrying value has become
impaired. The Company considers assets to be impaired if the carrying value
exceeds the future projected cash flows from related operations. The Company
also re-evaluates the periods of amortization to determine whether subsequent
events and circumstances warrant revised estimates of useful
lives.  As of June 30, 2009, the Company expects these assets to be
fully recoverable.
  13
  GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 June 30,
2009
 Unaudited
  Plant and equipment,
net
 
 Plant and
equipment are stated at cost less accumulated depreciation. Depreciation is
computed using the straight-line method over the estimated useful lives of the
assets with 3%-5% residual value.
 
 The
estimated useful lives are as follows:
 
 Property
      and plant
                                
                                10-40 YearsMachinery
      & Equipment
                                
                                10-30 YearsOffice
      equipment and furniture
                                
                                5 YearsMotor
      vehicles
                                
                                5 Years
 
 Construction
in progress represents the costs incurred in connection with the construction of
buildings or new additions to the Company’s plant facilities. No depreciation is
provided for construction in progress until such time as the assets are
completed and are placed into service. Maintenance, repairs and minor renewals
are charged directly to expense as incurred. Major additions and betterment to
buildings and equipment are capitalized. Interest incurred during construction
is capitalized into construction in progress. All other interest is expensed as
incurred.
 
 Long
lived assets, including plant, equipment and intangible assets are reviewed
annually, more often if necessary, to determine whether their carrying value has
become impaired. The Company considers assets to be impaired if the carrying
value exceeds the future projected cash flows from related operations. The
Company also re-evaluates the periods of depreciation and amortization to
determine whether subsequent events and circumstances warrant revised estimates
of useful lives. As of June 30, 2009, the Company expects these assets to be
fully recoverable.
 
 Investments in
unconsolidated subsidiaries
 
 Subsidiaries
in which the Company has the ability to exercise significant influence, but does
not have a controlling interest is accounted for using the equity method.
Significant influence is generally considered to exist when the Company has an
ownership interest in the voting stock between 20% and 50%, and other factors,
such as representation on the Board of Directors, voting rights and the impact
of commercial arrangements, are considered in determining whether the equity
method of accounting is appropriate. The Company accounts for investments with
ownership less than 20% using cost method.
 
 The
Company’s subsidiary, Hancheng Tongxing Metallurgy Co., Ltd. and EPID invested
in several companies from 2004 to 2009.
 
 Unconsolidated
      subsidiary
                                
                                Year
                                  acquired
                                
                                
                                Amount
      invested
                                
                                
                                %
      ownedShaanxi
      Daxigou Mining Co., Ltd
                                
                                2004
                                
                                
                                
                                732,500
                                
                                
                                
                                11Shaanxi
      Xinglong Thermoelectric Co., Ltd
                                
                                2004-2007
                                
                                
                                
                                6,837,008
                                
                                
                                
                                37.6Shaanxi
      Longgang Group Xian steel Co., Ltd
                                
                                2005
                                
                                
                                
                                60,448
                                
                                
                                
                                10Shaanxi
      Longgang Group Co., Ltd
                                
                                2003-2004
                                
                                
                                
                                3,472,050
                                
                                
                                
                                3.8Huashan
      Metallurgical Equipment Co. Ltd.
                                
                                2003
                                
                                
                                
                                87,807
                                
                                
                                
                                25Hejin
      Liyuan Washing Coal Co., Ltd.
                                
                                2006
                                
                                
                                
                                135,268
                                
                                
                                
                                38Shanxi
      Longmen Coal Chemical Industry Co., Ltd
                                
                                2009
                                
                                
                                
                                6,592,500
                                
                                
                                
                                15Xian
      Delong Powder Engineering Materials Co., Ltd.
                                
                                2006
                                
                                
                                
                                991,601
                                
                                
                                
                                27Total
                                
                                
                                
                                
                                
                                $
                                18,909,182
  14
  GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 June 30,
2009
 Unaudited
  Total
investment in unconsolidated subsidiaries amounted to $18,909,182 and
$13,959,432 as of June 30, 2009 and December 31, 2008,
respectively.
 
 Short-term notes
payable
 
 Short-term
notes payable are lines of credit extended by banks. When purchasing raw
materials, the Company often issues a short-term note payable to the vendor.
This short-term note payable bears no interest and is guaranteed by the bank for
its complete face value and usually mature within three to six months period.
The banks usually require the Company to deposit a certain amount of cash at the
bank as a guarantee deposit, which is classified on the balance sheet as
restricted cash.
 
 Earnings per share
 
 The
Company reports earnings per share in accordance with the provisions of SFAS
128, "Earnings Per Share." SFAS 128 requires presentation of basic and diluted
earnings per share in conjunction with the disclosure of the methodology used in
computing such earnings per share.
 
 Basic
earnings per share are computed by dividing income available to common
stockholders by the weighted average common shares outstanding during the
period. Diluted earnings per share takes into account the potential dilution
that could occur if securities or other contracts to issue common stock were
exercised and converted into common stock.
 
 Income
taxes
 
 The
Company reports income taxes pursuant to SFAS 109, “Accounting for Income
Taxes”. SFAS 109 requires the recognition of deferred income tax liabilities and
assets for the expected future tax consequences of temporary differences between
income tax basis and financial reporting basis of assets and liabilities.
Provision for income taxes consists of taxes currently due plus deferred taxes.
The Company adopted FASB Interpretation 48, “Accounting for Uncertainty in
Income Taxes” (“FIN 48”), as of January 1, 2007. A tax position is recognized as
a benefit only if it is “more likely than not” that the tax position would be
sustained in a tax examination, with a tax examination being presumed to occur.
The amount recognized is the largest amount of tax benefit that is greater than
50% likely of being realized on examination. For tax positions not meeting the
“more likely than not” test, no tax benefit is recorded. The adoption had no
effect on the Company’s financial statements.
 
 The
charge for taxation is based on the results for the year as adjusted for items,
which are non-assessable or disallowed. It is calculated using tax rates that
have been enacted or substantively enacted by the balance sheet
date.
  15
  GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 June 30,
2009
 Unaudited
  Deferred
tax is accounted for using the balance sheet liability method in respect of
temporary differences arising from differences between the carrying amount of
assets and liabilities in the financial statements and the corresponding tax
basis used in the computation of assessable tax profit. In principle, deferred
tax liabilities are recognized for all taxable temporary differences. Deferred
tax assets are recognized to the extent that it is probable that taxable profit
will be available against which deductible temporary differences can be
utilized. Deferred tax is calculated using tax rates that are expected to apply
to the period when the asset is realized or the liability is settled. Deferred
tax is charged or credited in the income statement, except when it is related to
items credited or charged directly to equity, in which case the deferred tax is
also dealt with in equity. Deferred tax assets and liabilities are offset when
they relate to income taxes levied by the same taxation authority and the
Company intends to settle its current tax assets and liabilities on a net
basis.
 
 Deferred
income taxes are recognized for temporary differences between the tax bases of
assets and liabilities and their reported amounts in the financial statements,
net operating loss carry forwards and credits, by applying enacted statutory tax
rates applicable to future years. Deferred tax assets are reduced by a valuation
allowance when, in the opinion of management, it is more likely than not that
some portion or all of the deferred tax assets will not be realized. Current
income taxes are provided for in accordance with the laws of the relevant taxing
authorities.
 
 Share-based
compensation
 
 The
Company accounts for equity instruments issued in exchange for the receipt of
goods or services from other than employees in accordance with SFAS 123R,
“Accounting for Stock-Based Compensation,” and the conclusions reached by EITF
96-18, “Accounting for Equity Instruments That Are Issued to Other Than
Employees for Acquiring or in Conjunction with Selling Goods or Services.” Costs
are measured at the estimated fair market value of the consideration received or
the estimated fair value of the equity instruments issued, whichever is more
reliably determinable. The value of equity instruments issued for consideration
other than employee services is determined on the earlier of a performance
commitment or completion of performance by the provider of goods or services as
defined by EITF 96-18. In the case of equity instruments issued to consultants,
the fair value of the equity instrument is recognized over the term of the
consulting agreement.
 
 Non controlling
interests
 
 Effective
January 1, 2009, the Company adopted SFAS 160, “Noncontrolling Interests in
Consolidated Financial Statements - an amendment of Accounting Research Bulletin
No. 51” Certain provisions of this statement are required to be adopted
retrospectively for all periods presented. Such provisions include a requirement
that the carrying value of noncontrolling interests (previously referred to as
minority interests) be removed from the mezzanine section of the balance sheet
and reclassified as equity.
 
 Further,
as a result of adoption on SFAS 160, net income attributable to noncontrolling
interests is now excluded from the determination of consolidated net income. In
addition, foreign currency translation adjustment is allocated between
controlling and noncontrolling interests.
  16
  GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 June 30,
2009
 Unaudited
  Recently issued accounting
pronouncements
 
 In
January 2009, the FASB issued FSP EITF 99-20-1, “Amendments to the Impairment
Guidance of EITF Issue No. 99-20, and EITF Issue No. 99-20, Recognition of
Interest Income and Impairment on Purchased and Retained Beneficial Interests in
Securitized Financial Assets” (“FSP EITF 99-20-1”). FSP EITF 99-20-1 changes the
impairment model included within EITF 99-20 to be more consistent with the
impairment model of SFAS No. 115. FSP EITF 99-20-1 achieves this by amending the
impairment model in EITF 99-20 to remove its exclusive reliance on “market
participant” estimates of future cash flows used in determining fair value.
Changing the cash flows used to analyze other-than-temporary impairment from the
“market participant” view to a holder’s estimate of whether there has been a
“probable” adverse change in estimated cash flows allows companies to apply
reasonable judgment in assessing whether an other-than-temporary impairment has
occurred. The adoption of FSP EITF 99-20-1 did not have a material impact on our
consolidated financial statements.
 
 In April
2009, the FASB issued FSP FAS 157-4, “Determining Fair Value When the Volume and
Level of Activity for the Asset or Liability Have Significantly Decreased and
Identifying Transactions That Are Not Orderly” (FSP FAS 157-4). FSP FAS 157-4
amends SFAS 157 and provides additional guidance for estimating fair value in
accordance with SFAS 157 when the volume and level of activity for the asset or
liability have significantly decreased and also includes guidance on identifying
circumstances that indicate a transaction is not orderly for fair value
measurements. This FSP shall be applied prospectively with retrospective
application not permitted. This FSP shall be effective for interim and annual
periods ending after June 15, 2009, with early adoption permitted for
periods ending after March 15, 2009. An entity early adopting this FSP must
also early adopt FSP FAS 115-2 and FAS 124-2, “Recognition and Presentation of
Other-Than-Temporary Impairments” (FSP FAS 115-2 and FAS 124-2). Additionally,
if an entity elects to early adopt either FSP FAS 107-1 and APB 28-1, “Interim
Disclosures about Fair Value of Financial Instruments” (FSP FAS 107-1 and APB
28-1) or FSP FAS 115-2 and FAS 124-2, it must also elect to early adopt this
FSP. The adoption of FAS 157-4 does not have a significant impact on the
determination or reporting of our financial results.
 
 In April
2009, the FASB issued FSP FAS 115-2 and FAS 124-2. This FSP amends SFAS 115,
“Accounting for Certain Investments in Debt and Equity Securities,” SFAS 124,
“Accounting for Certain Investments Held by Not-for-Profit Organizations,” and
EITF Issue No. 99-20, “Recognition of Interest Income and Impairment on
Purchased Beneficial Interests and Beneficial Interests That Continue to Be Held
by a Transferor in Securitized Financial Assets,” to make the
other-than-temporary impairments guidance more operational and to improve the
presentation of other-than-temporary impairments in the financial statements.
This FSP will replace the existing requirement that the entity’s management
assert it has both the intent and ability to hold an impaired debt security
until recovery with a requirement that management assert it does not have the
intent to sell the security, and it is more likely than not it will not have to
sell the security before recovery of its cost basis. This FSP provides increased
disclosure about the credit and noncredit components of impaired debt securities
that are not expected to be sold and also requires increased and more frequent
disclosures regarding expected cash flows, credit losses, and an aging of
securities with unrealized losses. Although this FSP does not result in a change
in the carrying amount of debt securities, it does require that the portion of
an other-than-temporary impairment not related to a credit loss for a
held-to-maturity security be recognized in a new category of other comprehensive
income and be amortized over the remaining life of the debt security as an
increase in the carrying value of the security. This FSP shall be effective for
interim and annual periods ending after June 15, 2009, with early adoption
permitted for periods ending after March 15, 2009. An entity may early
adopt this FSP only if it also elects to early adopt FSP FAS 157-4. Also, if an
entity elects to early adopt either FSP FAS 157-4 or FSP FAS 107-1 and APB 28-1,
the entity also is required to early adopt this FSP. The adoption of FAS 115-2
and FAS 124-2 do not have a significant impact on the determination or reporting
of our financial results.
  17
  GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 June 30,
2009
 Unaudited
  In April
2009, the FASB issued FSP FAS 107-1 and APB 28-1. This FSP amends SFAS
No. 107, “Disclosures about Fair Value of Financial Instruments,” to
require disclosures about fair value of financial instruments not measured on
the balance sheet at fair value in interim financial statements as well as in
annual financial statements. Prior to this FSP, fair values for these assets and
liabilities were only disclosed annually. This FSP applies to all financial
instruments within the scope of SFAS 107 and requires all entities to disclose
the method(s) and significant assumptions used to estimate the fair value of
financial instruments. This FSP shall be effective for interim periods ending
after June 15, 2009, with early adoption permitted for periods ending after
March 15, 2009. An entity may early adopt this FSP only if it also elects
to early adopt FSP FAS 157-4 and FSP FAS 115-2 and FAS 124-2. This FSP does not
require disclosures for earlier periods presented for comparative purposes at
initial adoption. In periods after initial adoption, this FSP requires
comparative disclosures only for periods ending after initial adoption. The
adoption of FAS 107-1 and APB 28-1 do not have a significant impact on the
determination or reporting of our financial results.
 
 In May
2009, the FASB issued Statement of Financial Accounting Standards No.
165,Subsequent Events (“FAS 165”) [ASC 855-10-05], which provides guidance to
establish general standards of accounting for and disclosures of events that
occur after the balance sheet date but before financial statements are issued or
are available to be issued. FAS 165 also requires entities to disclose the date
through which subsequent events were evaluated as well as the rationale for why
that date was selected. FAS 165 is effective for interim and annual periods
ending after June 15, 2009, and accordingly, we adopted this Standard during the
second quarter of 2009. FAS 165 requires that public entities evaluate
subsequent events through the date that the financial statements are
issued.
 
 In June
2009, the FASB issued Statement No. 166, Accounting for Transfers of Financial
Assets – an amendment of FASB No. 140 (“FAS 140”), Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities (“FAS 166”).
FAS 166 amends the criteria for a transfer of a financial asset to be accounted
for as a sale, redefines a participating interest for transfers of portions of
financial assets, eliminates the qualifying special-purpose entity concept and
provides for new disclosures. FAS 166 is effective for the Company beginning in
2010. Should the Company’s accounts receivable securitization programs not
qualify for sale treatment under the revised rules, future securitization
transactions entered into on or after January 1, 2010 would be classified as
debt and the related cash flows would be reflected as a financing activity. We
do not believe that it will have a significant impact on the determination or
reporting of our financial results.
  In June
2009, the FASB issued Statement No. 167, Amendments to FASB Interpretation No.
46(R) (“FAS 167”). FAS 167 amends the consolidation guidance for variable
interest entities (“VIE”) by requiring an on-going  qualitative assessment
of which entity has the power to direct matters that most significantly impact
the activities of a VIE and has the obligation to absorb losses or benefits that
could be potentially significant to the VIE. FAS 167 is effective for the
Company beginning in 2010. We do not believe that it will have a significant
impact on the determination or reporting of our financial results.
 
 Note
3 – Accounts receivable and allowance for doubtful accounts
 
 Accounts
receivable, including related party receivables, net of allowance for doubtful
accounts consists of the following:
  18
  GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 June 30,
2009
 Unaudited
  June
      30,
                            2009
                          
                          
                          December
      31,
                            2008UnauditedAccounts
      receivable
                          
                          $
                          16,638,762
                          
                          
                          $
                          8,730,149Less:
      allowance for doubtful accounts
                          
                          
                          601,754
                          
                          
                          
                          401,109Net
      accounts receivable
                          
                          $
                          16,037,008
                          
                          
                          $
                          8,329,040
 
 Movement
of allowance for doubtful accounts is as follows:
 
 June
      30,
                            2009
                          
                          
                          December
      31,
                            2008UnauditedBeginning
      balance
                          
                          $
                          401,109
                          
                          
                          $
                          148,224Charge
      to expense
                          
                          
                          201,287
                          
                          
                          
                          124,727Addition
      from acquisition
                          
                          
                          -
                          
                          
                          
                          238,259Less
      Written-off
                          
                          
                          -
                          
                          
                          
                          (119,022
                          )Exchange
      rate effect
                          
                          
                          (642
                          )
                          
                          
                          8,921Ending
      balance
                          
                          $
                          601,754
                          
                          
                          $
                          401,109
 
 Note
4 – Inventory
 
 Inventory
consists of the following:
 
 June
      30,
                              2009
                            
                            
                            December
      31,
                              2008UnauditedSupplies
                            
                            $
                            1,872,255
                            
                            
                            $
                            1,884,387Raw
      materials
                            
                            
                            72,434,365
                            
                            
                            
                            41,083,743Work
      in process
                            
                            
                            -
                            
                            
                            
                            333,611Finished
      goods
                            
                            
                            69,406,661
                            
                            
                            
                            16,247,174Totals
                            
                            $
                            143,713,281
                            
                            
                            $
                            59,548,915
 
 Raw
materials consist primarily of iron ore and coke at Longmen Joint Venture, steel
strip at Daqiuzhuang Metal and billet at Maoming. Work in process primarily
consists of pig iron and other semi-finished products. The cost of finished
goods includes direct costs of raw materials as well as direct labor used in
production. Indirect production costs such as utilities and indirect labor
related to production such as assembling, shipping and handling costs are also
included in the cost of inventory.
 
 The
Company values its inventory at the lower of cost or market, determined on a
weighted average method, or net realizable value. As of December 31, 2008,
management determined the carrying amount of inventory exceeded net realizable
value, $2,243,232 had been written down and the amounts were included in cost of
goods sold. As of June 30, 2009, management determined the net realizable value
of inventory was over the carrying amount, therefore $0 had been written
down.
  19
  GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 June 30,
2009
 Unaudited
  Note
5 – Advances on inventory purchases
 
 Advances
on inventory purchases are monies deposited or advanced to outside vendors or
related parties on future inventory purchases. Due to the high shortage of steel
in China, most of the Company’s vendors require a certain amount of money to be
deposited with them as a guarantee that the Company will complete its purchases
on a timely basis.
 
 This
amount is refundable and bears no interest. The Company has legally binding
contracts with its vendors, which required the deposit to be returned to the
Company when the contract ends. The inventory is normally delivered within one
month after the monies have been advanced. The total outstanding amount,
including advances to related parties, was $51,522,934 and $49,528,506 as of
June 30, 2009 and December 31, 2008, respectively.
 
 Note 6 – Plant and equipment,
net
 
 Plant and
equipment consist of the following:
 
 June
      30,
                              2009
                            
                            
                            December
      31,
                              2008UnauditedBuildings
      and improvements
                            
                            $
                            119,162,032
                            
                            
                            $
                            118,143,847Machinery
                            
                            
                            365,197,169
                            
                            
                            
                            226,594,341Transportation
      equipment
                            
                            
                            8,579,858
                            
                            
                            
                            7,299,240Other
      equipment
                            
                            
                            2,769,607
                            
                            
                            
                            2,755,129Construction
      in process
                            
                            
                            113,666,583
                            
                            
                            
                            199,818,052Totals
                            
                            
                            609,375,249
                            
                            
                            
                            554,610,609Less
      accumulated depreciation
                            
                            
                            (70,899,296
                            )
                            
                            
                            (62,905,581
                            )Totals
                            
                            $
                            538,475,953
                            
                            
                            $
                            491,705,028
 
 Longmen
Joint Venture constructed two blast furnaces and a sintering
system.  All costs related to construction have been capitalized as
construction in progress and amounted to $180,471,238 as of December 31, 2008.
The two blast furnaces amounting $147,704,581 had been transferred to fixed
assets in April 2009, the sintering system is still under construction as of
June 30, 2009.
 
 Depreciation,
including amounts in cost of sales, for the three months ended June 30, 2009 and
2008 amounted to $7,048,755 and $4,369,068, respectively, and for the six months
ended June 30, 2009 and 2008, amount to $13,073,512 and $8,868,941,
respectively.
 
 The rebar
production line from our Maoming subsidiary was sold and transferred to our
Longmen Joint Venture for a value of $16,481,022 (RMB112,498,446). There is no
change in fixed asset accounts because it is an intercompany
transaction.
  20
  GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 June 30,
2009
 Unaudited
  Note
7 – Intangible assets
 
 Intangible
assets consist of the following:
  June
      30,
                                2009
                              
                              
                              December
      31,
                                2008UnauditedLand
      use right
                              
                              $
                              27,476,538
                              
                              
                              $
                              27,467,031Software
                              
                              
                              344,313
                              
                              
                              
                              292,693Subtotal
                              
                              
                              27,820,851
                              
                              
                              
                              27,759,724Accumulated
      Amortization – Land use right
                              
                              
                              (3,561,317
                              )
                              
                              
                              (3,204,069
                              )Accumulated
      Amortization – software
                              
                              
                              (42,754
                              )Accumulated
      Amortization subtotal
                              
                              
                              (3,604,071
                              )
                              
                              
                              (3,204,069
                              )Totals
                              
                              $
                              24,216,780
                              
                              
                              $
                              24,555,655
 
 Total
amortization expense for the three months ended June 30, 2009 and 2008, amounted
to $180,148 and $239,524, respectively, and for six months ended June 30, 2009
and 2008, amounted to $404,564 and $444,670, respectively.
 
 The estimated
aggregate amortization expense for each of the five succeeding fiscal years is
as follows:
 
 Years
                      
                      Estimated
      Amortization
                        Expense
                      
                      
                      Gross
      carrying
                        Amount2009
                      
                      $
                      1,000,000
                      
                      
                      $
                      23,716,7802010
                      
                      
                      1,000,000
                      
                      
                      
                      22,716,7802011
                      
                      
                      1,000,000
                      
                      
                      
                      21,716,7802012
                      
                      
                      1,000,000
                      
                      
                      
                      20,716,7802013
                      
                      $
                      1,000,000
                      
                      
                      $
                      19,716,780
 
 Note
8 – Debt
 
 Short term
loans
 
 Short
term loans represent amounts due to various banks, other companies and
individuals, and related parties normally due within one year. The principles of
loans are due at maturity. However, the loans can be renewed with the banks,
related parties and other parties.
 
 Short
term loans due banks, related parties and other parties consisted of the
following:
  21
  GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 June 30,
2009
 Unaudited
  June
      30,
                                    2009
                                  
                                  
                                  December
      31,
                                    2008UnauditedDaqiuzhuang
      Metal: Loan from banks in China, due various dates from August 2009 to
      April 2010. Weighted average interest rate 6.66% per annum, either
      guaranteed by another company or secured by
      equipment/inventory.
                                  
                                  $
                                  25,880,690
                                  
                                  
                                  $
                                  27,383,022Longmen
      Joint Venture: Loan from banks in China, due various dates from July 2009
      to June 2010. Weighted average interest rate 5.49% per annum, either
      guaranteed by another company or secured by equipment/buildings/land use
      right.
                                  
                                  
                                  71,316,200
                                  
                                  
                                  
                                  38,875,500
 
 Baotou:
      Loan from banks in China, due March 2009. Annual interest rate of 12%,
      Guaranteed by another company and secured by equipment.
                          
                          
                          -
                          
                          
                          
                          114,734Maoming:
      Loan from banks in China, due January 2009. Annual interest rate of 7.47%,
      guaranteed by another company.
                          
                          
                          -
                          
                          
                          
                          1,467,000Total
      – bank loans
                          
                          $
                          97,196,890
                          
                          
                          $
                          67,840,256
 
 June
      30,
                        2009
                      
                      
                      December
      31,
                        2008UnauditedLoan
      from various unrelated companies and individuals, due various dates from
      July 2009 to January 2010, and interest rates up to 12% per
      annum
                      
                      $
                      101,360,240
                      
                      
                      $
                      87,833,706Total
      – other loans
                      
                      $
                      101,360,240
                      
                      
                      $
                      87,833,706
 
 June
      30,
                        2009
                      
                      
                      December
      31,
                        2008UnauditedQiu
      Steel: Related party loan from Tianjin Heng Ying and Tianjin Da Zhan, due
      June 2010. Annual interest rate of 5%.
                      
                      $
                      7,339,650
                      
                      
                      $
                      7,349,670Total
      – related loans
                      
                      $
                      7,339,650
                      
                      
                      $
                      7,349,670
 
 The
Company had various loans from unrelated companies and individuals. The balances
amounted to $101,360,240 and $87,833,706 as of June 30, 2009 and December 31,
2008, respectively. Out of the $101,360,240 current period balance, $23,621,232
carries no interest, and the remaining $77,739,008 carries annual interest rates
ranging from 7.2% to 12%. $29,394,068 of prior year balance carries no interest
and the remaining $58,439,638 are subject to interest rates ranging from 7.2% to
12%. All short term loans from unrelated companies and individuals are due on
demand and unsecured.
  22
  GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 June 30,
2009
 Unaudited
  Short term notes
payable
 
 Short
term notes payable are lines of credit extended by the banks. When purchasing
raw materials, the Company often issues a short term note payable to the vendor
funded with draws on the lines of credit. This short term note payable is
guaranteed by the bank for its complete face value. The banks usually do not
charge interest on these notes but require the Company to deposit a certain
amount of cash at the bank as a guarantee deposit which is classified on the
balance sheet as restricted cash.
 
 The
Company had the following short term notes payable:
 
 June
      30,
                                      2009
                                    
                                    
                                    December
      31,
                                      2008UnauditedDaqiuzhuang
      Metal: Notes payable from banks in China, due various dates from August
      2009 to October 2009. Restricted cash required of $3,984,800 and
      $15,727,914 for June 30, 2009 and December 31, 2008, respectively and
      either guaranteed by another company.
                                    
                                    $
                                    7,618,000
                                    
                                    
                                    $
                                    18,630,900Longmen
      Joint Venture: Notes payable from banks in China, due various dates from
      July 2009 to December 2009.. Restricted cash of $161,501,600 and
      $98,073,410 for June 30, 2009 and December 31, 2008, respectively and
      either guaranteed by another company or secured by equipment, or no
      guarantee.
                                    
                                    
                                    210,432,600
                                    
                                    
                                    
                                    159,536,250Bao
      Tou: Notes payable from banks in China, due July 2009. Restricted cash of
      $5,127,500 and $5,134,500 for June 30, 2009 and December 31, 2008,
      respectively and guaranteed by buildings.
                                    
                                    
                                    7,325,000
                                    
                                    
                                    
                                    7,335,000Maoming:
      Notes payable from banks in China, due various dates from September 2009
      to December 2009. Restricted cash of $29,593,000 and $11,764,512 for June
      30, 2009  and December 31, 2008 and guaranteed by buildings and
      equipments..
                                    
                                    
                                    48,638,000
                                    
                                    
                                    
                                    20,538,000Grand
      totals
                                    
                                    $
                                    274,013,600
                                    
                                    
                                    $
                                    206,040,150
 
 Total
interest expense for the three months ended June 30, 2009 and 2008 on the debt
listed above amounted to $1,578,766 and $5,710,308 respectively, and for the six
months ended June 30, 2009 and 2008, interest expense amounted to $4,668,278 and
$8,583,173, respectively.
  23
  GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 June 30,
2009
 Unaudited
  Capitalized
interest amounted to $5,661,000 and $1,963,886 for the three months ended June
30, 2009 and 2008, respectively, and for the six months ended June 30, 2009 and
2008, capitalized interest amounted to $7,937,911 and $2,775,391.
 
 Note
9 – Customer deposits
 
 Customer
deposits represent amounts advanced by customers on product orders. The product
normally is shipped within one month after receipt of the advance payment, and
the related sale is recognized in accordance with the Company’s revenue
recognition policy. As of June 30,2009 and December 31, 2008, customer deposits
amounted to $161,007,558 and $148,317,903, including related parties deposits
$3,946,437 and $7,216,319, respectively.
 
 Note
10 – Deposits due to sales representatives
 
 Daqiuzhuang
Metal and two of Longmen Joint Venture’s subsidiaries, Yuxin Trading and Yuteng
Trading, entered into agreements with various entities to act as the Company’s
exclusive sales agent in a specified area.  These exclusive sales
agents must meet certain criteria and are required to deposit a certain amount
of money with the Company. In return the sales agents receive exclusive sales
rights to a specified area and discounted prices on products they order. These
deposits bear no interest and are required to be returned to the sales agent
once the agreement has been terminated. The Company had $40,056,218 and
$8,149,279 in deposits due to sales representatives outstanding as of June 30,
2009 and December 31, 2008, respectively. Due to increase in demand in first
half 2009, the Company received additional deposit amounted $32 million from
sales representatives to secure sales quantity. These deposits are refundable in
one year based on volume fulfillment and bear interest at 3%-8% per
annum.
 
 Note
11 – Convertible notes
 
 On
December 13, 2007, the Company entered into a Securities Purchase Agreement (the
“Agreement”) with certain institutional investors (the “Buyers”) issuing
$40,000,000 (“Notes”) and 1,154,958 warrants (the “Warrants”). The warrants can
be converted to common stock through May 13, 2013 at $13.51 per
share.
 
 The Notes
bear initial interest at 3% per annum, which will be increased each year as
specified in the Notes, payable semi-annually in cash or shares of the Company’s
common stock. The Notes have a five year term through December 12, 2012. They
are convertible into shares of the common stock, subject to customary
anti-dilution adjustments. The initial conversion price is $12.47. The Company
may redeem the Notes at 100% of the principal amount, plus any accrued and
unpaid interest, beginning December 13, 2008, provided the market price of the
common stock is at least 150% of the then applicable conversion price for 30
consecutive trading days prior to the redemption.
 
 The Notes
are secured by a first priority, perfected security interest in certain shares
of common stock of Zuosheng Yu, as evidenced by the pledge agreement. The Notes
are subject to events of default customary for convertible securities and for a
secured financing.
 
 The
Warrants grant the Buyers the right to acquire shares of common stock at $13.51
per share, subject to customary anti-dilution adjustments.  The
Warrants may be exercised at any time on or after May 13, 2008, but not after
May 13, 2013, the expiration date of the Warrants.
  24
  GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 June 30,
2009
 Unaudited
  In
connection with this transaction, the Company and the Buyers entered into a
registration rights agreement. The Company agreed to register within 60 calendar
days common stock issuable to the Buyers for resale on a registration statement
to be effective by 90 calendar days or 120 days if the registration statement is
subject to a full review by the U.S. Securities and Exchange Commission. The
Company is required to register at least 120% of the sum of shares issuable upon
conversion of the Notes, the exercise of the Warrants and the payment of
interest accrued on the Notes. The registration rights are subject to customary
exceptions and qualifications and compliance with certain registration
procedures. The Company was required to file the registration statement on
February 11, 2008. The Company filed the registration statement on February 13,
2008, which was two days after the required filing date. The Company reached an
agreement with all note holders to waive the related penalty of
$427,000.
 
 In
addition, certain management members of the Company also entered into a lock-up
agreement with the Company pursuant to which each person agreed not to sell any
personally owned shares one year after the initial effective date of the resale
registration statement described above.
 
 Pursuant
to APB 14, “Accounting for Convertible Debt and Debt Issued with Stock Purchase
Warrants,” the Company discounted the Notes equal to the fair value of the
warrants. The Notes were further discounted for the fair value of the conversion
option. The combined discount is being amortized to interest expense over the
life of the Notes using the effective interest method.
 
 The fair
value of conversion option and the warrants were calculated using the Cox
Rubenstein Binomial model based on the following variables:
 
 ·
              Expected
      volatility of 125%
 ·
              Expected
      dividend yield of 0%
 ·
              Risk-free
      interest rate of 2.04%
 ·
              Expected
      lives of five years
 ·
              Market
      price at issuance date of $10.43
 ·
              Strike
      price of $12.47 and $13.51, for the conversion option and the warrants,
      respectively
 
 Pursuant
to SFAS 133 and EITF 00-19, the Company determined that both the warrants and
the conversion option embedded in the Notes meet the definition of a derivative
instrument and must be carried as a liability and marked to market each
reporting period.
 
 On
December 13, 2007, the Company recorded $34,719,062 as derivative liability,
including $9,298,044 for the fair value of the warrants and $25,421,018 for fair
value of the conversion option. The initial carrying value of the Notes was
$5,280,938. The financing cost of $5,159,000 was recorded as note issuance cost
and is being amortized to interest expense over the term of the Notes using the
effective interest method.
 
 In July
2008, $6,750,000 of notes was converted to 541,299 shares of common stock at a
conversion price of $12.47. Pursuant to EITF 00-19, the Company valued the
conversion option on note conversion date. A total of $6,103,232 of carrying
value and derivative liability had been reclassified into equity. In addition,
195,965 shares of common stock were issued as make whole interest expense of
$2,310,313.
 
 Re-Set of Conversion
Price
 
 Paragraph
7(f) of the Convertible Notes (which were issued on December 13, 2007) provides
for adjustment of the conversion price of the Notes, as follows:
  25
  GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 June 30,
2009
 Unaudited
  Adjustment.
If on the earlier of the (i) one (1) year anniversary of the Initial Effective
Date (as defined in the Registration Rights Agreement)and (ii) two (2) year
anniversary of the Closing Date (the "Adjustment Date"), the
Conversion Price in effect exceeds the Market Price as of the Adjustment Date
(the "Adjusted Conversion
Price"), the Conversion Price hereunder shall be reset to the Adjusted
Conversion Price as of the Adjustment Date. For the avoidance of doubt, the
Adjusted Conversion Price, if any, shall not apply to any Conversion Amount
converted into Common Stock prior to the Adjustment Date.
 
 The
“Market Price” is defined in paragraph 30(v) of the Senior Convertible Notes
as:
 “Market
Price” means, for any given date, the lower of (x) the arithmetic average of the
Weighted Average Price of the Common Stock for the thirty (30) consecutive
Trading Day period ending on the Trading Day immediately preceding such date and
(y) the Weighted Average Price of the Common Stock on the Trading Day
immediately preceding such date.
 
 The
Initial Registration Statement became effective on May 7, 2008 and thus the
Adjustment Date was May 7, 2009. The Weighted Average Price of the Common Stock
for the 30 consecutive Trading Day period ended on May 6, 2009 was $4.2511 and,
accordingly, in accordance with the existing terms of the Convertible Notes, the
conversion price was adjusted on May 7, 2009 to $4.2511.
 
 The
derivative liability related to the embedded conversion option was adjusted as
of May 7, 2009, based on the revised conversion price. As a result of the
reduced conversion price, the derivative liability increased as of May 7, 2009
by $27,104,429, which amount is included in the change in the value of the
derivative liability in the Income Statement.
 
 From May
7 to June 30, 2009, $21,700,000 of notes was converted to 5,104,596 shares of
common stock at a conversion price of $4.2511. Pursuant to EITF 00-19, the
Company valued the conversion option on note conversion date. A total of
$24,130,429 of carrying value and derivative liability had been reclassified
into equity. According to the convertible note agreement, the Company incurred
the make whole interest expense of $6,454,683.
 
 As of
June 30, 2009, in accordance with SFAS 133, the fair value of derivative
liabilities was recalculated and increased by $26,726,167 during the period,
including $1,102,656 for the increase in fair value of the warrants and
$25,623,511 for the increase in fair value of the conversion
option.
 
 As of
June 30, 2009, the balance of derivative liabilities was $11,053,276, which
consisted of $2,919,872 for the warrants and $8,133,404 for the conversion
option, and the carrying value of the notes was $3,049,619. The effective
interest charges on notes totaled $820,232 and $928,556 for the three months
ended June 30, 2009 and 2008, respectively, and for the six months ended June
30, 2009 and 2008, the effective interest amounted to $1,847,709 and $1,732,851,
respectively.
 
 Note
issuance cost was amortized to interest expense for the three months ended June
30, 2009 and 2008 amounted to $22,365 and $11,535 respectively. Note issuance
cost was amortized to interest expense for the six months ended June 30, 2009
and 2008 amounted to $43,282 and $20,429, respectively.
 The
changes in the derivative liability related to the convertible notes, and the
warrants that were issued in conjunction with those notes, are summarized as
follows:
 Derivative
      LiabilityConversionFeatures
                                    
                                    
                                    Warrants
                                    
                                    
                                    TotalDecember
      13, 2007
                                    
                                    $
                                    25,421,018
                                    
                                    
                                    
                                    9,298,044
                                    
                                    
                                    
                                    34,719,062Change
      in value (gain)
                                    
                                    
                                    -4,576,171
                                    
                                    
                                    
                                    -1,659,583
                                    
                                    
                                    
                                    -6,235,754December
      31, 2007
                                    
                                    
                                    20,844,847
                                    
                                    
                                    
                                    7,638,461
                                    
                                    
                                    
                                    28,483,308Change
      in value (gain)
                                    
                                    
                                    -1,951,184
                                    
                                    
                                    
                                    -719,580
                                    
                                    
                                    
                                    -2,670,764March
      31, 2008
                                    
                                    
                                    18,893,663
                                    
                                    
                                    
                                    6,918,881
                                    
                                    
                                    
                                    25,812,545Change
      in value (loss)
                                    
                                    
                                    20,370,777
                                    
                                    
                                    
                                    7,415,855
                                    
                                    
                                    
                                    27,786,632June
      30, 2008
                                    
                                    
                                    39,264,440
                                    
                                    
                                    
                                    14,334,736
                                    
                                    
                                    
                                    53,599,177Conversions
      - liability transferred to equity
                                    
                                    
                                    -5,759,720
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    -5,759,720Change
      in value (gain)
                                    
                                    
                                    -21,090,722
                                    
                                    
                                    
                                    -8,794,176
                                    
                                    
                                    
                                    -29,884,898September
      30, 2008
                                    
                                    
                                    12,413,998
                                    
                                    
                                    
                                    5,540,560
                                    
                                    
                                    
                                    17,954,559Change
      in value (gain)
                                    
                                    
                                    -5,589,893
                                    
                                    
                                    
                                    -2,461,655
                                    
                                    
                                    
                                    -8,051,548December
      31, 2008
                                    
                                    
                                    6,824,105
                                    
                                    
                                    
                                    3,078,905
                                    
                                    
                                    
                                    9,903,010Change
      in value (gain)
                                    
                                    
                                    -2,852,879
                                    
                                    
                                    
                                    -1,261,690
                                    
                                    
                                    
                                    -4,114,569March
      31, 2009
                                    
                                    
                                    3,971,226
                                    
                                    
                                    
                                    1,817,215
                                    
                                    
                                    
                                    5,788,441Conversions
      - liability transferred to equity
                                    
                                    
                                    -21,461,333
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    -21,461,333Change
      in value (loss)
                                    
                                    
                                    25,623,512
                                    
                                    
                                    
                                    1,102,656
                                    
                                    
                                    
                                    26,726,168June
      30, 2009
                                    
                                    $
                                    8,133,405
                                    
                                    
                                    
                                    2,919,871
                                    
                                    
                                    
                                    11,053,276
  26
  GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 June 30,
2009
 Unaudited
  Note
12 – Supplemental disclosure of cash flow information
 
 Interest
paid amounted to $4,071,240 and $5,648,992 for the three months ended June 30,
2009 and 2008, respectively, and for the six months ended June 30, 2009 and
2008, amounted to $6,691,992 and $8,687,340, respectively.
 
 Income
tax payments amounted to $1,283,319 and $4,608,462 for the three months
ended June 30, 2009 and 2008, respectively, and for the six months ended June
30, 2009 and 2008, amounted to $1,826,398 and $ 5,713,515,
respectively.
 
 On
January 8, 2008 the Company issued 150,000 shares of common stock at $10.43 per
share as additional note issuance cost totaled $1,564,500.
 
 On
February 5, 2008, the Company issued senior management and directors 76,600
shares of common stock at $7.16 per share, as compensation. The shares were
valued at the quoted market price on the date granted. The Company recorded
compensation expense of $548,456 for the year ended December 31,
2008.
 
 On April
14, 2008, the Company, Mr, Zuosheng Yu, (CEO of the Company) and Mr. Zhang Dan
Li (BOD member of Long Men Joint Venture) entered into a compensation agreement
in which Mr. ZuoSheng Yu agreed to transfer his own 600,000 shares to Mr. Zhang
Dan Li in exchange for 15 years of service in the Company. Pursuant to SFAS 123R
(Share-Based Payment) share-based payments awarded to an employee of the
reporting entity by a related party or other holder of an economic interest in
the entity is treated as compensation as if the shareholder has made a capital
contribution. The shares are valued at $6.91 on grant date for a total of
$4,146,000 and will be amortized over the life of agreement. A total of $69,100
of compensation expense and additional paid in capital has been recorded for the
three months ended June 30, 2009, and 2008, respectively, and $138,200 and
$69,100 for the six months ended June 30, 2009, and 2008,
respectively.
 
 On April
15, 2008, the Company granted senior management and directors 87,400 shares of
common stock at $6.66 per share, as compensation. The shares were valued at the
quoted market price on the date granted. The Company recorded compensation
expense of $582,084 for the year ended December 31, 2008.
 
 On July
3, 2008, the Company granted senior management and directors 90,254 shares of
common stock at $10.29 per share, as compensation. The shares were valued at the
market price on the date granted. The Company recorded compensation expense of
$928,672 for the year ended December 31, 2008.
 
 In July
2008, $6,750,000 of notes was converted to 541,299 shares of common stock at a
conversion price of $12.47. In addition 195,965 shares of common stock were
issued as make whole interest expense of $2,310,313.
 
 In
September 2008, 140,000 shares of warrants in connection with the redeemable
preferred stock were exercised at $5.00 per share.
 
 On
October 28, 2008, the Company granted Teamlink Investment Limited, 100,000
shares of commons stock at $3.6 per share as consulting service expense
amounting to $360,000. According to the period of service provided, $60,000 was
recorded as expense in 2008 and $300,000 will be amortized within 10
months.
  27
  GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 June 30,
2009
 Unaudited
  On
October 28, 2008, the Company granted Hayden Communication International, Inc.,
the public relations company, 25,000 shares of commons stock at $3.6 per share
as public relationship expense of $90,000.
 
 On
November 24, 2008, the Company granted senior management and directors 87,550
shares of common stock at $3.5 per share, as compensation. The shares were
valued at the quoted market price on the date granted. The Company recorded
compensation expense of $306,425 for the year ended December 31,
2008.
 
 On
January 15, 2009, the Company granted convertible notes holders 152,240 shares
of common stock at $3.66 per share, as cash payments made for interest. The
shares were valued as 90% of the arithmetic average of the Weighted Average
Price of the Common Shares on each for the ten consecutive Trading Days
immediately preceding the applicable Interest Date.
 
 On May 8,
2009, the Company issued 300,000 shares of common stock to Maoming Hengda
Steel’s debtor, Guangzhou Hengda at $6 per share, as cash payments made for
settling other short term loan.
 
 From May
7 to June 30, 2009, $21,700,000 of notes was converted to 5,104,596 shares of
common stock at a Conversion Price of 4.2511. According to the convertible bond
agreement, the Company recorded the make whole interest expense of $6,454,683.
As of June 30, 2009, 1,399,759 shares of common stock for it had been
issued.
 
 Note
13 - Gain from debt extinguishment and Government grant
 
 Debt
extinguishment
 
 For the
six months ended June 30, 2009, the Company recorded gain from debt
extinguishment totaling $2,930,200. On February 20, 2009, Maoming Hengda, a
subsidiary entered into a Debt Waive Agreement with Guangzhou Hengda, pursuant
to which Guangzhou Hengda agreed to waive $2,930,200 (RMB20,000,000) of the
total $23,955,220 (RMB163,516,860) debt that Maoming Hengda owes to Guangzhou
Hengda. The Company determined that the subsequent debt settlement does not
constitute a contingency at date of purchase as defined in SFAS 141 “Business
Combinations” and thus should not result in a reallocation of the purchase
price. The waiver is irrevocable.
 
 Government
grant
 
 Based on
national industrial policies and environmental protection laws and regulations,
in order to reduce energy consumption, emissions Shaanxi Province Development
and Reform Commission worked with local industries to eliminate of outdated iron
and steel production capacity in form of government grant. Longmen Joint Venture
received $4.2 million (RMB29 million) in government grant for compliance in
dismantling two blast furnaces. The Company wrote off the residual book value of
the furnaces dismantled totaling $0.7 million (RMB5 million), and recorded other
income of $3,519,890 for the six months ended June 30, 2009.
 
 Note
14 – Taxes
 
 Income
tax
 
 On
January 1, 2008, the new Enterprise Income Tax (“EIT”) law replaced the existing
laws for Domestic Enterprises (“DES”) and Foreign Invested Enterprises (“FIEs”).
The new standard EIT rate of 25% has replaced the 33% rate currently applicable
to both DES and FIEs. The two-year tax exemption and three-year 50% tax
reduction tax holiday for production-oriented FIEs will not be eliminated for
certain entities incorporated on or before March 16, 2007.
  28
  GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 June 30,
2009
 Unaudited
  Significant
components of the provision for income taxes on earnings and deferred taxes on
net operating losses from operation for the three months ended June 30,
2009  and 2008 are as follows:
 
 June
      30, 2009
                              
                              
                              June
      30, 2008Unaudited
                              
                              
                              UnauditedCurrent
                              
                              $
                              3,229,810
                              
                              
                              
                              1,292,890Deferred
                              
                              
                              (1,221,850
                              )
                              
                              
                              (206,100
                              )Total
      income taxes
                              
                              $
                              2,007,960
                              
                              
                              
                              1,086,790
 
 Significant
components of the provision for income taxes on earnings and deferred taxes on
net operating losses from operation for the six months ended June 30,
2009  and 2008 are as follows:
 
 June
      30, 2009
                            
                            
                            June
      30, 2008Unaudited
                            
                            
                            UnauditedCurrent
                            
                            $
                            3,394,031
                            
                            
                            
                            1,959,246Deferred
                            
                            
                            -
                            
                            
                            
                            (422,633
                            )Total
      income taxes
                            
                            $
                            3,394,031
                            
                            
                            
                            1,536,613
 
 According
to Chinese tax regulations, the net operating loss can be carried forward to
offset with operating income for the next five years. Management believes the
deferred tax asset is fully realizable.
 
 The
principal component of the deferred income tax assets is as
follows:
 
 June
      30,
                                            2009
                                          
                                          
                                          December
      31,
                                            2008UnauditedBeginning
      balance
                                          
                                          $
                                          7,487,380
                                          
                                          
                                          $
                                          399,751Xi’an
      Rolling Mill’s ,YuXin,  YuTeng, HuaLong and
TongXing
                                            Net
      operating loss carry-forward
                                          
                                          
                                          230,750
                                          
                                          
                                          
                                          4,945,752Effective
      tax rate
                                          
                                          
                                          25
                                          %
                                          
                                          
                                          24.76
                                          %Deferred
      tax asset
                                          
                                          $
                                          57,688
                                          
                                          
                                          $
                                          1,224,626Long
      Gang Headquarter’s
                                            Net
      operating loss carry-forward
                                          
                                          
                                          -14,815,927
                                          
                                          
                                          
                                          36,809,350Effective
      tax rate
                                          
                                          
                                          15
                                          %
                                          
                                          
                                          15.24
                                          %Deferred
      tax asset
                                          
                                          $
                                          -2,222,389
                                          
                                          
                                          $
                                          5,610,223Exchange
      difference
                                          
                                          
                                          -10,175
                                          
                                          
                                          
                                          252,780Totals
                                          
                                          $
                                          5,312,504
                                          
                                          
                                          $
                                          7,487,380
  29
  GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 June 30,
2009
 Unaudited
  Under the
Income Tax Laws of PRC, the Company’s subsidiary, Daqiuzhuang Metal, is
generally subject to an income tax at an effective rate of 25% on income
reported in the statutory financial statements after appropriate tax
adjustments, unless the enterprise is located in a specially designated region
where it allows foreign enterprises a two-year income tax exemption and a 50%
income tax reduction for the following three years. Daqiuzhuang Metal, became a
Chinese Sino-foreign joint venture at the time of the merger on October 14, 2004
and it became eligible for the tax benefit. Daqiuzhuang Metal is located in
Tianjin Costal Economic Development Zone and under the Income Tax Laws of
Tianjin City of PRC, it is eligible for an income tax rate of 24%. Therefore,
Daqiuzhuang Metal is exempt from income taxes for the years ended December 31,
2005 and 2006 and is entitled to 50% income tax reduction of the special income
tax rate of 24%, which is a rate of 12% for the years ended December 31, 2007,
2008 and 2009.
 
 The
Company’s subsidiary, Longmen Joint Venture, is located in the mid-west region
of China. It qualifies for the “Go-West” tax rebate of 15% tax rate promulgated
by the government; therefore, income tax is accrued at 15%.
 
 Baotou
Steel Pipe Joint Venture is located in Inner Mongolia, is subject to an income
tax at an effective rate of 25%.
 
 Maoming
Henggang is located in Guangdong province, is subject to an income tax at an
effective rate of 25%.
 
 The
following table reconciles the U.S. statutory rates to the Company’s effective
tax rate for the six months ended June 30, 2009 and 2008 as
follows:
 
 June
      30, 2009
                                    
                                    
                                    June
      30,2008UnauditedU.S.
      Statutory rates
                                    
                                    
                                    34.00
                                    %
                                    
                                    
                                    34.00
                                    %Foreign
      income not recognized in USA
                                    
                                    
                                    (34.00
                                    )%
                                    
                                    
                                    (34.00
                                    )%China
      income taxes
                                    
                                    
                                    25
                                    %
                                    
                                    
                                    25.00
                                    %Tax
      effect of income not taxable for tax purpose
                                    
                                    
                                    -1.47
                                    %
                                    
                                    
                                    (4.03
                                    )%Effect
      of different tax rate of subsidiaries operating in other
      jurisdictions
                                    
                                    
                                    -3.15
                                    %
                                    
                                    
                                    (10.32
                                    )%Total
      provision for income taxes
                                    
                                    
                                    20.38
                                    %
                                    
                                    
                                    10.65
                                    %
  30
  GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 June 30,
2009
 Unaudited
  The
Company has cumulative undistributed earnings of foreign subsidiaries of
approximately $14,733,301 as of June 30, 2009, is included in consolidated
retained earnings and will continue to be indefinitely reinvested in
international operations.  Accordingly, no provision has been made for
U.S. deferred taxes related to future repatriation of these earnings, nor is it
practicable to estimate the amount of income taxes that would have to be
provided if we concluded that such earnings will be remitted in the
future.
 
 General
Steel Holdings Inc. was incorporated in the United States and has incurred net
operating losses for income tax purposes for the six months ended June 30, 2009
and 2008, respectively. The net operating loss carry forwards for United States
income taxes amounted to $2,824,982 which may be available to reduce future
years’ taxable income. These carry forwards will expire, if not utilized,
through 2027. Management believes that the realization of the benefits from
these losses appears uncertain due to the Company’s limited operating history
and continuing losses for United States income tax purposes. Accordingly, the
Company has provided a 100% valuation allowance on the deferred tax asset
benefit to reduce the asset to zero. The valuation allowance at June 30, 2009
was $1,245,000. The net change in the valuation allowance for the six months
ended June 30, 2009 and year ended December 31, 2008 was an increase of $285,000
and $645,000, respectively. Management will review this valuation allowance
periodically and make adjustments as warranted.
 
 Value
added Tax
 
 Enterprises
or individuals who sell commodities, engage in repair and maintenance or import
and export goods in the PRC are subject to a value added tax in accordance with
Chinese laws. The value added tax standard rate is 17% of the gross sales price.
A credit is available whereby VAT paid on the purchases of semi-finished
products or raw materials used in the production of the Company’s finished
products can be used to offset the VAT due on sales of the finished
product.
 
 VAT on
sales and VAT on purchases amounted to $179,247,890 and $165,915,511 for the six
months ended June 30, 2009, VAT on sales and VAT on purchases amounted to
$173,244,315 and $135,853,629 for the six months ended June 30, 2008,
respectively. Sales and purchases are recorded net of VAT collected and paid as
the Company acts as an agent for the government. VAT taxes are not impacted by
the income tax holiday.
 
 VAT on
sales and VAT on purchases amounted to $93,172,074 and $98,244,173 for the three
months ended June 30, 2009, VAT on sales and VAT on purchases amounted to
$102,270,716 and $69,994,430 for the three months ended June 30,
2008,respectively. Sales and purchases are recorded net of VAT collected and
paid as the Company acts as an agent for the government. VAT taxes are not
impacted by the income tax holiday.
 
 Taxes
payable consisted of the following:
 June
      30,
                                2009
                              
                              
                              December 31,
                                2008UnauditedVAT
      taxes payable
                              
                              $
                              (2,803,509
                              )
                              
                              $
                              8,985,278Income
      taxes payable
                              
                              
                              1,793,383
                              
                              
                              
                              2,509,520Misc
      taxes
                              
                              
                              2,159,950
                              
                              
                              
                              2,421,838Totals
                              
                              $
                              1,149,824
                              
                              
                              $
                              13,916,636
  31
  GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 June 30,
2009
 Unaudited
  Note
15 – Earnings per share
 
 The
calculation of earnings per share is as follows:
  Three
      months ended June 30
                            
                            
                            Six
      months ended June 30,2009
                            
                            
                            2008
                            
                            
                            2009
                            
                            
                            2008Unaudited
                            
                            
                            Unaudited
                            
                            
                            Unaudited
                            
                            
                            UnauditedIncome
      (Loss) attributable to holders of common shares
                            
                            $
                            (31,789,212
                            )
                            
                            $
                            (24,271,226
                            )
                            
                            $
                            (24,454,580
                            )
                            
                            $
                            (22,082,766
                            )Basic
      weighted average number of common shares outstanding
                            
                            
                            39,533,099
                            
                            
                            
                            34,928,576
                            
                            
                            
                            37,918,177
                            
                            
                            
                            34,883,740Diluted
      weighted average number of common shares outstanding
                            
                            
                            39,533,099
                            
                            
                            
                            34,928,576
                            
                            
                            
                            37,918,177
                            
                            
                            
                            34,883,740Net
      income (Loss)per shareBasic
                            
                            $
                            (0.804
                            )
                            
                            $
                            (0.695
                            )
                            
                            $
                            (0.645
                            )
                            
                            $
                            (0.633
                            )Diluted
                            
                            $
                            (0.804
                            )
                            
                            $
                            (0.695
                            )
                            
                            $
                            (0.645
                            )
                            
                            $
                            (0.633
                            )
 
 For the
three months and six months ended June 30, 2009, the Company incurred net loss,
therefore there is no dilutive effect for its earnings per share.
 
 Note
16 – Related party balances and transactions
 
 The
Company subleased a portion of its land use rights to Tianjin Jing Qiu Steel
Market Company, a related party under common control. The Company’s Chairman,
CEO and majority shareholder, Zuosheng Yu (aka Henry Yu), is the chairman and
the largest shareholder of Jing Qiu Steel Market Company. The lease term is one
year and is renewed annually.
 
 For
      the six months ended
                          June
      30,2009
                        
                        
                        For
      the six months ended
                          June
      30,2008Unaudited
                        
                        
                        UnauditedRental
      Income
                        
                        $
                        879,420
                        
                        
                        $
                        851,040
 
 For
      the three months ended
                          June
      30,2009
                        
                        
                        For
      the three months ended
                          June
      30,2008Unaudited
                        
                        
                        UnauditedRental
      Income
                        
                        $
                        439,890
                        
                        
                        $
                        431,730
 
 The
Company’s short term loan of $1,465,000 from Shenzhen Development Bank is
personally guaranteed by the Company’s Chairman, CEO, and majority shareholder
Zuosheng Yu (aka Henry Yu).
 
 Tianjin
Dazhan Industry Co., Ltd. (“Dazhan”) and Tianjin Hengying Trading Co., Ltd.
(“Hengying”) are steel trading companies controlled by the Company’s Chairman,
CEO and majority shareholder, Zuosheng Yu. Dazhan and Hengying acted as trading
agents of the Company to make purchases and sales for the Company.
  32
  GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 June 30,
2009
 Unaudited
  For
      the six months ended
                            June
      30,2009
                          
                          
                          For
      the six months ended
                            June
      30,2008Unaudited
                          
                          
                          UnauditedPurchase
      from Hengying and Dazhan
                          
                          $
                          15,863,969
                          
                          
                          $
                          54,350,613Sales
      to Hengying and Dazhan
                          
                          $
                          1,024,107
                          
                          
                          $
                          15,733,297
 
 For
      the three months ended
                              June
      30,2009
                            
                            
                            For
      the three months ended
                              June
      30,2008Unaudited
                            
                            
                            UnauditedPurchase
      from Hengying and Dazhan
                            
                            $
                            9,034,889
                            
                            
                            $
                            25,916,567Sales
      to Hengying and Dazhan
                            
                            $
                            513,954
                            
                            
                            $
                            14,453,484
 
 All
transactions with related parties are for normal business activities and are
short term in nature. Settlements for the balances are usually in cash. The
following charts summarize the related party transactions as of June 30, 2009
and December 31, 2008.
 
 a.
              Other
      receivables - related parties
 
 Name
      of related parties
                        
                        Relationship
                        
                        June
      30,
                          2009
                        
                        
                        December
      31,
                          2008UnauditedBeijing
      Wendlar
                        
                        Chairman
      of General Steel Holdings, Inc. owns more than 5% in this
      company
                        
                        $
                        219,750
                        
                        
                        $
                        376,324De
      Long Fen Ti
                        
                        Longmen
      JV’s subsidiary (unconsolidated)
                        
                        
                        353,791
                        
                        
                        
                        -Tianjin
      Jin Qiu Steel Market
                        
                        Chairman
      of General Steel Holdings, Inc. owns more than 5% in this
      company
                        
                        
                        146,500
                        
                        
                        
                        146,700Daishang
      trading Co., Ltd.
                        
                        Longmen
      JV’s subsidiary’s joint venture partner
                        
                        
                        97,099
                        
                        
                        
                        -Maoming
      Shengze Trading
                        
                        Chairman
      of General Steel Holdings, Inc. owns more than 5% in this
      company
                        
                        
                        14,650,000
                        
                        
                        
                        -Total
                        
                        
                        
                        $
                        15,467,140
                        
                        
                        $
                        523,024
  33
  GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 June 30,
2009
 Unaudited
  b.
              Advances
      on inventory purchases – related
parties
 
 Name
      of related parties
                    
                    Relationship
                    
                    June
      30,
                      2009
                    
                    
                    December
      31,
                      2008UnauditedLiyuan
      Ximei
                    
                    Longmen
      JV’s subsidiary (unconsolidated)
                    
                    $
                    7,459,408
                    
                    
                    $
                    502,336Daishang
      trading Co., Ltd.
                    
                    Longmen
      JV’s subsidiary’s joint venture partner
                    
                    
                    3,584,589
                    
                    
                    
                    1,872,301Maoming
      Shengze Trading
                    
                    Chairman
      of General Steel Holdings, Inc. owns more than 5% in this
      company
                    
                    
                    4,655,237
                    
                    
                    
                    -Total
                    
                    
                    
                    $
                    15,699,234
                    
                    
                    $
                    2,374,637
 
 c.
              Accounts
      payable due to related parties
 
 Name
      of related parties
                        
                        Relationship
                        
                        June
      30,
                          2009
                        
                        
                        December
      31,
                          2008UnauditedLong
      Men Group
                        
                        General
      Steel’s joint venture partner
                        
                        $
                        21,260,423
                        
                        
                        $
                        10,630,309Henan
      Xinmi Kanghua
                        
                        Longmen
      JV’s subsidiary’s joint venture partner
                        
                        
                        840,026
                        
                        
                        
                        1,500,987Zhengzhou
      Shenglong
                        
                        Longmen
      JV’s subsidiary’s joint venture partner
                        
                        
                        102,612
                        
                        
                        
                        -Baotou
      Shengda Steel Pipe
                        
                        Chairman
      of General Steel Holdings, Inc. owns more than 5% in this
      company
                        
                        
                        903,106
                        
                        
                        
                        1,558,228ShanXi  Fangxin
                        
                        Longmen
      JV’s subsidiary’s joint venture partner
                        
                        
                        1,301,279
                        
                        
                        
                        1,451,336Baogang
      Jianan Group
                        
                        General
      Steel’s joint venture partner
                        
                        
                        156,011
                        
                        
                        
                        185,664Jingma
      Jiaohua
                        
                        Longmen
      JV’s subsidiary (unconsolidated)
                        
                        
                        5,074,114
                        
                        
                        
                        -Beijing
      Wendlar
                        
                        Chairman
      of General Steel Holdings, Inc. owns more than 5% in this
      company.
                        
                        
                        945,980
                        
                        
                        
                        -Total
                        
                        
                        
                        $
                        30,583,551
                        
                        
                        $
                        15,326,524
 
 d.
              Short
      term loan due to related parties
 
 Name
      of related parties
                            
                            Relationship
                            
                            June
      30,
                              2009
                            
                            
                            December
      31,
                              2008UnauditedDazhan
                            
                            Chairman
      of General Steel Holdings, Inc. owns more than 5% in this
      company
                            
                            $
                            3,940,850
                            
                            
                            $
                            3,946,230Hengying
                            
                            Chairman
      of General Steel Holdings, Inc. owns more than 5% in this
      company
                            
                            
                            3,398,800
                            
                            
                            
                            3,403,440Total
                            
                            
                            
                            $
                            7,339,650
                            
                            
                            $
                            7,349,670
  34
  GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 June 30,
2009
 Unaudited
  e.
              Other
      payables due to related parties
 
 Name
      of related parties
                      
                      Relationship
                      
                      June
      30,
                        2009
                      
                      
                      December
      31,
                        2008UnauditedGolden
      Glister
                      
                      Chairman
      of General Steel Holdings, Inc. owns more than 5% in this
      company
                      
                      $
                      600,000
                      
                      
                      $
                      600,000Hengying
                      
                      Chairman
      of General Steel Holdings, Inc. owns more than 5% in this
      company
                      
                      
                      12,219,646
                      
                      
                      
                      -Dazhan
                      
                      
                      
                      
                      3,486,700
                      
                      
                      
                      -Baotou
      Shengda Steel Pipe
                      
                      Chairman
      of General Steel Holdings, Inc. owns more than 5% in this
      company
                      
                      
                      110,135
                      
                      
                      
                      77,013Beijing
      Wendlar
                      
                      Chairman
      of General Steel Holdings, Inc. owns more than 5% in this
      company
                      
                      
                      2,827
                      
                      
                      
                      -Total
                      
                      
                      
                      $
                      16,419,308
                      
                      
                      $
                      677,013
 
 f.
              Customer
      deposits – related parties
 
 Name
      of related parties
                    
                    Relationship
                    
                    June
      30,
                      2009
                    
                    
                    December
      31,
                      2008UnauditedDazhan
                    
                    Chairman
      of General Steel Holdings, Inc. owns more than 5% in this
      company
                    
                    $
                    3,946,437
                    
                    
                    $
                    2,759,964Haiyan
                    
                    Longmen
      JV’s subsidiary (unconsolidated)
                    
                    
                    -
                    
                    
                    1,522,355Maoming
      Heng Da Materials
                    
                    Chairman
      of General Steel Holdings, Inc. owns more than 5% in this
      company
                    
                    
                    -
                    
                    
                    
                    2,934,000Total
                    
                    
                    
                    $
                    3,946,437
                    
                    
                    $
                    7,216,319
  35
  GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 June 30,
2009
 Unaudited
  Note
17 –Business combinations
 
 On
January 14, 2008, the Company through Longmen Joint Venture, completed its
acquisition of a controlling interest in Hancheng Tongxing Metallurgy Co., Ltd.
(“Tongxing”). Tongxing contributed its land use right of approximately 53 acres
(217,487 square meters) with an appraised value of approximately $4.1 million
(RMB 30 million). Pursuant to the agreement, the land will be converted into
shares valued at approximately $3.1 million (RMB 23 million), providing the
Joint Venture stake of 22.76% ownership in Tongxing and making it Tongxing’s
largest and controlling shareholder. The parties agreed to make the effective
date of the transaction January 1, 2008. The acquisition is accounted for as
acquisition under common control.
 
 Assumed
      byTongxing
                                  
                                  Fair
      Value
                                  
                                  
                                  Longmen
      Joint
                                    Venture
      (22.76)%Current
      assets
                                  
                                  $
                                  55,504,572
                                  
                                  
                                  $
                                  12,632,840Non
      current assets
                                  
                                  
                                  8,088,884
                                  
                                  
                                  
                                  1,841,030Total
      assets
                                  
                                  
                                  63,593,456
                                  
                                  
                                  
                                  14,473,870Total
      liabilities
                                  
                                  
                                  50,782,229
                                  
                                  
                                  
                                  11,558,035Net
      assets
                                  
                                  $
                                  12,811,227
                                  
                                  
                                  $
                                  2,915,835
 
 On August
11, 2008, the Company through its subsidiary, Longmen Joint Venture, completed
its acquisition of a controlling interest in Beijing Hua Tian Yu Long
International Steel Trade Co., Ltd. The Longmen Joint Venture paid $128,265 (RMB
876,731.71) for 50% equity based on the appraisal value on June 30,
2008.
 
 On June
25, 2008, The Company through Qiu Steel Investment entered into equity purchase
agreement with the shareholders of Maoming to acquire 99% equity of Maoming. The
total purchase price for the acquisition is $7.3 million (RMB 50 million). The
fair value of Maoming was $10.1 million (RMB 69 million) as of June 30,
2008.  Pursuant to SFAS 141, the excess of total fair value acquired
over purchase price should be allocated as a pro rata reduction of non-current
assets. Subsequently, the Company recorded the difference as a reduction of
fixed assets acquired.
 
 The joint
venture’s name is Maoming Heng Da Steel Group Co. Ltd., a company formed under
the laws of the PRC. It is located in Maoming city, Guangdong province in China.
It produces and sells high speed wire.
 
 Assumed
      byMaoming
                                
                                Fair
      Value
                                
                                
                                The
      CompanyCurrent
      assets
                                
                                $
                                45,314,444
                                
                                
                                $
                                44,861,300Non
      current assets
                                
                                
                                81,780,107
                                
                                
                                
                                78,290,811Total
      assets
                                
                                
                                127,094,551
                                
                                
                                
                                123,152,111Total
      liabilities
                                
                                
                                117,027,385
                                
                                
                                
                                115,857,111Net
      assets
                                
                                $
                                10,067,166
                                
                                
                                $
                                7,295,000
  36
  GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 June 30,
2009
 Unaudited
  The
financial data of Maoming as of December 31, 2008 is included in the Company’s
consolidated financial statements.
 
 Distribution
payable to former shareholders for the above acquisitions amount to $19,193,149
and $18,765,209 as of June 30, 2009 and December 31, 2008,
respectively.
 
 Note
18 - Equity
 
 On
January 8, 2008 the Company issued 150,000 shares of common stock at $10.43 per
share as additional note issuance cost totaled $1,564,500. The shares price is
determined as the quoted market price on the date granted.
 
 On
February 5, 2008, the Company issued senior management and directors 76,600
shares of common stock at $7.16 per share, as compensation. The shares were
valued at the quoted market price on the date granted. The Company recorded
compensation expense of $548,456 for the year ended December 31,
2008.
 
 On April
14, 2008, the Company, Mr, Zuosheng Yu, (CEO of the Company) and Mr. Zhang Dan
Li (BOD member of Long Men Joint Venture) entered into a compensation agreement
in which Mr. ZuoSheng Yu agreed to transfer his own 600,000 shares to Mr. Zhang
Dan Li in exchange for 15 years of service in the Company. Pursuant to SFAS 123R
(Share-Based Payment) share-based payments awarded to an employee of the
reporting entity by a related party or other holder of an economic interest in
the entity is treated as compensation as if the shareholder has made a capital
contribution. The shares are valued at $6.91 on grant date for a total of
$4,146,000 and will be amortized over the life agreement. A total of $207,300 of
compensation expense and additional paid in capital has been recorded in
2008.
 
 On April
15, 2008, the Company granted senior management and directors 87,400 shares of
common stock at $6.66 per share, as compensation. The shares were valued at the
quoted market price on the date granted. The Company recorded compensation
expense of $582,084 for the year ended December 31, 2008.
 
 On July
3, 2008, the Company granted senior management and directors 90,254 shares of
common stock at $10.29 per share, as compensation. The shares were valued at the
market price on the date granted. The Company recorded compensation expense of
$928,672 for the year ended December 31, 2008.
 
 541,299
shares of common stock were issued upon conversion of notes with a carrying
value of $6,750,000 at a conversion price of $12.48. In addition 195,965 shares
of common stock were issued as make whole interest expense of
$2,310,313.
 
 In
September 2008, 140,000 warrants, issued in connection with the redeemable
preferred stock, were exercised at $5.00 per share.
 
 On
October 28, 2008, the company granted Teamlink Investment Limited, 100,000
shares of commons stock at $3.6 per share as consulting service expense
$360,000. According to the period of service provided, $60,000 was recorded as
expense in 2008 and $300,000 will be amortized within 10 months. $180,000 of
public relationship expense had been recorded for the six months ended June 30,
2009.
  37
  GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 June 30,
2009
 Unaudited
  On
October 28, 2008, the Company granted Hayden Communication International, Inc.,
the public relations company, 25,000 shares of commons stock at $3.6 per share
as public relationship expense of $90,000.
 
 On
November 24, 2008, the Company granted senior management and directors 87,550
shares of common stock at $3.50 per share, as compensation. The shares were
valued at the market price on the date granted. The Company recorded
compensation expense of $306,425 for the year ended December 31,
2008.
 
 On
January 15, 2009, the Company granted convertible notes holders 152,240 shares
of common stock at $3.66 per share, as share payments for interest. The shares
were computed as 90% of the arithmetic average of the Weighted Average Price of
the Common Shares on each for the ten consecutive Trading Days immediately
preceding the applicable Interest Date.
 
 On
March 9, 2009, the Company granted senior management and directors 109,250
shares of common stock at $1.85 per share, as compensation. The shares were
valued at the quoted market price on the date granted. The Company recorded
compensation expense of $202,003 for the six months ended June 30,
2009.
 
 On
April 7, 2009, the Company granted senior management and directors 106,750
shares of common stock at $2.77 per share, as compensation. The shares were
valued at the quoted market price on the date granted. The Company recorded
compensation expense of $295,590 for the six months ended June 30,
2009.
 
 On May 8,
2009, the Company issued 300,000 shares of common stock to Maoming Hengda
Steel’s debtor, Guangzhou Hengda at $6 per share, as cash payments made for
settling other short term loan.
 
 From May
7 to June 30, 2009, $21,700,000 of notes was converted to 5,104,596 shares of
common stock at Conversion Price, $4.2511. According to the convertible bond
agreement, the Company recorded the make whole interest expense of $6,454,683.
As of June 30, 2009, 1,399,759 shares of common stock for it had been issued.
See note 11 for details.
 
 The
Company has the following warrants outstanding:
 
 Outstanding
      as of January 1, 2008
                    
                    
                    1,388,292Granted
                    
                    
                    -Forfeited
                    
                    
                    (93,334
                    )Exercised
                    
                    
                    (140,000
                    )Outstanding
      As of December 31, 2008
                    
                    
                    1,154,958Granted
                    
                    
                    -Forfeited
                    
                    
                    -Exercised
                    
                    
                    -Outstanding
      As of June 30, 2009
                    
                    
                    1,154,958
  38
  GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 June 30,
2009
 Unaudited
  Outstanding
      Warrants
                  
                  
                  Exercisable
      WarrantsExercise
                    Price
                  
                  
                  Number
                  
                  
                  Average
                    Remaining
                    Contractual
                    Life
                  
                  
                  Average
                    Exercise
                    Price
                  
                  
                  Number
                  
                  
                  Average
                    Remaining
                    ContractualLife$
                  13.51
                  
                  
                  
                  1,154,958
                  
                  
                  
                  3.87
                  
                  
                  $
                  13.51
                  
                  
                  
                  1,154,958
                  
                  
                  
                  3.87
 
 Note
19 – Retirement plan
 
 Regulations
in the People’s Republic of China require the Company to contribute to a defined
contribution retirement plan for all employees. All Joint Venture employees are
entitled to a retirement pension amount calculated based upon their salary at
their date of retirement and their length of service in accordance with a
government managed pension plan. The PRC government is responsible for the
pension liability to the retired staff. The Company is required to contribute
20% of the employees’ monthly base salary. Employees are required to contribute
8% of their base salary to the plan. Total pension expense incurred by the
Company amounted to $780,597 and $818,091 for the three months ended June 30,
2009, and 2008, respectively, and $1,592,903 and $1,331,057 for the six months
ended June 30, 2009, and 2008, respectively.
 
 Note 20–Statutory reserves
 
 The laws
and regulations of the People’s Republic of China require that before an
enterprise distributes profits to its partners, it must first satisfy all tax
liabilities, provide for losses in previous years, and make allocations, in
proportions determined at the discretion of the board of directors, to the
statutory reserves. The statutory reserves include the surplus reserve funds and
the enterprise fund and these statutory reserves represent restricted retained
earnings.
 
 Surplus reserve
fund
 
 The
Company is required to transfer 10% of its net income, as determined in
accordance with the PRC accounting rules and regulations, to a statutory surplus
reserve fund until such reserve balance reaches 50% of the Company’s registered
capital.
 
 The
transfer to this reserve must be made before distribution of any dividend to
shareholders. The surplus reserve fund is non-distributable other than during
liquidation and can be used to fund previous years’ losses, if any, and may be
utilized for business expansion or converted into share capital by issuing new
shares to existing shareholders in proportion to their shareholding or by
increasing the par value of the shares currently held by them, provided that the
remaining reserve balance after such issue is not less than 25% of the
registered capital.
 
 Note
21 – Commitment and contingencies
 
 Hancheng
Tongxing Metallurgy Co., Ltd., one subsidiary of Longmen Joint Venture, is
obligated to contribute $32,962,500 (RMB225 million), as registered capital to
Shaanxi Longmen Coal and Chemical Co., Ltd by the end of 2010. Tongxing had
contributed $6,592,500 as of June 30, 2009.
 
 Daqiuzhuang
Metal provides dormitory facilities for its employees under a 10 year rental
contract. The agreement began January 2006 and required full prepayment for the
10 year period totaling $466,200.
 
 Daqiuzhuang
Metal rented land for 50 years starting September 2005. Total amount of the rent
over the 50 years period is approximately $1,044,728 (or
RMB8,067,400).
  39
  GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 June 30,
2009
 Unaudited
    As of
June 30, 2009, total future minimum lease payments for the unpaid portion under
an operating lease were as follows:
 
 Year
      ended December 31,
                      
                      Amount2009
                      
                      $
                      856,7732010
                      
                      
                      263,7002011
                      
                      
                      263,7002012
                      
                      
                      131,8502013
                      
                      
                      -Thereafter
                      
                      
                      -Total
                      
                      $
                      1,516,023
 
 Total
rental expense for the six months ended June 30, 2009 and 2008, amounted to
$170,120 and $164,630, respectively, and total rental expense amounted to
$85,021 and $98,798 for the three months ended June 30, 2009 and 2008,
respectively.
 
 Long Men
Joint Venture is constructing two blast furnaces in 2008, the total contract
cost was $257,343,816 of which $239,310,567 was paid, and $18,033,249 will be
paid within one year.
 
 Note
22 – Segments
 
 The
Company sells steel which are used by customers in various
industries.  The Company’s chief operating decision-makers (i.e. chief
executive officer and his direct reports) review financial information presented
on a consolidated basis, accompanied by disaggregated information about revenues
by product lines for purposes of allocating resources and evaluating financial
performance. There are no segment managers who are held accountable for
operations, operating results and plans for levels or components below the
consolidated unit level.  Based on qualitative and quantitative
criteria established by SFAS 131, “Disclosures about Segments of an Enterprise
and Related Information”, the Company considers itself to be operating within
one reportable segment.
 
 The
Company does not have long-lived assets located in foreign countries. In
accordance with the enterprise-wide disclosure requirements of SFAS 131, the
Company's net revenue from external customers by main product lines is as
follows:
 
 For
      the three months
                                      ended
                                    
                                    For
      the six months ended(in
      thousands)
                                    
                                    2009
                                    
                                    
                                    2008
                                    
                                    
                                    2009
                                    
                                    
                                    2008Products
                                    Unaudited
                                    
                                    Unaudited
                                    
                                    Unaudited
                                    
                                    UnauditedRe-bar
                                    
                                    $
                                    364,767
                                    
                                    
                                    $
                                    335,781
                                    
                                    
                                    $
                                    657,482
                                    
                                    
                                    $
                                    592,233Hot-Rolled
      Sheets
                                    
                                    
                                    13,878
                                    
                                    
                                    
                                    48,348
                                    
                                    
                                    
                                    26,577
                                    
                                    
                                    
                                    82,366High
      Speed Wire
                                    
                                    
                                    26,487
                                    
                                    
                                    NA
                                    
                                    
                                    
                                    43,737
                                    
                                    
                                    NASpiral-Welded
      Steel Pipe
                                    
                                    
                                    3,815
                                    
                                    
                                    
                                    2,900
                                    
                                    
                                    
                                    3,946
                                    
                                    
                                    
                                    3,996Total
      sales revenue
                                    
                                    $
                                    408,947
                                    
                                    
                                    $
                                    387,029
                                    
                                    
                                    $
                                    731,742
                                    
                                    
                                    $
                                    678,595
  40
  GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 June 30,
2009
 Unaudited
  Note
23 – Subsequent Event
 
 The
Company has performed an evaluation of subsequent events through August 7th,
2009, which is the date of financial statements issuance. In July, 2009,
$4,940,000 of notes was converted to 1,162,055 shares of common stock at a
conversion price of $4.2511.
 
 41




ITEM
2. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS




Forward-Looking
Statements:





The
following discussion of the financial condition and results of operations should
be read in conjunction with the consolidated financial statements and related
notes thereto. The following discussion contains forward-looking statements.
General Steel Holdings, Inc. is referred to herein as “we” or “our.” The words
or phrases “would be,” “will allow,” “expect to”, “intends to,” “will likely
result,” “are expected to,” “will continue,” “is anticipated,” “estimate,” or
similar expressions are intended to identify forward-looking statements. Such
statements include those concerning our expected financial performance, our
corporate strategy and operational plans. Actual results could differ materially
from those projected in the forward-looking statements as a result of a number
of risks and uncertainties, including: (a) those risks and uncertainties related
to general economic conditions in China, including regulatory factors that may
affect such economic conditions; (b) whether we are able to manage our planned
growth efficiently and operate profitable operations, including whether our
management will be able to identify, hire, train, retain, motivate and manage
required personnel or that management will be able to successfully manage and
exploit existing and potential market opportunities; (c) whether we are able to
generate sufficient revenues or obtain financing to sustain and grow our
operations; and (d) whether we are able to successfully fulfill our primary
requirements for cash which are explained below under “Liquidity and Capital
Resources. Unless otherwise required by applicable law, we do not undertake, and
we specifically disclaim any obligation, to update any forward-looking
statements to reflect occurrences, developments, unanticipated events or
circumstances after the date of such statement.





Management
Comments





CONTINUED
GROWTH





Sales volume and revenue reached new
highs. Sales volume for the three months ended June 30, 2009 increased 62.7% to
956,321 metric tons compared to 587,855 metric tons for the same period last
year.





Sales
volume for the six months ended June 30, 2009 increased 50.4% to 1.67 million
metric tons compared to 1.11 million metric tons for the same period last
year.





Sales revenue for the three months
ended June 30, 2009 increased 5.7% to $408.9 million compared to $387.0 million
for the same period last year.





Sales
revenue for the six months ended June 30, 2009 increased 7.8% to $731.7 million
compared to $678.6 million for the same period last year.





Gross
Profit for the three months ended June 30, 2009 was $22.5 million.





Income from operations for the three
months ended June 30, 2009 was a gain of $12.9 million.





Infrastructure
projects and real estate are drivers for the record-breaking, profitable growth
in our largest market, Shaanxi province where we hold dominant market share for
construction steel.





The
global economic slowdown has had a relatively mild impact in the developing
central and western regions of China (such as Shaanxi province), due to these
economies having low reliance on exports. In addition, these economies have
received a boost from government infrastructure stimulus spending of which our
segment of the steel industry (construction steel) is a direct
beneficiary.




42




GLOBAL
ECONOMIC SLOWDOWN





North America and Europe continue to
experience economic slowdown, and rising unemployment. The result is weakened
consumer demand from the developed countries. Many Chinese companies dependent
on exports or supplying export-related industries have seen their demand
dramatically reduced.





According to Mysteel.com, a leading
Chinese steel industry information provider, Chinese steel exports have dropped
65.4% in the first half of 2009. This has changed China from being a net
exporter of steel to being a net importer of steel.





GENERAL
STEEL AND THE GLOBAL ECONOMIC SLOWDOWN


Our subsidiaries have varying exposure
to the global economic slowdown:





Longmen Joint
Venture


Longmen Joint Venture, our largest
subsidiary, comprises approximately 90% of our total revenue. Its focuses on
supplying construction steel to the less developed markets of Shaanxi and
Sichuan provinces in central China. The economies in this region have been
relatively sheltered from the global economic slowdown as witnessed by our
record growth in volume and revenue in this region. Selling prices for
construction steel in Shaanxi province command a premium compared to other
regions of China due to strong demand.





Our record growth this quarter is
largely attributed to:


·
            Government economic stimulus
      package with a key emphasis on infrastructure-related projects in central
      and western China;


·
            Government “Go West” incentives
      to promote development in central and western
  China;


·
            Recovery of the real estate
      sector in central and western China;
and,


·
            Exceptional execution by our
      Longmen Joint Venture management team bringing new capacity on-line
      through our two new 1,280 m3blast
      furnaces.





Maoming


Maoming focuses on supplying
construction steel in western Guangdong and Guangxi provinces. This region has a
large population of factories dependent upon exports and has been hit hard by
the global economic slowdown.





At the time we purchased this
state-of-the-art construction steel facility in mid 2008 at 27.6% discount to
net asset value, it had be running at only approximately 10% of
capacity.   Our strategy was always to bring value to our company
by increasing the utilization of these assets.





In sticking with our strategy,
management has relocated our rebar processing line from Maoming to our Longmen
Joint Venture. This move to the Shaanxi market, which has healthier economics of
strong demand, and higher rebar selling prices will increase utilization of this
asset to nearly full capacity.





We will continue to process and sell
high-speed wire at our Maoming facility. We have reached record production this
quarter of 71,536 metric tons high-speed wire and June 2009 marks an important
milestone as gross margin turn positive for the subsidiary.





The ability to move assets to between
regional markets to take advantage of better economics is a good example of
synergies that have developed between our subsidiaries.




43




Daqiuzhuang
Metal


Daqiuzhuang Metal produces hot-rolled
sheets and sells them throughout China. This sector of the steel industry has
been heavily impacted by the global economic slowdown. Export demand for
cold-rolled sheets has dropped dramatically and now cold-rolled sheet
manufacturers are redirecting their excess capacity for sale in the domestic
market.





Cold-rolled sheets have superior
qualities to hot-rolled sheets and have historically sold at a premium to
hot-rolled sheets. Daqiuzhuang Metal created a market niche by creating
hot-rolled sheets with similar properties of cold-rolled sheets sold at a price
higher than traditional hot-rolled sheets, but at a discount to cold-rolled
sheets. With exporters of cold-rolled sheets redirecting their product to the
domestic market, the excess supply has brought down the price of cold-rolled
sheets to a level that competes with hot-rolled sheets. This has put pressure
our hot-rolled sheet business.





This business has been impacted by the
global economic slowdown, but in the second quarter we have seen recovery in
prices and increase in shipment volume.





Baotou Steel Pipe Joint
Venture


Baotou Steel Pipe Joint Venture
produces spiral-weld steel pipes for the energy sector primarily to transport
oil and steam. The energy sector in China continues to invest and expand its
energy infrastructure. As a result, we have not experienced a slowdown in this
business during global economic slowdown, and are experiencing competition for
raw materials due to demand generated by government driven infrastructure
projects.





China is a country comprised of many
distinct economies with individual dynamics. The same can be said of the Chinese
steel industry, which is comprised of different segments with their own
micro-trends.





Our largest subsidiary (comprising 90%
of our revenue), Longmen Joint Venture is located in the developing region of
central China. The GDP of Shaanxi province, our main market,  has
grown 13.2%
in the first half of 2009.





Our company’s main product is
construction steel (comprising 96% of our first half 2009 revenue). The
construction steel sector of the Chinese steel industry currently enjoys
favorable dynamics of demand and price.





Being in the right place; with the
right product; at the right time are good reasons to be optimistic about the
future.





CONVERTIBLE
BOND RESET AND CONVERSIONS


In
December of 2007 we obtained $40 million by issuing a Convertible Bond (CB). The
money from this CB was ultimately used to fund our acquisition of Longmen JV
(For details on our Convertible bond, see notes of our financial
statements).





According
to the terms of our CB, on May 7, 2009, the conversion price of $12.47 was reset
to the market price, which is defined as the lower of $12.47 or the average of
the weighted average price of our common stock for 30 consecutive days preceding
May 7, 2009. This resulted in our conversion price being reset to
$4.2511.





During the second quarter of 2009, our
CB holders converted $21.7 million of debt into equity. As of August 7, 2009 a
total of $33.39 million of CB debt have been converted to equity. We are glad to
have our CB holders convert: our debt is reduced and our public float has
increased.





Considering the funds from our CB were
used to purchase controlling interest in Longmen JV (which provides 90% of our
total revenue), this CB played an important role in executing our growth
strategy. The acquisition of Longmen JV was transformational to the
company.




44




MERGER
AND ACQUISITIONS


On September 3, 2008, we announced a
letter of intent for a joint venture with Yantai Steel Pipe Company. Twelve days
later Lehman Brothers filed for bankruptcy protection, starting a chain
reaction, which sent the global financial system into temporary
chaos.





With all the uncertainty brought about
by the ensuing financial crisis, we decided with our partners that it would be
wise to wait for more clarity about the macro-environment before moving forward
with this target acquisition. Nothing has changed about our vision for Yantai
Steel Pipe Co., We have finished our due diligence, and we are in the period of
negotiating contractual terms.





Nothing
has changed regarding our merger and acquisition (M&A)
strategy.





We continue to move forward with our
two-pronged growth strategy of investment in our existing operations and growth
via M&A activities.





SUMMARY


Our record-breaking volume and sales
during global economic slowdown makes a few points stand out:


·
            Our
      two-pronged growth strategy of upgrading our existing operations and
      growth via M&A activities is clearly
  working;


·
            We
      are a direct beneficiary of the China economic stimulus infrastructure
      spending program; and,


·
            The developing regions of China
      are growing and are relatively less impacted by the global economic
      slowdown.





The
operating performance of our iron and steel business is the heart of General
Steel Holdings, Inc. Our future is directly tied to our ability to generate
positive cash flow from operations. It is important to separate non-operating,
non-cash items from our GAAP Net Earnings to fully understand and evaluate the
performance of our company.





Company
Overview





General Steel Holdings, Inc. (“General
Steel”), headquartered in Beijing, China, operates a diverse portfolio of
Chinese steel companies. Our companies serve various industries and produce a
variety of steel products including: rebar, hot-rolled sheets,spiral-weld pipes
and high-speed wire. Our aggregate production capacity of steel products is 6.3
million metric tons per year, of which the majority is rebar. Individual
industry segments have unique demand drivers, such as rural income,
infrastructure construction and energy consumption. Domestic economic conditions
are an overall driver for all our products.





Our vision is to become one of the
largest non-government owned steel companies in China.





Our mission is to acquire Chinese steel
companies and increase their profitability and efficiencies with the infusion of
applied western management practices, advanced production technologies and
capital resources.





Our strategy is to grow through
aggressive mergers, joint ventures and acquisitions targeting state-owned
enterprise steel companies and selected entities with outstanding potential. We
have executed this strategy and consummated controlling interest positions in
three joint ventures. We are actively pursuing a plan to acquire additional
assets.





We presently have controlling interest
in four steel subsidiary companies:




45




•
            Tianjin
      Daqiuzhuang Metal Sheet Co., Ltd. (Daqiuzhuang
  Metal);


•
                Baotou
      Steel - General Steel Special Steel Pipe Joint Venture Co., Ltd. (Baotou
      Steel Pipe Joint
Venture);


•
            Shaanxi
      Longmen Iron and Steel Co., Ltd. (Longmen Joint Venture);
    and


•
            Maoming
      Hengda Steel Group Limited
(Maoming).





Steel
Operating Companies





•
Tianjin Daqiuzhuang Metal
Sheet Co., Ltd. (“Daqiuzhuang Metal”)





Tianjin Daqiuzhuang Metal Sheet Co.,
Ltd. (“Daqiuzhuang Metal”), started its operation in 1988. Daqiuzhuang Metal’s
core business is the manufacturing of high quality hot-rolled carbon and silicon
steel sheets which are mainly used in the production of small agricultural
vehicles and other specialty markets.





Daqiuzhuang Metal has ten steel sheet
production lines capable of processing approximately 400,000 tons of 0.75-2.0 mm
hot-rolled steel sheets per year. Products are sold through a nation-wide
network of 35 distributors and three regional sales offices.





Daqiuzhuang Metal uses a traditional
rolling mill production sequence, such as heating, rolling, cutting, annealing,
and flattening to process and cut coil segments into steel sheets. Sheets
produced at the facility have a length of approximately 2,000mm; a width of
approximately 1,000mm, and a thickness ranging from 0.75-2.0mm. Limited size
adjustments can be made to meet order requirements. Products sell under the
registered “Qiu Steel” brand name.





On May 14, 2009 Daqiuzhuang Metal
changed it’s official name from “Tianjin Daqiuzhuang Metal Sheet Co. Ltd.” to
“General Steel (China) Co. Ltd.” to better reflect it’s role as a merger and
acquisition platform for steel company investments in China.





•
Baotou Steel - General Steel
Special Steel Pipe Joint Venture Co., Ltd. (“Baotou Steel Pipe Joint
Venture”)





On April 27, 2007, Daqiuzhuang Metal
and Baotou Iron and Steel Group Co., Ltd. ("Baotou Steel") entered into an
Amended and Restated Joint Venture Agreement (the "Agreement"), amending the
Joint Venture Agreement entered into on September 28, 2005 ("Original Joint
Venture Agreement"). The Amended and Restated Joint Venture Agreement increased
Daqiuzhuang Metal's ownership interest in the Joint Venture to 80%. The joint
venture company’s name is Baotou Steel - General Steel Special Steel Pipe Joint
Venture Company Limited (“Baotou Steel Pipe Joint Venture”).





Baotou Steel Pipe Joint Venture
received its business license on May 25, 2007. It has four production lines
capable of producing 100,000 tons of double spiral-weld pipes. These pipes are
used in the energy sector primarily to transport oil and steam. Pipes produced
at the mill have a diameter ranging from 219-1240mm; a wall thickness ranging
from 6-13mm; and a length ranging from 6-12m. Presently, Baotou Steel Pipe Joint
Venture sells its products using an internal sales force to customers in the
Inner Mongolia Autonomous Region and the northwest region of China.





This joint venture started production
and testing operations in the second quarter 2007 and began to generate revenue
in the third quarter 2007.





•
Shaanxi Longmen Iron and Steel
Co., Ltd. (“Longmen Joint Venture”)





Effective June 1, 2007 through two
subsidiaries, Daqiuzhuang Metal and Tianjin Qiu Steel Investment Co., Ltd., we
entered into a joint venture agreement with Shaanxi Longmen Iron & Steel
Group Co., Ltd. (“Long Steel Group”) to form Shaanxi Longmen Iron and Steel Co.,
Ltd. (“Longmen Joint Venture”). Through our two subsidiaries, we invested
approximately $39 million cash and collectively hold approximately 60% of the
Longmen Joint Venture.




46




Long Steel Group, located in Hancheng
city, Shaanxi province, in China’s central region, was founded in 1958 and
incorporated in 2002.





Long Steel Group operates as a
fully-integrated steel production facility.  Less than 10% of steel
companies in China have fully-integrated steel production capacity.





Our Longmen Joint Venture, assumed
existing operating units of the Long Steel Group. The Long Steel Group
contributed most of its working assets to the Longmen Joint
Venture.





Currently, the Longmen Joint Venture
has four branch offices, seven subsidiaries under direct control and eight
entities in which we have non controlling interest.  It employs
approximately 5,750 full-time workers.





Transportation
Facility: The Company’s subsidiary, Shaanxi Longmen Iron and Steel Co., Ltd.
(“Longmen JV”), operates transportation services through its Changlong Branch,
located at Hancheng city, Shaanxi province. Changlong Branch owns 126 vehicles
and provides transportation services exclusively to Longmen JV.





Coke
Operation: The Company, through its subsidiary, Longmen JV, owns 22.76% of
Hancheng Tongxing Metallurgy Co., Ltd. (“Tongxing”). Located in Hancheng city,
Shaanxi province, Tongxing produces approximately 200,000 metric tons of second
grade coke per month.  Tongxing sells all of its output to Longmen
JV.





The
Company does not own iron palletizing facility.





Longmen Joint Venture’s products are
categorized within the steel industry as “longs” (referencing their shape).
Rebar is generally considered a regional product because its weight and
dimension make it ill-suited for cost-effective long-haul ground transportation.
By our estimates, the provincial market demand for rebar is six - eight million
metric tons per year. Slightly more than half of this demand radiates from
Xi’an, the province capital, located 180km from the Longmen Joint Venture main
site. We estimate that in Xi’an we have a 72% market share according to Xi’an
Steel Market Statistics dated April 7, 2009.





An established regional network of 24
agents and two sales offices sell the Longmen Joint Venture’s products. All
products sell under the registered brand name of “Yulong” which enjoys strong
regional recognition and awareness. Rebar and billet products carry ISO 9001 and
9002 certification and many other products have won national quality awards.
Products produced at the facility have been used in the construction of the
Yangtze River Three Gorges Dam, Xi’an International Airport, the Xi Han, Xi Tong
and Xi Da provincial expressways, and are currently being used in the
construction of the Xi’an city subway system.





On September 24, 2007, Longmen Joint
Venture acquired controlling interest in two subsidiaries of Long Steel Group:
Longmen Iron and Steel Group Co., Ltd. Environmental Protection Industry
Development Co., Ltd. and Longmen Iron and Steel Group Co., Ltd. Hualong Fire
Retardant Materials Co., Ltd.





The Longmen Joint Venture entered into
an equity transfer agreement with Long Steel Group to acquire its 74.92%
ownership interest in its subsidiary, Longmen Iron and Steel Group Co., Ltd.
Environmental Protection Industry Development Co., Ltd. (“EPID”). The Joint
Venture paid $2.4 million (RMB 18,080,930) in exchange for the ownership
interest. The facility utilizes solid waste generated from the steel making
process to produce construction products including, building blocks, landscape
tiles, curb tops, ornamental tiles.




47




At the same time, the Longmen Joint
Venture also entered into a second equity agreement with the Long Steel Group to
acquire its 36% ownership interest in its subsidiary, Longmen Iron and Steel
Group Co., Ltd. Hualong Fire Retardant Materials Co., Ltd. (“Hualong”). The
Joint Venture paid $430,000 (RMB 3,287,980) in exchange for the ownership
interest. The Joint Venture is the largest shareholder in the company. The
facility produces fire-retardant materials used in various processes in the
production of steel.





On January 11, 2008, Longmen Joint
Venture completed its acquisition of a controlling interest in Hancheng Tongxing
Metallurgy Co., Ltd. (“Tongxing”). Longmen Joint Venture contributed its land
use right of 21.45 hectares (approximately 53 acres) with an appraised value of
approximately $4.1 million (RMB 30,227,333). Pursuant to the agreement, the land
will be converted into shares valued at approximately $3.1 million (RMB
22,744,419), providing the Joint Venture a stake of 22.76% ownership in Tongxing
and making it Tongxing’s largest and controlling shareholder. Tongxing has two
core operating areas: coking coal production and rebar processing. Its coking
coal operations have an annual production capacity of 300,000 metric tons. Its
rebar processing facility has an annualized rolling capacity of 300,000 metric
tons.





•  Maoming
Hengda Steel Group Limited (Maoming)





On June 25, 2008, through our
subsidiary Tianjin Qiu Steel Investment, we acquired 99% of Maoming Hengda Steel
Group, Limited (“Maoming”) for RMB 50 million (approximately $7.3 million).
Maoming’s core business is the production of high-speed wire and rebar, products
used in the construction industry.  Located on 140 hectares
(approximately 346 acres) in Maoming city, Guangdong province, the facility has
two production lines capable of producing 1.8 million metric tons of 5.5-16mm
diameter high-speed wire and 12-38mm diameter rebar annually. The products are
sold through nine distributors targeting customers in Guangxi province and the
western region of Guangdong province.





The facility had been operating at
approximately 10% of capacity due to, we believe, a redirected corporate focus
of the previous owners.





Operating
Information Summary by Subsidiaries





Daqiuzhuang
                                    Metal
                                  
                                  Baotou
      Steel Pipe
                                    Joint
      Venture
                                  
                                  Longmen
      Joint
                                    Venture
                                  
                                  MaomingAnnual
      Production Capacity (metric tons)
                                  
                                  400,000
                                  
                                  100,000
                                  
                                  4
      million
                                  
                                  1.8
      millionMain
      Products
                                  
                                  Hot-rolled
      Sheet
                                  
                                  Spiral-weld
      pipe
                                  
                                  Rebar
                                  
                                  High-speed
      wireMain
      Application
                                  
                                  Light
      Agricultural Vehicles
                                  
                                  Energy
      transport
                                  
                                  Infrastructure
      and Construction
                                  
                                  Infrastructure
      and Construction





Stock
listing





Our stock
trades on the NYSE under the ticker symbol “GSI”.





Factors
affecting our operating results





Demand
for our products





Overall, domestic economic growth is an
important demand driver for our products. Currently, China is experiencing an
economic downturn from its past eight years of record
growth.  Nevertheless, according to estimates issued by Morgan Stanley
on April 27, 2009, it estimates that China’s economy will still grow by
approximately 7.0% in 2009, well above many western developed economies.
Industry demand drivers for our products include construction and infrastructure
growth, rural income growth and energy demand.




48




At Longmen Joint Venture, growth in
regional construction and infrastructure projects drives demand for our
products. According to the 11th
Five-Year National Economic and Social Development Plan (the
“NESDP”)(2006-2010), development of China’s western region is one of the
top-five economic priorities of the nation. Shaanxi, the province where Longmen
Joint Venture is located, has been designated as a bridgehead for development
into the western region, and Xi’an, the provincial capital, has been designated
as a focal point for this development. Our Longmen Joint Venture is 180km from
Xi’an and does not have another major competitor within a 250km radius.
According to a Shaanxi provincial government report issued on January 16, 2008,
there were 150 construction and infrastructure projects scheduled to begin in
the province in 2008. Major projects include six new highways, one new airport,
the expansion of the Xi’an airport, a new ring subway system and three new dams.
We see strong demand for our products driven by these and many other
construction and infrastructure projects. We believe that there will be
sustained regional demand for several years ahead as the government continues to
strengthen its western region development efforts.





At Daqiuzhuang Metal, rural income
growth drives demand for our hot-rolled carbon sheets. According to the Asian
Development Bank statistics, well over 60% of the nation’s 1.3 billion total
population is comprised of low-income, rural farmers. Our steel sheets are used
in the construction of light agricultural vehicles targeted for sale to
low-income, rural farmers. We believe our sheets are lighter and of greater
ductility than those of our competitors and are preferred by manufacturers of
light agricultural vehicles. According to the 11th
Five-Year NESDP (2006-2010), raising the level of rural income is a top economic
and social goal for the country. Many government initiatives, including removal
of certain agricultural and local product taxes, have been implemented to spur
rural income development. The government expects annual rural income to grow
between 5% and 10% through 2010. Transportation asset growth slightly lags
behind the growth in rural net income, so we anticipate demand for light
agricultural vehicles to continue to grow between 4.7% and 9.6% throughout
2010.





At Baotou Steel Pipe Joint Venture,
energy sector growth which spurs the need to transport oil and steam drives
demand for spiral-weld steel pipe. Presently, demand is fueled by smaller
pipeline projects and municipal energy infrastructure projects within the
region.





At Maoming, infrastructure growth and
business development are demand drivers for our construction steel products.
Guangdong province serves as an export hub to Southeast Asia and abroad for many
products produced in China, and is one of China’s most economically advanced
provinces.  According to a National Development and Reform Commission
Industrial Update issued June 23, 2008 projected annual demand for steel
products in Guangdong will reach 50 million metric tons by the end of
2010.  On June 3, 2008, the Guangdong provincial government announced
plans within the Bei Shan Ling Port District, the area in which our facility is
located, to build 76 new shipping terminals with an aggregate throughput of 350
million metric tons annually.   These construction projects and
other infrastructure projects in the region will be demand drivers for our
products.





Supply of
raw materials





Iron ore





Our primary raw materials consist of
iron ore, coke, hot-rolled steel coil and steel billets. Daqiuzhuang Metal and
Baotou Steel Pipe Joint Venture use hot-rolled steel coil as their main raw
material. Longmen Joint Venture uses iron ore and coke as its main raw material.
Maoming uses steel billets as its raw material. Iron ore is the main raw
material used to produce hot-rolled steel coil and steel billets. As a result,
the price of iron ore and coke are the primary raw material cost driver for our
products.




49




Longmen Joint Venture represents 4
million tons of our aggregate 6.3 million metric tons annual production
capacity. At Longmen Joint Venture, approximately 90% of the production costs
are attributable to the purchase of raw materials, with iron ore being the
largest component of the purchase.





According to the China Iron and Steel
Association, approximately 60% of the domestic steel industry’s demand for iron
ore must be filled by imports. At our Longmen Joint Venture, we purchase iron
ore from four primary sources: the Mulonggou mine (owned by the Longmen Joint
Venture), the Daxigou mine (owned by our joint venture partner), domestic
sources and from imports. The Daxigou mine has 300 million metric tons of proven
iron ore reserves. According to the terms of our joint venture agreement with
the strategic partner, we have first rights of refusal for sales and development
from this mine.





We currently source approximately 15%
of our iron ore from the Mulonggou and Daxigou mines, 70%-75% from domestic
mines and remaining amount from imports. The Longmen JV sources iron ore from
the Mulonggou and Daxigou mines below market prices due to its shareholding
relationships. We believe gaining greater direct control over our key raw
material supply is important for margin and secured source
protection.





Coke





After iron ore, coke is our second most
largely consumed raw material. It takes approximately 550 to 600kg of coke to
make one metric ton of pig-iron.





Our Longmen facility is located in the
center of China’s coal belt. All coke used at Longmen Joint Venture is sourced
from the town in which Longmen Joint Venture is located. This ensures dependable
supply and minimum transportation costs for this key raw material.





The
sources and/or major suppliers of the Company’s raw materials are as
follows:




Shaanxi Longmen Iron and
Steel Co., Ltd. (Longmen Joint Venture)





Major
Suppliers


Name of the Supplier
                                          
                                          Raw Material
                                            Purchased
                                          
                                          % of Total Raw
                                            Material
                                            Purchased
                                          
                                          
                                          Relationship with GSIShaanxi
      Longmen Iron & Steel Group Co., Ltd.
                                          
                                          Iron
      Ore
                                          
                                          
                                          12.2
                                          %
                                          
                                          Related
      PartyShaanxi
      Haiyan Coal Chemical Industry Co., Ltd
                                          
                                          Coke
                                          
                                          
                                          7.8
                                          %
                                          
                                          Related
      partyShaanxi
      Huanghe Material Co., Ltd
                                          
                                          Coke
                                          
                                          
                                          7.5
                                          %
                                          
                                          Others
      (non-related party)Yunnan
      Jingliyuan Industrial Co., Ltd
                                          
                                          Alloy
                                          
                                          
                                          2.4
                                          %
                                          
                                          Others
      (non-related party)Shaanxi
      Jinhu Industrial and Commercial Co., Ltd
                                          
                                          Iron
      Ore
                                          
                                          
                                          2.2
                                          %
                                          
                                          Others
      (non-related party)Total
                                          
                                          
                                          32.1
                                          %
 
 Tianjin Daqiuzhuang Metal
Sheet Co., Ltd. (Daqiuzhuang Metal)
 
 Major
Suppliers
 
 Name of the Supplier
                                          
                                          Raw Material
                                            Purchased
                                          
                                          % of Total Raw
                                            Material
                                            Purchased
                                          
                                          
                                          Relationship with GSITianjin
      Hengying Trade Co., Ltd
                                          
                                          Hot
      roll coil
                                          
                                          
                                          46.7
                                          %
                                          
                                          Related
      partyTianjin
      Dazhan Industrial Co., Ltd
                                          
                                          Hot
      roll coil
                                          
                                          
                                          26.7
                                          %
                                          
                                          Related
      partyTianjin
      Rongchengxiang Iron & Steel Group
                                          
                                          Hot
      roll coil
                                          
                                          
                                          13.3
                                          %
                                          
                                          Others
      (non-related party)General
      Qiu Steel Pipe Co., Ltd
                                          
                                          Hot
      roll coil
                                          
                                          
                                          7.6
                                          %
                                          
                                          Others
      (non-related party)Shenghua
      Xinyuan
                                          
                                          Hot
      roll coil
                                          
                                          
                                          3.4
                                          %
                                          
                                          Others
      (non-related party)Total
                                          
                                          
                                          97.7
                                          %
  50
  Baotou Steel - General Steel
Special Steel Pipe Joint Venture Co., Ltd. (Baotou Steel Pipe Joint
Venture)
 
 Major
Suppliers
 
 Name of the Supplier
                                                          
                                                          Raw Material
                                                            Purchased
                                                          
                                                          % of Total Raw
                                                            Material
                                                            Purchased
                                                          
                                                          
                                                          Relationship with GSITianjin
      Jinchang Import Co., Ltd
                                                          
                                                          Steel
      coil
                                                          
                                                          
                                                          35
                                                          %
                                                          
                                                          Others
      (non-related party)Tianjin
      Fulida Steel Pipe Co., Ltd
                                                          
                                                          Steel
      pipe
                                                          
                                                          
                                                          16
                                                          %
                                                          
                                                          Others
      (non-related party)Tianjin
      Zhaoliang Trade Co., Ltd
                                                          
                                                          Billet
                                                          
                                                          
                                                          34
                                                          %
                                                          
                                                          Others
      (non-related party)Tianjin
      Yingbo Yixin Trade Co., Ltd
                                                          
                                                          Billet
                                                          
                                                          
                                                          5
                                                          %
                                                          
                                                          Others
      (non-related party)Baotou
      Huiyuan Trade Co., Ltd
                                                          
                                                          Steel
      coil
                                                          
                                                          
                                                          4
                                                          %
                                                          
                                                          Others
      (non-related party)Total
                                                          
                                                          
                                                          94
                                                          %
 
 Maoming Hengda Steel Group
Limited (Maoming)
 
 Major
Suppliers
 
 Name of the Supplier
                                          
                                          Raw Material
                                            Purchased
                                          
                                          % of Total Raw
                                            Material
                                            Purchased
                                          
                                          
                                          Relationship with GSIGuangxi
      Shenglong Metallurgy Co. Ltd
                                          
                                          Steel
      billet
                                          
                                          
                                          36.5
                                          %
                                          
                                          Others
      (non-related party)China
      Railway Material Commercial Corporation Tianjin Office
                                          
                                          Billet
                                          
                                          
                                          32.6
                                          %
                                          
                                          Others(non-related
      party)Maoming
      Shengze Trading Co., Ltd
                                          
                                          Billet
                                          
                                          
                                          27.1
                                          %
                                          
                                          Related
      partyMaoming
      Zhengmao Develop Co., Ltd
                                          
                                          Heavy
      oil
                                          
                                          
                                          1.6
                                          %
                                          
                                          Others
      (non-related party)Maoming
      Dazhongmao Petrochemical Co., Ltd
                                          
                                          Heavy
      oil
                                          
                                          
                                          0.9
                                          %
                                          
                                          Others
      (non-related party)Total
                                          
                                          
                                          98.7
                                          %




Industry
consolidation





It is the goal of the central
government to consolidate 50% of domestic production among the top ten steel
companies by 2010 and 70% by 2020. Throughout 2008, it steadily heightened its
consolidation effort.  The following list highlights a few of the
major steel company consolidation done during the year.





·           Hubei-based 
Wuhan  Iron & Steel Group acquired Liuzhou Iron & Steel Group
and  established  Guangxi  Iron  &  Steel 
Group  for the purpose of building  a new mill in Fangchenggang city,
Guangxi province.





·           Shanghai-based
Baosteel acquired  and is recapitalizing Guangzhou Iron & Steel
Enterprises Group and Shaoguan  Steel  Co. Ltd. with the goal of
building a new facility in Guangdong province.





·           Shandong
Iron & Steel Group was formed in Shandong province through the mergers of
Laiwu  Steel  Group  and  Jinan  Iron & Steel
Group.




51




·           Hebei
Iron & Steel  Group  was formed through  the merger of
Tangshan Iron & Steel Group and Handan Iron  &  Steel 
Group  in  Hebei  province.





All the above mentioned
major mergers and acquisitions have been government-directed. In
addition, Tangshan Bohai Steel Group and Tangshan Changcheng Steel Group were
formed in late December. These two groups were formed from 39 local private
mills in Tangshan city in Hebei province.





On January 14, 2009, the central
government approved the steel industry revitalization plan. The plan requires
the industry to constrict overall production, eliminate backward capacity and
strengthen its technical innovation. The revitalization plan also encourages
enterprises to accelerate the merger process so as to form a more concentrated
industry structure and enhance the overall competitiveness.





Operating
Results





Sales
Revenue




Three
months ended June 30, 2009 compared with three months ended June 30,
2008





Sales revenue for the three months
ended June 30, 2009 increased 5.7% to $408.9 million compared to $387 million
for the same period last year.





Sales
      Revenue
                    
                    2nd
      Quarter 2009
                    
                    
                    
                    
                    
                    2nd
      Quarter, 2008
                    
                    
                    
                    
                    
                    Change
                    
                    
                    ChangeVolume
                    
                    
                    Revenue
                    
                    
                    %
                    
                    
                    Volume
                    
                    
                    Revenue
                    
                    
                    %
                    
                    
                    Volume
                      %
                    
                    
                    Revenue
                      %Longmen
      JV
                    
                    
                    843,291
                    
                    
                    $
                    364,767,407
                    
                    
                    
                    90
                    %
                    
                    
                    517,200
                    
                    
                    $
                    335,781,209
                    
                    
                    
                    87
                    %
                    
                    
                    63.0
                    %
                    
                    
                    8.6
                    %Maoming
                    
                    
                    76,238
                    
                    
                    $
                    26,486,603
                    
                    
                    
                    6
                    %
                    
                    NA
                    
                    
                    NA
                    
                    
                    
                    0
                    %Daqiuzhuang
      Metal
                    
                    
                    28,579
                    
                    
                    $
                    13,878,409
                    
                    
                    
                    3
                    %
                    
                    
                    66,148
                    
                    
                    $
                    48,348,198
                    
                    
                    
                    12
                    %
                    
                    
                    -56.8
                    %
                    
                    
                    -71.3
                    %Baotou
      Steel Pipe JV
                    
                    
                    8,213
                    
                    
                    $
                    3,814,728
                    
                    
                    
                    1
                    %
                    
                    
                    4,507
                    
                    
                    $
                    2,899,529
                    
                    
                    
                    1
                    %
                    
                    
                    82.2
                    %
                    
                    
                    31.6
                    %Total
                    
                    
                    956,321
                    
                    
                    $
                    408,947,147
                    
                    
                    
                    100
                    %
                    
                    
                    587,855
                    
                    
                    $
                    387,028,936
                    
                    
                    
                    100
                    %
                    
                    
                    62.7
                    %
                    
                    
                    5.7
                    %





The
increase in sales revenue is predominantly due to sales volume increase of
63% at our Longmen JV; 82% volume increase at our Baotou Steel Pipe JV which
offset lower selling prices and declines at Daqiuzhuang Metal.
 
 The Sales Revenue increase is also
attributed to our Maoming acquisition, which was acquired June 25, 2008. Sale
Revenue for the three months ended June 30, 2009 reflects full three months of
operations whereas this subsidiary did not exist for the same period last
year.
 
 Longmen Joint Venture - Comprised 90%
of second quarter total sales. These sales were fueled by stable demand for
construction steel in our addressable markets and increased production capacity
contributed by our two new 1,280 cubic meter blast furnaces.
 
 Maoming  - Comprised 6% of
second quarter total sales. This subsidiary was acquired June 25, 2008 so there
is no comparable statistic to the same period last year.
 
 Daqiuzhuang Metal – Due to economic
slowdown, demand for energy hot-rolled sheets has dropped compounded by
large excess capacity of cold-rolled sheets which can be used as a replacement
product.
 
 Baotou Steel Pipe JV – Increase
activity due to China’s investment in energy infrastructure.
  52
  Six
months ended June 30, 2009 compared with six months ended June 30,
2008
 
 Sales
revenue for the six months ended June 30, 2009 increased 7.8% to $731.7 million
compared to $678.6 million for the same period last year.
 
 SALES
      REVENUE
                                                                              
                                                                              Six
      months endingJune
      30, 2009
                                                                              
                                                                              
                                                                              
                                                                              
                                                                              
                                                                              June
      30, 2008
                                                                              
                                                                              
                                                                              
                                                                              
                                                                              
                                                                              Change
                                                                              
                                                                              
                                                                              ChangeVolume
                                                                              
                                                                              
                                                                              Revenue
                                                                              
                                                                              
                                                                              %
                                                                              
                                                                              
                                                                              Volume
                                                                              
                                                                              
                                                                              Revenue
                                                                              
                                                                              
                                                                              %
                                                                              
                                                                              
                                                                              Volume
      %
                                                                              
                                                                              
                                                                              Revenue
      %Longmen
      JV
                                                                              
                                                                              
                                                                              1,492,618
                                                                              
                                                                              
                                                                              $
                                                                              657,482,097
                                                                              
                                                                              
                                                                              
                                                                              89
                                                                              %
                                                                              
                                                                              
                                                                              986,800
                                                                              
                                                                              
                                                                              $
                                                                              592,233,021
                                                                              
                                                                              
                                                                              
                                                                              87
                                                                              %
                                                                              
                                                                              
                                                                              51.3
                                                                              %
                                                                              
                                                                              
                                                                              11.0
                                                                              %Maoming
                                                                              
                                                                              
                                                                              118,607
                                                                              
                                                                              
                                                                              $
                                                                              43,736,596
                                                                              
                                                                              
                                                                              
                                                                              6
                                                                              %
                                                                              
                                                                              NA
                                                                              
                                                                              
                                                                              NA
                                                                              
                                                                              
                                                                              
                                                                              0
                                                                              %Daqiuzhuang
      Metal
                                                                              
                                                                              
                                                                              53,434
                                                                              
                                                                              
                                                                              $
                                                                              26,576,519
                                                                              
                                                                              
                                                                              
                                                                              4
                                                                              %
                                                                              
                                                                              
                                                                              119,887
                                                                              
                                                                              
                                                                              $
                                                                              82,365,588
                                                                              
                                                                              
                                                                              
                                                                              12
                                                                              %
                                                                              
                                                                              
                                                                              -55.4
                                                                              %
                                                                              
                                                                              
                                                                              -67.7
                                                                              %Baotou
      Steel Pipe JV
                                                                              
                                                                              
                                                                              8,981
                                                                              
                                                                              
                                                                              $
                                                                              3,945,831
                                                                              
                                                                              
                                                                              
                                                                              1
                                                                              %
                                                                              
                                                                              
                                                                              6,339
                                                                              
                                                                              
                                                                              $
                                                                              3,996,326
                                                                              
                                                                              
                                                                              
                                                                              1
                                                                              %
                                                                              
                                                                              
                                                                              41.7
                                                                              %
                                                                              
                                                                              
                                                                              -1.3
                                                                              %Total
                                                                              
                                                                              
                                                                              1,673,640
                                                                              
                                                                              
                                                                              $
                                                                              731,741,043
                                                                              
                                                                              
                                                                              
                                                                              100
                                                                              %
                                                                              
                                                                              
                                                                              1,113,026
                                                                              
                                                                              
                                                                              $
                                                                              678,594,935
                                                                              
                                                                              
                                                                              
                                                                              100
                                                                              %
                                                                              
                                                                              
                                                                              50.4
                                                                              %
                                                                              
                                                                              
                                                                              7.8
                                                                              %
 
 The
increase in sales revenue is predominantly due to sales volume increase of
51% at our Longmen’s JV; 42% volume
increase at our Baotou Steel Pipe JV which offset lower selling prices and
declines at Daqiuzhuang Metal.
 
 The Sales Revenue increase is also
attributed to our Maoming acquisition, which was acquired June 25, 2008. Sale
Revenue for the six months ended June 30, 2009 reflects full six months of
operations whereas this subsidiary did not exist for the same period last
year.
 
 Gross
Profit
 
 Three
months ended June 30, 2009 compared with three months ended June 30,
2008
 
 Gross profit for the three months ended
June 30, 2009 decreased 1.6% to $22.5 million from $22.9 million for the same
period last year.
 
 GROSS
      PROFIT
                                                          
                                                          Three
      months endedJune
      30, 2009
                                                          
                                                          
                                                          June
      30, 2008Gross
      Profit
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          Gross
      ProfitGross
      Profit
                                                          
                                                          
                                                          Margin
      %
                                                          
                                                          
                                                          Gross
      Profit
                                                          
                                                          
                                                          Margin
      %Longmen
      JV
                                                          
                                                          $
                                                          24,658,885
                                                          
                                                          
                                                          
                                                          6.76
                                                          %
                                                          
                                                          $
                                                          21,164,269
                                                          
                                                          
                                                          
                                                          6.30
                                                          %Maoming
                                                          
                                                          $
                                                          (1,329,831
                                                          )
                                                          
                                                          
                                                          -5.02
                                                          %
                                                          
                                                          NADaqiuzhuang
      Metal
                                                          
                                                          $
                                                          (825,470
                                                          )
                                                          
                                                          
                                                          -5.95
                                                          %
                                                          
                                                          $
                                                          1,701,567
                                                          
                                                          
                                                          
                                                          3.52
                                                          %Baotou
      Steel Pipe JV
                                                          
                                                          $
                                                          (4,891
                                                          )
                                                          
                                                          
                                                          -0.13
                                                          %
                                                          
                                                          $
                                                          2,969
                                                          
                                                          
                                                          
                                                          0.10
                                                          %Total
                                                          
                                                          $
                                                          22,498,693
                                                          
                                                          
                                                          
                                                          5.50
                                                          %
                                                          
                                                          $
                                                          22,868,805
                                                          
                                                          
                                                          
                                                          5.91
                                                          %
 
 Longmen Joint
Venture
 The Gross
Profit Margin of our largest subsidiary, Longmen JV, has improved due to healthy
business fundamentals boosted by government economic stimulus infrastructure
spending.
 
 Maoming
 Our
Maoming subsidiary was acquired on June 25, 2008 so there is not a comparable
number for the same period last year. The previous owners had never run the
facilities at more than 10% utilization.
  We have
been steadily increasing the production volume at our Maoming facility to
improve the financial results of the subsidiary. In the second quarter,
production reached 76 thousand tons and for the month of June, Gross Profit at
Maoming turned positive and the subsidiary achieved breakeven operating results,
an important step point for the company.
  53
  Below is
a month-by-month breakdown of Maoming second quarter gross profit. Note the
swing to positive Gross Profit in June 2009.
 
 Maoming
      Gross Profit
                                
                                Second
      Quarter 2009-
      by month
                                
                                April
                                
                                
                                May
                                
                                
                                JuneRevenue
                                
                                $
                                9,105,291
                                
                                
                                $
                                9,206,623
                                
                                
                                $
                                8,174,689Cost
      of Sales
                                
                                $
                                10,105,931
                                
                                
                                $
                                9,791,339
                                
                                
                                $
                                7,919,164Gross
      Profit
                                
                                $
                                -1,000,639
                                
                                
                                $
                                -584,717
                                
                                
                                $
                                255,525Gross
      Profit Margin %
                                
                                
                                -11.0
                                %
                                
                                
                                -6.4
                                %
                                
                                
                                3.1
                                %
 
 Daqiuzhuang
Metal
 Daqiuzhuang Metal is impacted
by the global economic slowdown specifically weak demand and competition
from cold rolled steel sheets. Second quarter has seen some recovery in demand
and prices, most notably in June.
 
 Baotou Steel Pipe
JV
 Gross Margins have been impacted by
increase in raw material prices. Our policy is to minimize inventory. This means
that we purchase raw materials only after we have a firm customer order in hand.
In the second quarter, we got caught with a contract where raw material prices
rose immediately following the signing of a customer order impacting our gross
margin.
 
 Six
months ended June 30, 2009 compared with six months ended June 30,
2008
 
 Gross
profit for the six months ended June 30, 2009 decreased 1.2% to $35.4 million
from $35.9 million for the same period last year.
  GROSS
      PROFIT
                                                                    
                                                                    Six
      months endedJune
      30, 2009
                                                                    
                                                                    
                                                                    June
      30, 2008Gross
      Profit
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    Gross
      ProfitGross
      Profit
                                                                    
                                                                    
                                                                    Margin
      %
                                                                    
                                                                    
                                                                    Gross
      Profit
                                                                    
                                                                    
                                                                    Margin
      %Longmen
      JV
                                                                    
                                                                    $
                                                                    39,395,264
                                                                    
                                                                    
                                                                    
                                                                    5.99
                                                                    %
                                                                    
                                                                    $
                                                                    32,188,422
                                                                    
                                                                    
                                                                    
                                                                    5.44
                                                                    %Maoming
                                                                    
                                                                    $
                                                                    (3,572,009
                                                                    )
                                                                    
                                                                    
                                                                    -8.17
                                                                    %
                                                                    
                                                                    NADaqiuzhuang
      Metal
                                                                    
                                                                    $
                                                                    (403,641
                                                                    )
                                                                    
                                                                    
                                                                    -1.52
                                                                    %
                                                                    
                                                                    $
                                                                    3,625,872
                                                                    
                                                                    
                                                                    
                                                                    4.40
                                                                    %Baotou
      Steel Pipe JV
                                                                    
                                                                    $
                                                                    1,198
                                                                    
                                                                    
                                                                    
                                                                    0.03
                                                                    %
                                                                    
                                                                    $
                                                                    36,626
                                                                    
                                                                    
                                                                    
                                                                    0.92
                                                                    %Total
                                                                    
                                                                    $
                                                                    35,420,812
                                                                    
                                                                    
                                                                    
                                                                    4.84
                                                                    %
                                                                    
                                                                    $
                                                                    35,850,920
                                                                    
                                                                    
                                                                    
                                                                    5.28
                                                                    %
 
 The
financial crisis, collapse of banks, and ensuing global economic slowdown have
made year-to-year comparisons like comparing apples to oranges. We believe
looking at Gross Profit quarter-to-quarter provides more insight into our
business. See below,
 
 GROSS
      PROFIT
                                
                                2nd
      Quarter 2009
                                
                                
                                1st
      Quarter 2009
                                
                                
                                4th
      Quarter 2008Gross
                                  Profit
                                
                                
                                
                                
                                
                                Gross
                                  Profit
                                
                                
                                
                                
                                
                                Gross
                                  ProfitGross
                                  Profit
                                
                                
                                Margin
                                  %
                                
                                
                                Gross
                                  Profit
                                
                                
                                Margin
                                  %
                                
                                
                                Gross
                                  Profit
                                
                                
                                Margin
                                  %Longmen
      JV
                                
                                $
                                24,658,885
                                
                                
                                
                                6.76
                                %
                                
                                $
                                14,736,378
                                
                                
                                
                                4.99
                                %
                                
                                $
                                (17,179,872
                                )
                                
                                
                                -7.33
                                %Maoming
                                
                                $
                                (1,329,831
                                )
                                
                                
                                -5.02
                                %
                                
                                $
                                (2,242,177
                                )
                                
                                
                                -13.00
                                %
                                
                                $
                                (2,621,672
                                )
                                
                                
                                -29.45
                                %Daqiuzhuang
      Metal
                                
                                $
                                (825,470
                                )
                                
                                
                                -5.95
                                %
                                
                                $
                                421,828
                                
                                
                                
                                3.32
                                %
                                
                                $
                                (2,815,061
                                )
                                
                                
                                -19.47
                                %Baotou
      Steel Pipe JV
                                
                                $
                                (4,891
                                )
                                
                                
                                -0.13
                                %
                                
                                $
                                6,090
                                
                                
                                
                                4.65
                                %
                                
                                $
                                1,041,070
                                
                                
                                
                                30.08
                                %Total
                                
                                $
                                22,498,693
                                
                                
                                
                                5.50
                                %
                                
                                $
                                12,922,119
                                
                                
                                
                                4.0
                                %
                                
                                $
                                (21,575,535
                                )
                                
                                
                                -8.26
                                %
  54
  Selling,
General and Administrative Expenses
 
 Three
months ended June 30, 2009 compared with three months ended June 30,
2008
 
 Selling, general and administrative
expenses, such as executive compensation, office expenses, legal and accounting
charges, travel charges, and various taxes were $9.6 million for the three
months ended June 30, 2009, compared to $9.5 million for the same period of
2008.
 
 Six
months ended June 30, 2009 compared with six months ended June 30,
2008
 
 Selling, general and administrative
expenses $18.7 million for the six months ended June 30, 2009, compared to $16
million for the same period of 2008. This increase is attributed the addition of
Maoming subsidiary which did not exist for the same period last year and 51%
increase of sales volume at our Longmen Joint Venture.
 
 Other
income (expense)
 
 Three
months ended June 30, 2009 compared with three months ended June 30,
2008
 
 Other income (expense) for the three
months ended June 30, 2009 was an expense of $34.4 million compared to expense
of $32.5 million for the same period last year.
 
 Three
      months endedJune
      30, 2009
                            
                            
                            June
      30, 2008OTHER
      INCOME (EXPENSE), NETInterest
      income
                            
                            $
                            763,764
                            
                            
                            $
                            877,099Interest/finance
      expense
                            
                            
                            -4,854,138
                            
                            
                            
                            -6,289,868Convertible
      note make whole interest
                            
                            
                            -6,454,683Change
      in fair value of derivative liabilities
                            
                            
                            -26,726,167
                            
                            
                            
                            -27,786,632Income
      from equity investments
                            
                            
                            2,752,664Other
      nonoperating income( expense), net
                            
                            
                            142,348
                            
                            
                            
                            649,871Total
      other income (expense), net
                            
                            $
                            -34,376,212
                            
                            
                            $
                            -32,549,530
 
 Six
months ended June 30, 2009 compared with six months ended June 30,
2008
 
 Other income (expense) for the six
months ended June 30, 2009 was an expense of $25.4 million compared to expense
of $34.9 million for the same period last year.
 
 Six
      months endedJune
      30, 2009
                          
                          
                          June
      30, 2008OTHER
      INCOME (EXPENSE), NETInterest
      income
                          
                          $
                          1,642,397
                          
                          
                          $
                          1,457,417Interest/finance
      expense
                          
                          
                          -7,792,916
                          
                          
                          
                          -12,276,375Convertible
      note make whole interest
                          
                          
                          -6,454,683Change
      in fair value of derivative liabilities
                          
                          
                          -22,611,599
                          
                          
                          
                          -25,115,869Gain
      from debt extinguishment
                          
                          
                          2,930,200Government
      grant
                          
                          
                          3,519,890Income
      from equity investments
                          
                          
                          2,698,032Other
      nonoperating income( expense), net
                          
                          
                          652,564
                          
                          
                          
                          1,019,142Total
      other income (expense), net
                          
                          $
                          -25,416,115
                          
                          
                          $
                          -34,915,685
 
 55
 
 -
      Interest Income:
      interest received from deposits held in
banks
 - Interest /finance expense:
interest paid on bank loans, on early redemption of Notes Receivables various
bank fees
 - Notes converted – make-whole expense: non cash
incentive written in our convertible bond agreement for early conversion by our
note holders
 - Change in fair value of derivative
liabilities: related to valuation of the conversion features and warrant
liabilities of our convertible debt. This is a non-cash, non-operating
item
 - Gain from debt extinguishment:
RMB 20 million debt extinguishment by Hengda Group. Not only does the debt
extinguishment add to our profitability, it also reduces cash that needs to be
paid out.
 -Government grant: In order to
reduce energy consumption emissions, Shaanxi Province Development and Reform
Commission worked with local industries to eliminate outdated iron and steel
production facilities. During first quarter 2009 Longmen Joint Venture received
RMB 29 million in government incentives for compliance in dismantling two small
blast furnaces, less RMB 5 million residual book value of the
furnaces.
 - Income from equity
investments: entities in which we do not have controlling interest and do
not consolidate their results into our financial statements
 - Other non-operating income (expense),
net:Rental income collected by Daqiuzhuang Metal offset by disposal of
obsolete equipment at our Longmen JV.
  56
  Net
income attributable to General Steel Holdings Inc.
 
 Three
months ended June 30, 2009 compared with three months ended June 30,
2008
 
 Net income attributable to General
Steel Holdings Inc. for the three months ended June 30, 2009 was a loss of $31.8
million compared to a loss of $24.3 million for the same period of last
year.
 
 Three
      months endedJune
      30, 2009
                              
                              
                              June
      30, 2008NET
      LOSS BEFORE NONCONTROLLING INTEREST
                              
                              $
                              -23,449,536
                              
                              
                              $
                              -20,270,736LESS:Net
      income attributable to the noncontrolling interest
                              
                              
                              8,339,676
                              
                              
                              
                              4,000,490NET
      LOSS ATTRIBUTABLE TO GENERAL STEEL
                              
                              $
                              -31,789,212
                              
                              
                              $
                              -24,271,226
  The main
factors for the Net loss are non-operating; non-cash expenses associated with
our December 2007 Convertible Bond.
 
 Six
months ended June 30, 2009 compared with six months ended June 30,
2008
 
 Three
      months endedNon-operating,
      non-cash expenses assocated with our December 2007 Convertible
      Bond
                                    
                                    June
      30, 2009
                                    
                                    
                                    June
      30, 2008Convertible
      note make whole interest
                                    
                                    $
                                    -6,454,683Change
      in fair value of derivative liabilities
                                    
                                    
                                    -26,726,167
                                    
                                    
                                    $
                                    -27,786,632Total
      expenses associated with our December 2007 Convertible
Bond
                                    
                                    $
                                    -33,180,850
                                    
                                    
                                    $
                                    -27,786,632
 NOTE:
These are non-operating; non-cash expenses
 57





Six
      months endedJune
      30, 2009
                          
                          
                          June
      30, 2008NET
      LOSS BEFORE NONCONTROLLING INTEREST
                          
                          $
                          -12,121,652
                          
                          
                          $
                          -16,637,420LESS:Net
      income attributable to the noncontrolling interest
                          
                          
                          12,332,928
                          
                          
                          
                          5,445,346NET
      LOSS ATTRIBUTABLE TO GENERAL STEEL
                          
                          $
                          -24,454,580
                          
                          
                          $
                          -22,082,766
 
 Net income attributable to General
Steel Holdings Inc. for the six months ended June 30, 2009 was a loss of $24.5
million compared to a loss of $22.1 million for the same period of last
year.
 
 The main
factors for the GAAP Net Income loss are non-operating; non-cash expenses
associated with our December 2007 Convertible Bond.
 
 Earnings
per share
 Three
months ended June 30, 2009 compared with three months ended June 30,
2008
 Three
      months endedEarnings
      per share
                                    
                                    June
      30, 2009
                                    
                                    
                                    June
      30, 2008NET
      LOSS ATTRIBUTABLE TO GENERAL STEEL
                                    
                                    $
                                    -31,789,212
                                    
                                    
                                    $
                                    -24,271,226WEIGHTED
      AVERAGE NUMBER OF SHARESBasic
                                    
                                    
                                    39,533,099
                                    
                                    
                                    
                                    34,928,576Diluted
                                    
                                    
                                    39,533,099
                                    
                                    
                                    
                                    34,928,576EARNING
      PER SHAREBasic
                                    
                                    $
                                    (0.804
                                    )
                                    
                                    $
                                    (0.695
                                    )Diluted
                                    
                                    $
                                    (0.804
                                    )
                                    
                                    $
                                    (0.695
                                    )
 
 The main factors for the GAAP earning
per share loss are non-operating; non-cash expenses associated with our December
2007 Convertible Bond.
  Six
months ended June 30, 2009 compared with six months ended June 30,
2008
  Six
      months endedEarnings
      per share
                                        
                                        June
      30, 2009
                                        
                                        
                                        June
      30, 2008NET
      LOSS ATTRIBUTABLE TO GENERAL STEEL
                                        
                                        $
                                        -24,454,580
                                        
                                        
                                        $
                                        -22,082,766WEIGHTED
      AVERAGE NUMBER OF SHARESBasic
                                        
                                        
                                        37,918,177
                                        
                                        
                                        
                                        34,883,740Diluted
                                        
                                        
                                        37,918,177
                                        
                                        
                                        
                                        34,883,740EARNING
      PER SHAREBasic
                                        
                                        $
                                        (0.645
                                        )
                                        
                                        $
                                        (0.633
                                        )Diluted
                                        
                                        $
                                        (0.645
                                        )
                                        
                                        $
                                        (0.633
                                        )
    58
  The
management of General Steel Holdings uses non-GAAP adjusted net earnings to
measure the performance of the Company’s business internally by excluding
non-recurring items as well as non-cash charges related to the Company’s 2007
convertible notes.  The Company’s management believes that these
non-GAAP adjusted financial measures allow the management to focus on managing
business operating performance because these measures reflect the essential
operating activities of General Steel Holdings and provide a consistent method
of comparison to historical periods. The Company believes that providing the
non-GAAP measures that management uses internally to its investors is useful to
investors for a number of reasons. The non-GAAP measures provide a consistent
basis for investors to understand General Steel Holding’s financial performance
in comparison to historical periods without variation of non-recurring items and
non-operating related charges. In addition, it allows investors to evaluate the
Company's performance using the same methodology and information as that used by
the management. Non-GAAP measures are subject to inherent limitations because
they do not include all of the expenses included under GAAP and because they
involve the exercise of judgment of which charges are excluded from the non-GAAP
financial measure. However, the management of General Steel Holdings compensates
for these limitations by providing the relevant disclosure of the items
excluded.
 
 The
following table provides the non-GAAP financial measure and a reconciliation of
the non-GAAP measure to the GAAP net income.
  59
 
 Three
      months endedJune
      30, 2009
                                              
                                              
                                              June
      30, 2008NET
      LOSS ATTRIBUTABLE TO GENERAL STEEL
                                              
                                              $
                                              (31,789,212
                                              )
                                              
                                              $
                                              (24,271,226
                                              )less
      - Non-operating, non-cash expenses associated with our December 2007
      Convertible BondNotes
      converted-make-whole interest
                                              
                                              
                                              (6,454,683
                                              )Change
      in fair value of derivative liabilities
                                              
                                              
                                              (26,726,167
                                              )
                                              
                                              
                                              (27,786,632
                                              )ADJUSTED
      NET INCOME
                                              
                                              $
                                              1,391,638
                                              
                                              
                                              $
                                              3,515,406WEIGHTED
      AVERAGE NUMBER OF SHARESBasic
                                              
                                              
                                              39,533,099
                                              
                                              
                                              
                                              34,928,576Diluted
                                              
                                              
                                              39,533,099
                                              
                                              
                                              
                                              34,928,576ADJUSTED  EARNING
      PER SHAREBasic
                                              
                                              $
                                              0.035
                                              
                                              
                                              $
                                              0.101Diluted
                                              
                                              $
                                              0.035
                                              
                                              
                                              $
                                              0.101
  Six
      months endedJune
      30, 2009
                                                
                                                
                                                June
      30, 2008NET
      LOSS ATTRIBUTABLE TO GENERAL STEEL
                                                
                                                $
                                                (24,454,580
                                                )
                                                
                                                $
                                                (22,082,766
                                                )less
      - Non-operating, non-cash expenses associated with our December 2007
      Convertible BondNotes
      converted-make-whole interest
                                                
                                                
                                                (6,454,683
                                                )Change
      in fair value of derivative liabilities
                                                
                                                
                                                (22,611,599
                                                )
                                                
                                                
                                                (25,115,869
                                                )ADJUSTED
      NET INCOME
                                                
                                                $
                                                4,611,702
                                                
                                                
                                                $
                                                3,033,103WEIGHTED
      AVERAGE NUMBER OF SHARESBasic
                                                
                                                
                                                37,918,177
                                                
                                                
                                                
                                                34,883,740Diluted
                                                
                                                
                                                37,918,177
                                                
                                                
                                                
                                                34,883,740ADJUSTED
      EARNING PER SHAREBasic
                                                
                                                $
                                                0.122
                                                
                                                
                                                $
                                                0.087Diluted
                                                
                                                $
                                                0.122
                                                
                                                
                                                $
                                                0.087
 
 For the
three months ended June 30, 2009 the adjusted net income of $1.40 million, or
the adjusted EPS of $0.035 per share, for the second quarter of 2009 in the
table above excluded a $26.7 million non-cash charge due to change in fair value
of derivatives and a $6.45 million make whole interest due to notes
converted.  This adjusted net income compared, on the same basis, with
the net income of $3.51 million, or $0.101 per share, in the second quarter of
2008.
 
 For the
six months ended June 30, 2009 the adjusted net income of $4.61
million, or the adjusted EPS of $0.122 per share, for the first two quarters of
2009 in the table above excluded a $22.6 million non-cash charge due to change
in fair value of derivatives and a $6.45 million make whole interest due to
notes converted.  This adjusted net income compared, on the same
basis, with the net income of $3.03 million, or $0.087 per share, for the first
two quarters of 2008.
  60
  Income
taxes
 
 The Company did not carry on any
business and did not maintain any branch office in the United States during the
three months ended June 30, 2009 and 2008. Therefore, no provision for
withholding or U.S. federal or state income taxes or tax benefits on the
undistributed earnings and/or losses of the Company has been made.
 
 Under the
Income Tax Laws of PRC, the Company’s subsidiary, Daqiuzhuang Metal, is
generally subject to an income tax at an effective rate of 25% on income
reported in the statutory financial statements after appropriate tax
adjustments, unless the enterprise is located in a specially designated region
where it allows foreign enterprises a two-year income tax exemption and a 50%
income tax reduction for the following three years. Daqiuzhuang Metal, became a
Chinese Sino-foreign joint venture at the time of the merger on October 14, 2004
and it became eligible for the tax benefit. Daqiuzhuang Metal is located in
Tianjin Costal Economic Development Zone and under the Income Tax Laws of
Tianjin City of PRC, it is eligible for an income tax rate of 24%. Therefore,
Daqiuzhuang Metal is exempt from income taxes for the years ended December 31,
2005 and 2006 and is entitled to 50% income tax reduction of the special income
tax rate of 24%, which is a rate of 12% for the years ended December 31, 2007,
2008 and 2009.
  The
Company’s subsidiary, Longmen Joint Venture, is located in the mid-west region
of China. It qualifies for the “Go-West” tax rebate of 15% tax rate promulgated
by the government; therefore, income tax is accrued at 15%.
  Baotou
Steel Pipe Joint Venture is located in Inner Mongolia, is subject to an income
tax at an effective rate of 25%.
  Maoming
Henggang is located in Guangdong province, is subject to an income tax at an
effective rate of 25%.
  For the
three months ended June 30, 2009, we had a tax expense of $2.0 million and for
the six months ended June 30, 2009 we had a tax expense of $3.4
million.
  The
Company has cumulative undistributed earnings of foreign subsidiaries of
approximately $14,733,301 as of June 30, 2009, is included in consolidated
retained earnings and will continue to be indefinitely reinvested in
international operations.  Accordingly, no provision has been made for
U.S. deferred taxes related to future repatriation of these earnings, nor is it
practicable to estimate the amount of income taxes that would have to be
provided if we concluded that such earnings will be remitted in the
future.
  General
Steel Holdings Inc. was incorporated in the United States and has incurred net
operating losses for income tax purposes for the six months ended June 30, 2009
and 2008, respectively. The net operating loss carry forwards for United States
income taxes amounted to $2,824,982 which may be available to reduce future
years’ taxable income. These carry forwards will expire, if not utilized,
through 2027. Management believes that the realization of the benefits from
these losses appears uncertain due to the Company’s limited operating history
and continuing losses for United States income tax purposes. Accordingly, the
Company has provided a 100% valuation allowance on the deferred tax asset
benefit to reduce the asset to zero. The valuation allowance at June 30, 2009
was $1,245,000. The net change in the valuation allowance for the six months
ended June 30, 2009 and year ended December 31, 2008 was an increase of $285,000
and $645,000, respectively. Management will review this valuation allowance
periodically and make adjustments as warranted.
 
 Noncontrolling
Interest
 
 Noncontrolling interest mainly consists
of Long Steel Group’s 40% interest in Longmen Joint Venture, Baotou Iron and
Steel Group’s 20% interest in Baotou Steel Pipe Joint Venture and 1% interest in
Maoming by another entity.
  61
  Accounts
Receivable
 
 Accounts receivable and accounts
receivable-related party were $16.0 million as of June 30, 2009 compared to $8.3
million on December 31, 2008.
 
 We recognize revenue when we ship out
products and pass the titles of the products to our customers and distributors.
We extended short-term credit to our customers and distributors with good
reputations and long-term business relationships. We have not experienced any
bad debt in these accounts. Also, we review our accounts receivable on a regular
basis to determine if the bad debt allowance is adequate and adjust the
allowance amount if needed. We believe the accounts receivable amount is
collectible. Nevertheless, to be conservative and prudent in our management
practice, as of June 30, 2009, we reserved $0.6 million for bad debt allowance
based on our reasonable estimate.
 
 Liquidity
and capital resources
 The
steel business is capital intensive and we utilize leverage greater than our
industry peers which enables us to generate revenue compared to our shareholder
equity at a rate higher than our industry peers. We utilize leverage in the form
of credit from banks, vendor financing, customer deposits and others. This
blended form of financing reduces our reliance on any single
source.
 
 In
evaluating the extent of leverage employed by the company, it should be noted
that certain assets offset related liabilities.
 -
              Restricted
      cash is held in banks as collateral for Notes
    Payables.
 -
              Inventory
      is used to fulfill Customer
Deposits.
 
 Short
term notes payable
 As of
June 30, 2009 we had $274 million in short term notes payables liabilities which
are secured by restricted cash of $200.2 million and other assets. These are
lines of credit extended by banks for a maximum of 6 months and used to finance
working capital. The short-term notes payables must be paid in full at maturity
and credit availability is most likely continued upon payment at maturity.
There are no additional significant financial covenants.
 
 Short-term
notes payable are the lowest cost form of financing available in China. We pay
zero interest on this type of credit. This is a monetary tool used by China’s
central bank to inject liquidity into the Chinese monetary system,
 
 Short
term loans – banks
 As of
June 30, 2009 we had $97.2 million in short term bank loans. These are bank
loans with a one year maturity and must be paid in full upon maturity. There are
no additional significant financial covenants tied to these loans. Chinese banks
have not been impacted as heavily by the financial crisis as US banks and
current creditors will most likely renew their lending to us after our
loans mature as they have in the past.
 
 We are
able to repay our short term notes payables and short term bank loans upon
maturity using available capital resources.
 
 For more
details about our debts, please see note 8 in our notes of
the financial statements.
 
 Convertible
Notes
 
 On
December 13, 2007, the Company entered into a Securities Purchase Agreement (the
“Agreement”) with certain institutional investors (the “Buyers”) issuing
$40,000,000 (“Notes”) and 1,154,958 warrants (the “Warrants”). The warrants can
be converted to common stock through May 13, 2013 at $13.51 per
share.
  62
  The Notes
bear initial interest at 3% per annum, which will be increased each year as
specified in the Notes, payable semi-annually in cash or shares of the Company’s
common stock. The Notes have a five year term through December 12, 2012. They
are convertible into shares of the common stock, subject to customary
anti-dilution adjustments. The initial conversion price is $12.47. The Company
may redeem the Notes at 100% of the principal amount, plus any accrued and
unpaid interest, beginning December 13, 2008, provided the market price of the
common stock is at least 150% of the then applicable conversion price for 30
consecutive trading days prior to the redemption.
 
 The Notes
are secured by a first priority, perfected security interest in certain shares
of common stock of Zuosheng Yu, as evidenced by the pledge agreement. The Notes
are subject to events of default customary for convertible securities and for a
secured financing.
 
 The
Warrants grant the Buyers the right to acquire shares of common stock at $13.51
per share, subject to customary anti-dilution adjustments. The Warrants may be
exercised at any time on or after May 13, 2008, but not after May 13, 2013, the
expiration date of the Warrants. In connection with this transaction, the
Company and the Buyers entered into a registration rights agreement. The Company
agreed to register within 60 calendar days common stock issuable to the Buyers
for resale on a registration statement to be effective by 90 calendar days or
120 days if the registration statement is subject to a full review by the U.S.
Securities and Exchange Commission. The Company is required to register at least
120% of the sum of shares issuable upon conversion of the Notes, the exercise of
the Warrants and the payment of interest accrued on the Notes. The registration
rights are subject to customary exceptions and qualifications and compliance
with certain registration procedures. The Company was required to file the
registration statement on February 11, 2008. The Company filed the registration
statement on February 13, 2008, which was two days after the required filing
date. The Company reached an agreement with all note holders to waive the
related penalty of $427,000.
 
 In
connection with this transaction, the Company and Zuo Sheng Yu, the Chief
Executive Officer, and Victory New Holding Limited entered into a voting
agreement (the “Voting Agreement”), pursuant to which such shareholders agree to
vote in favor of the approval of this transaction. Certain management members of
the Company also entered into a lock-up agreement with the Company pursuant to
which each of such management members agrees not to sell or offer to sell the
Common Stock held by such a management member for one year after the initial
effective date of the resale Form S-3 Registration Statement described
above.
 
 According
to the terms of the Notes, on May 7, 2009, the conversion price of $12.47 was
reset to the market price, which is defined as the lower of $12.47 or the
average of the weighted average price of our common stock for 30 consecutive
days preceding May 7, 2009. This resulted in our conversion price being reset to
$4.2511.
 
 During
the second quarter of 2009, our Notes holders converted $21.7 million of debt
into equity. Combined with conversions earlier and subsequent to the end of
second quarter, a total of $33.39 million of Notes debt have been converted to
equity. We are glad to have our Notes holders convert: our debt is reduced and
our public float has increased.
 
 Cash-flow
 
 Operating
activities
 
 Net cash provided by operating
activities for the six months ended June 30, 2009 was $29.0 million compared to
cash used in operating activities of $36.5 million in the same period of 2008.
This change was mainly due to the combination of the following
factors:
  63
  Cash inflow after the adjustments of
some non-cash items to the net income such as depreciation and
amortization,(Gain)
Loss from debt extinguishment, (Gain) Loss on disposal of equipment, stock
issued for service and compensation, amortization of deferred note issuance
cost, amortization of discount on convertible notes, Change in fair value of
derivative instrument, make whole expense on note conversion, income from
investment and deferred tax assets, totaled of $36.3 million.
 
 Cash outflow resulting from accounts
receivable, notes receivable, other receivables and other receivables-related
parties, dividend receivable, inventory and advance on inventory purchase,
pre-paid expenses which was $104.3 million, compared to the same period last
year an outflow of $67.8 million. The increase of $36.5 million is mainly due to
inventory.
 
 Cash inflow due to the increase in
accounts payable, other payables, accrued liabilities, customer deposits,
dividend payable and tax payable totaled of $109.1 million compared to the same
period last year an inflow of $84.1 million. The increase of $25.0 million is
mainly due to increase in accounts payable.
 
 Investing
activities
 
 Net cash used in investing activities
was $26.4 million for six months of 2009 compared to $97.1 million used in the
same period of 2008. This reduction in cash outflow is mainly to increase in the
received deposits due to sales representatives and reduction of equipment
purchases.
 
 Financing
activities
 
 Net cash provided by financing
activities was $46.4 million for six months of 2009 compared to $42 million in
the same period of 2008. This increase is mainly due to increase in borrowing on
short term loan others.
 
 Shelf
Registration SEC Form S-3
 
 On January 15, 2009, we filed a shelf
registration statement SEC Form S-3, which is effective for a term of three
years.
 
 We may from time to time sell common
stock, in one or more offerings, for an aggregate initial offering price of
$60,000,000. We may sell the common stock to or through underwriters, directly
to investors or through agents.
  Each time we offer common stock, we
will provide a prospectus supplement containing more specific information about
the particular offering and attach it to this prospectus. The prospectus
supplements may also add, update or change information contained in this
prospectus. This prospectus may not be used to offer or sell securities without
a prospectus supplement which includes a description of the method and terms of
the offering.
  Impact
of inflation
  We are subject to commodity price risks
arising from price fluctuations in the market prices of the raw materials. We
have generally been able to pass on cost increases through price adjustments.
However, the ability to pass on these increases depends on market conditions
influenced by the overall economic conditions in China. We manage our price
risks through productivity improvements and cost-containment measures. We do not
believe that inflation risk is material to our business or our financial
position, results of operations or cash flows.
  64
  Compliance
with environmental laws and regulations
 
 Longmen
Joint Venture:
 
 Since 2002, our joint venture partner,
Long Steel Group, has invested $76 million (RMB 580 million) in a series of
comprehensive projects to reduce its waste emissions of coal gas, water, and
solid waste. In 2005 it received ISO 14001 certification for its overall
environmental management system. Long Steel Group has received several awards
from the Shaanxi provincial government for its increasing effort in
environmental protection.
 
 Long Steel Group has spent more than
$4.3 million (RMB 33 million) on a comprehensive waste water recycling and water
treatment system. The 2,000m3/h
treatment capacity system was implemented at the end of 2005. In the first
quarter of June 30, 2009, new water consumption per metric ton of steel produced
was 1.1 metric ton.
 
 Long Steel Group has one 10,000m3
coke-oven gas tank and one 50,000m3 blast
furnace coal gas tank to collect the residual coal gas produced from its own
facility and that of surrounding enterprises. Long Steel Group also has a
thermal power plant with two 25KW dynamos that uses the residual coal gas from
the blast furnaces and converters as fuel to generate power.
 
 Long Steel Group also has several
plants to further process solid waste generated from the steel making process
into useful products such as construction materials, building blocks, porcelain
tiles, curb tops, ornamental tiles, etc. The plants are capable of processing
400,000 metric tons of solid waste and generate revenue of more than $2.6
million (RMB 20 million) each year.
 
 Daqiuzhuang
Metal:
 
 Based on the equipment, technologies
and measures adopted, Daqiuzhuang Metal is not considered a high-pollutant
factory in China. The production process does not need much water and produces
only a minimal amount of chemical waste. Daqiuzhuang Metal uses gas-fired reheat
furnaces recommended by the State Environmental Protection Agency to heat raw
materials and semi-finished products.
 
 In 2005, Daqiuzhuang County ordered an
environmental clean-up campaign and required harmful waste water discharge to be
reduced. In order to meet these requirements, we invested $94,190 to remodel our
industrial water recycling system to reduce new water consumption and industrial
water discharge.
 
 This wastewater recycling system is
able to process 350 metric tons of wastewater daily. We can realize yearly
savings using this system of approximately $10,000.
  We believe that future costs relating
to environmental compliance will not have a materially adverse effect on the
Company’s financial position. There is always the possibility, however, that
unforeseen changes, such as new laws or enforcement policies, could result in
materially adverse costs.
 
 Off-balance
sheet arrangements
  There were no off-balance sheet
arrangements in the first quarter of 2009.
 
 Critical
Accounting Policies
 
 Management’s discussion and analysis of
its financial condition and results of operations are based upon our
consolidated financial statements, which have been prepared in accordance with
accounting principles generally accepted in the United States. Our financial
statements reflect the selection and application of accounting policies which
require management to make significant estimates and judgments. See Note 2 to
our consolidated financial statements, “Summary of Significant Accounting
Policies.” Management bases its estimates on historical experience and on
various other assumptions that are believed to be reasonable under the
circumstances. Actual results may differ from these estimates under different
assumptions or conditions.
  65
  We believe that the following reflect
the more critical accounting policies that currently affect our financial
condition and results of operations.
 
 Revenue
recognition
 
 The Company's revenue recognition
policies are in accordance with Staff Accounting Bulletin (“SAB”) 104. Sales
revenue is recognized at the date of shipment to customers when a formal
arrangement exists, the price is fixed or determinable, the delivery is
completed, no other significant obligations of the Company exist and
collectability is reasonably assured. Payments received before all of the
relevant criteria for revenue recognition are recorded as customer deposits.
Sales revenue represents the invoiced value of goods, net of value-added tax
(VAT). All of the Company’s products sold in the PRC are subject to a Chinese
value-added tax at a rate of 13% to 17% of the gross sales price. This VAT may
be offset by VAT paid by the Company on raw materials and other materials
included in the cost of producing the finished product.
 
 Use of
estimates
 
 The preparation of financial statements
in conformity with generally accepted accounting principles of the United States
of America requires management to make estimates and assumptions that affect the
amounts reported in the financial statements and accompanying notes. Significant
accounting estimates reflected in the Company’s financial statements include the
useful lives of and impairment for property, plant and equipment, potential
losses on uncollectible receivables and convertible notes. Actual results could
differ from these estimates.
 
 Derivative
Instrument
 
 The Company entered into a Securities
Purchase Agreement (the “Agreement”) with certain institutional investors (the
“Buyers”). Pursuant to the Agreement, the Company agreed to sell to the Buyers
(i) senior convertible notes in the aggregate principal amount of $40,000,000
(“Notes”) and (ii) warrants to purchase an additional aggregate amount of
1,154,958 shares of Common Stock of the Company (the “Warrants”). Both the
Warrants and the conversion option embedded in the Notes meet the definition of
a derivative instrument in SFAS 133, Accounting for Derivative Instruments and
Hedging Activities. Therefore these instruments are accounted for as derivative
liabilities and periodically marked-to-market. The change in the value of the
derivative liabilities is charged against or credited to income.
 
 Financial
instruments
 
 SFAS 107,
“Disclosures about Fair Value of Financial Instruments” defines financial
instruments and requires disclosure of the fair value of financial instruments
held by the Company. The Company considers the carrying amount of cash, accounts
receivable, other receivables, accounts payable and accrued liabilities, to
approximate their fair values because of the short period of time between the
origination of such instruments and their expected realization. For short term
loans and notes payable, the Company concluded the carrying values are a
reasonable estimate of fair value because of the short period of time between
the origination and repayment and their stated interest rate approximates
current rates available.
 
 The
Company also analyzes all financial instruments with features of both
liabilities and equity under SFAS 150, “Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity,” SFAS No 133,
“Accounting for Derivative Instruments and Hedging Activities” and EITF 00-19,
“Accounting for Derivative Financial Instruments Indexed to, and Potentially
Settled in, a Company’s Own Stock.” Additionally, the Company analyzes
registration rights agreements associated with any equity instruments issued to
determine if penalties triggered for late filing should be accrued under FSP
EITF 00-19-2, “Accounting for Registration Payment Arrangements.”
  66
  In
December 2007, the Company issued convertible notes totaling $40,000,000
(“Notes”) and 1,154,958 warrants. Both the warrants and the conversion option
embedded in the Notes meet the definition of a derivative instrument in SFAS
133. Therefore these instruments are accounted for as derivative liabilities and
marked-to-market each reporting period. The change in the value of the
derivative liabilities is charged against or credited to income.
 
 Fair value
measurements
 
 The
Company adopted SFAS 157, “Fair Value Measurements” on January 1, 2008. SFAS 157
defines fair value, establishes a three-level valuation hierarchy for
disclosures of fair value measurement and enhances disclosures requirements for
fair value measures. The three levels are defined as follow:
 
 Level 1   inputs to the
valuation methodology are quoted prices (unadjusted) for identical assets or
liabilities in active markets.
 
 Level 2   inputs to the
valuation methodology include quoted prices for similar assets and liabilities
in active markets, and inputs that are observable for the assets or liability,
either directly or indirectly, for substantially the full term of the financial
instruments.
 
 Level 3   inputs to the
valuation methodology are unobservable and significant to the fair
value.
 
 The
Company’s investment in unconsolidated subsidiaries amounted to $18,909,182 as
of June 30, 2009. Since there is no quoted or observable market price for the
fair value of similar long term investment, the Company then used the level 3
inputs for its valuation methodology. The determination of the fair value was
based on the capital investment that the Company contributed and income from
investment. The carrying value of the long term investments approximated the
fair value as of June 30, 2009.
 
 In 2007,
the conversion option on the $40 million Notes, as well as the 1,154,958
warrants issued in conjunction with the Notes are carried at fair value. The
fair value was determined using the Cox Rubenstein Binomial Model, defined in
SFAS 157 as level 2 inputs, and recorded the change in earnings. As a
result, the derivative liability is carried on the balance sheet at its fair
value.
 
 As of
June 30, 2009, the outstanding principal amounted to $11,550,000, and the
carrying value of the convertible note amounted to $3,049,619. The Company used
Level 3 inputs for its valuation methodology for the convertible note, and their
fair values are determined using cash flows discounted at relevant market
interest rates in effect at the period close since there is no observable market
price. The embedded warrants and conversion feature are valued by using level
two inputs to the Binomial Model and determined that the fair value amounted to
approximately $11.05 million due to the decrease in the Company’s common stock
price.
 
 Noncontrolling
interest
 
 Effective
January 1, 2009, the Company adopted SFAS 160, “Noncontrolling Interests in
Consolidated Financial Statements - an amendment of Accounting Research Bulletin
No. 51” Certain provisions of this statement are required to be adopted
retrospectively for all periods presented. Such provisions include a requirement
that the carrying value of noncontrolling interests (previously referred to as
minority interests) be removed from the mezzanine section of the balance sheet
and reclassified as equity.
 
 Further,
as a result of adoption on SFAS 160, net income attributable to noncontrolling
interests is now excluded from the determination of consolidated net income. In
addition, foreign currency translation adjustment is allocated between
controlling and noncontrolling interests.
  67
  As a
result of adoption of SFAS 160, we reclassified noncontrolling interests in the
amounts of $65.0 million and $54.6 million from the mezzanine section to equity
in the June 30, 2009 and December 31, 2008 balance sheets,
respectively
 
 New
Accounting Pronouncements
 
 In
January 2009, the FASB issued FSP EITF 99-20-1, “Amendments to the Impairment
Guidance of EITF Issue No. 99-20, and EITF Issue No. 99-20, Recognition of
Interest Income and Impairment on Purchased and Retained Beneficial Interests in
Securitized Financial Assets” (“FSP EITF 99-20-1”). FSP EITF 99-20-1 changes the
impairment model included within EITF 99-20 to be more consistent with the
impairment model of SFAS No. 115. FSP EITF 99-20-1 achieves this by amending the
impairment model in EITF 99-20 to remove its exclusive reliance on “market
participant” estimates of future cash flows used in determining fair value.
Changing the cash flows used to analyze other-than-temporary impairment from the
“market participant” view to a holder’s estimate of whether there has been a
“probable” adverse change in estimated cash flows allows companies to apply
reasonable judgment in assessing whether an other-than-temporary impairment has
occurred. The adoption of FSP EITF 99-20-1 did not have a material impact on our
consolidated financial statements.
 
 In April
2009, the FASB issued FSP FAS 157-4, “Determining Fair Value When the Volume and
Level of Activity for the Asset or Liability Have Significantly Decreased and
Identifying Transactions That Are Not Orderly” (FSP FAS 157-4). FSP FAS 157-4
amends SFAS 157 and provides additional guidance for estimating fair value in
accordance with SFAS 157 when the volume and level of activity for the asset or
liability have significantly decreased and also includes guidance on identifying
circumstances that indicate a transaction is not orderly for fair value
measurements. This FSP shall be applied prospectively with retrospective
application not permitted. This FSP shall be effective for interim and annual
periods ending after June 15, 2009, with early adoption permitted for
periods ending after March 15, 2009. An entity early adopting this FSP must
also early adopt FSP FAS 115-2 and FAS 124-2, “Recognition and Presentation of
Other-Than-Temporary Impairments” (FSP FAS 115-2 and FAS 124-2). Additionally,
if an entity elects to early adopt either FSP FAS 107-1 and APB 28-1, “Interim
Disclosures about Fair Value of Financial Instruments” (FSP FAS 107-1 and APB
28-1) or FSP FAS 115-2 and FAS 124-2, it must also elect to early adopt this
FSP. The adoption of FAS 157-4 does not have a significant impact on the
determination or reporting of our financial results.
 
 In April
2009, the FASB issued FSP FAS 115-2 and FAS 124-2. This FSP amends SFAS 115,
“Accounting for Certain Investments in Debt and Equity Securities,” SFAS 124,
“Accounting for Certain Investments Held by Not-for-Profit Organizations,” and
EITF Issue No. 99-20, “Recognition of Interest Income and Impairment on
Purchased Beneficial Interests and Beneficial Interests That Continue to Be Held
by a Transferor in Securitized Financial Assets,” to make the
other-than-temporary impairments guidance more operational and to improve the
presentation of other-than-temporary impairments in the financial statements.
This FSP will replace the existing requirement that the entity’s management
assert it has both the intent and ability to hold an impaired debt security
until recovery with a requirement that management assert it does not have the
intent to sell the security, and it is more likely than not it will not have to
sell the security before recovery of its cost basis. This FSP provides increased
disclosure about the credit and noncredit components of impaired debt securities
that are not expected to be sold and also requires increased and more frequent
disclosures regarding expected cash flows, credit losses, and an aging of
securities with unrealized losses. Although this FSP does not result in a change
in the carrying amount of debt securities, it does require that the portion of
an other-than-temporary impairment not related to a credit loss for a
held-to-maturity security be recognized in a new category of other comprehensive
income and be amortized over the remaining life of the debt security as an
increase in the carrying value of the security. This FSP shall be effective for
interim and annual periods ending after June 15, 2009, with early adoption
permitted for periods ending after March 15, 2009. An entity may early
adopt this FSP only if it also elects to early adopt FSP FAS 157-4. Also, if an
entity elects to early adopt either FSP FAS 157-4 or FSP FAS 107-1 and APB 28-1,
the entity also is required to early adopt this FSP. The adoption of FAS 115-2
and FAS 124-2 do not have a significant impact on the determination or reporting
of our financial results.
  68
  In April
2009, the FASB issued FSP FAS 107-1 and APB 28-1. This FSP amends SFAS
No. 107, “Disclosures about Fair Value of Financial Instruments,” to
require disclosures about fair value of financial instruments not measured on
the balance sheet at fair value in interim financial statements as well as in
annual financial statements. Prior to this FSP, fair values for these assets and
liabilities were only disclosed annually. This FSP applies to all financial
instruments within the scope of SFAS 107 and requires all entities to disclose
the method(s) and significant assumptions used to estimate the fair value of
financial instruments. This FSP shall be effective for interim periods ending
after June 15, 2009, with early adoption permitted for periods ending after
March 15, 2009. An entity may early adopt this FSP only if it also elects
to early adopt FSP FAS 157-4 and FSP FAS 115-2 and FAS 124-2. This FSP does not
require disclosures for earlier periods presented for comparative purposes at
initial adoption. In periods after initial adoption, this FSP requires
comparative disclosures only for periods ending after initial adoption. The
adoption of FAS 107-1 and APB 28-1 do not have a significant impact on the
determination or reporting of our financial results.
 
 In May
2009, the FASB issued Statement of Financial Accounting Standards No.
165,Subsequent Events (“FAS 165”) [ASC 855-10-05], which provides guidance to
establish general standards of accounting for and disclosures of events that
occur after the balance sheet date but before financial statements are issued or
are available to be issued. FAS 165 also requires entities to disclose the date
through which subsequent events were evaluated as well as the rationale for why
that date was selected. FAS 165 is effective for interim and annual periods
ending after June 15, 2009, and accordingly, we adopted this Standard during the
second quarter of 2009. FAS 165 requires that public entities evaluate
subsequent events through the date that the financial statements are
issued.
 
 In June
2009, the FASB issued Statement No. 166, Accounting for Transfers of Financial
Assets – an amendment of FASB No. 140 (“FAS 140”), Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities (“FAS 166”).
FAS 166 amends the criteria for a transfer of a financial asset to be accounted
for as a sale, redefines a participating interest for transfers of portions of
financial assets, eliminates the qualifying special-purpose entity concept and
provides for new disclosures. FAS 166 is effective for the Company beginning in
2010. Should the Company’s accounts receivable securitization programs not
qualify for sale treatment under the revised rules, future securitization
transactions entered into on or after January 1, 2010 would be classified as
debt and the related cash flows would be reflected as a financing activity. We
do not believe that it will have a significant impact on the determination or
reporting of our financial results.
  In June
2009, the FASB issued Statement No. 167, Amendments to FASB Interpretation No.
46(R) (“FAS 167”). FAS 167 amends the consolidation guidance for variable
interest entities (“VIE”) by requiring an on-going  qualitative assessment
of which entity has the power to direct matters that most significantly impact
the activities of a VIE and has the obligation to absorb losses or benefits that
could be potentially significant to the VIE. FAS 167 is effective for the
Company beginning in 2010. We do not believe that it will have a significant
impact on the determination or reporting of our financial results.
 
 Contractual
obligations and commercial commitments
  We have certain fixed contractual
obligations and commitments that include future estimated payments. Changes in
our business needs, cancellation provisions, changing interest rates, and other
factors may result in actual payments differing from the estimates. We cannot
provide certainty regarding the timing and amounts of payments. We have
presented below a summary of the most significant assumptions used in our
determination of amounts presented in the tables, in order to assist in the
review of this information within the context of our consolidated financial
position, results of operations, and cash flows.
  69
  The following tables summarize our
contractual obligations as of June 30, 2009, and the effect these obligations
are expected to have on our liquidity and cash flows in future
periods.
 
 Payment
      due by periodLess
      thanContractual
      obligations
                                                        
                                                        Total
                                                        
                                                        
                                                        1
      year
                                                        
                                                        
                                                        1-3
      years
                                                        
                                                        
                                                        4-
      5 yearsDollars
      amounts in thousandsBank
      loans (1)
                                                        
                                                        $
                                                        97,197
                                                        
                                                        
                                                        $
                                                        97,197
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        $Notes
      payable
                                                        
                                                        
                                                        274,014
                                                        
                                                        
                                                        
                                                        274,014Deposits
      due to sales representatives
                                                        
                                                        
                                                        40,056
                                                        
                                                        
                                                        
                                                        40,056Lease
      with Bao Gang
                                                        
                                                        
                                                        792
                                                        
                                                        
                                                        
                                                        264
                                                        
                                                        
                                                        
                                                        528Blast
      Furnace construction
                                                        
                                                        
                                                        18,033
                                                        
                                                        
                                                        
                                                        18,033Convertible
      notes ( Principal plus Interest )
                                                        
                                                        
                                                        14,933
                                                        
                                                        
                                                        
                                                        703
                                                        
                                                        
                                                        
                                                        2,151
                                                        
                                                        
                                                        
                                                        12,079Total
                                                        
                                                        $
                                                        445,025
                                                        
                                                        
                                                        $
                                                        430,267
                                                        
                                                        
                                                        $
                                                        2,679
                                                        
                                                        
                                                        $
                                                        12,079
  (1) Bank
loans in China are due on demand or normally within one year. These loans can be
renewed with the banks. This amount includes estimated interest payments as well
as debt maturities.
 
 ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
 Commodity
Price Risk and Related Risks
 
 In the
normal course of our business, we are exposed to market risk or price
fluctuations related to the purchase, production or sale of steel products over
which we have little or no control. We do not use any derivative commodity
instruments to manage the price risk. Our market risk strategy has generally
been to obtain competitive prices for our products and allow operating results
to reflect market price movements dictated by supply and demand. Based upon an
assumed 2009 annual production capacity of 6.3 million metric tons, a $1 change
in the annual average price would change annual pre-tax profits by approximately
$6.3 million.
 
 Interest
Rate Risk
 
 We are
subject to interest rate risk since our outstanding debts are short-term and
bear interest at variable interest rates. The future interest expense would
fluctuate in case of any change in the borrowing rates. We do not use swaps or
other interest rate protection agreements to hedge this risk. We believe our
exposure to interest rate risk is not material.
  Foreign
Currency Exchange Rate Risk
 
 Our
operating units, Daqiuzhuang Metal, Longmen Joint Venture and Baotou Steel Pipe
Joint Venture and Maoming, are all located in China. They produce and sell all
of their products domestically in the P.R.C. They are subject to the
foreign currency exchange rate risks due to the effects of fluctuations in the
Chinese Renminbi on revenues and operating costs and existing assets or
liabilities. We have not generally used derivative instruments to manage this
risk. Generally, a ten percent (10%) decrease in Renminbi exchange rate would
result in a $0.5 million decrease to income.
 
 ITEM
4. CONTROLS AND PROCEDURES
  Disclosure
Controls and Procedures
  We
maintain disclosure controls and procedures designed to ensure that information
required to be disclosed in reports filed under the Securities Exchange Act of
1934, as amended, is recorded, processed, summarized and reported within the
specified time periods, and that such information is accumulated and
communicated to management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions regarding required
disclosure.
  70
  Our
management, with the participation of our Chief Executive Officer and our Chief
Financial Officer, evaluated the effectiveness of our disclosure controls and
procedures (as defined in the Securities Exchange Act of 1934
Rules 13a-15(e) or 15d-15(e)) as of the end of the period covered by this
Quarterly Report on Form 10-Q. Based on that evaluation, our Chief Executive
Officer and Chief Financial Officer concluded that, as of that date, our
disclosure controls and procedures were not effective at the reasonable
assurance level because of the identification of material weaknesses in our
internal control over financial reporting discussed below, which we view as an
integral part of our disclosure controls and procedures.
  Internal
Control Over Financial Reporting
  As
discussed in our Annual Report on Form 10-K for the fiscal year
ended December 31, 2008, we identified the following material
weaknesses in our internal controls over accounting:
  Insufficient personnel with
appropriate accounting knowledge and training.We did not maintain a
sufficient complement of personnel with an appropriate level of accounting
knowledge, experience, and training in the application of generally accepted
accounting principles commensurate with financial reporting requirements and did
not implement adequate supervisory review to ensure the financial statements
at the subsidiary level were prepared in conformity with generally accepted
accounting principles in the United States of America.  This material
weakness resulted in audit adjustments that corrected interest capitalization,
raw material reserves and long term investment in the consolidated financial
statements for the year ended December 31, 2008.
 
 Incomplete related party transaction
identification.We did not design and maintain effective controls to
identify related party and intercompany transactions, which resulted in material
adjustments for intercompany transactions and disclosures of related party
transactions in the consolidated financial statements for the year ended
December 31, 2008.
  These
deficiencies could result in misstatements of the aforementioned accounts and
disclosures that would result in a material misstatement to the annual or
interim consolidated financial statements that would not be prevented or
detected. Accordingly, management has determined this control deficiency
constitutes a material weakness.
 
 We are
continuing to build our accounting resources and implement  related party
transaction review processes in response to the weaknesses. While we continue to
develop and implement new control processes and procedures to address these
weaknesses, we have determined that further improvements are required in
our accounting processes before we can consider the material weakness
remediated.
 Changes
in Internal Control Over Financial Reporting
 
 Other
than the remediation efforts described below, there have been no changes in our
internal control over financial reporting that have materially affected, or are
likely to materially affect, our internal control over financial
reporting.
  We
continue to undertake steps to strengthen our controls over accounting,
including:
  l
              Increasing
      preparation and review on related party
  transactions
  l
              Hiring
      more staff accountants who have appropriate knowledge about the U.S.
      financial reporting requirements
  l
              Enhancing
      job responsibilities and procedures for staff at all
  levels
  l
              Strengthening
      communications between senior management and subsidiary level
      management
 
 Our
material weaknesses in controls over accounting will not be considered
remediated until new internal controls are operational for a period of time and
are tested, and management and our independent registered public accounting firm
conclude that these controls are operating effectively. Due to the nature of and
time necessary to effectively remediate the material weaknesses identified to
date, we have concluded that material weaknesses in our internal control over
reclassification and elimination of related party transactions continues to
exist as of June 30, 2009.
  71
 
 PART II – OTHER
INFORMATION
 
 ITEM
1. LEGAL PROCEEDINGS
 
 From time
to time, we are subject to certain legal proceedings, claims and disputes that
arise in the ordinary course of our business. Although we cannot predict the
outcomes of these legal prceedings, we do not believe these actions; in the
aggregate will have a material adverse impact on our financial position, results
of operations or liquidity.
 
 ITEM
1A. RISK FACTORS
  Our
business, financial condition and results of operations are subject to various
risks, including those discussed below, which may affect the value of our
securities.
 
 Risks
Related to Our Business
 
 We
face substantial competition which, among other things, may lead to price
pressure and adversely affect our sales.
 
 We
compete with other market players on the basis of product quality,
responsiveness to customer needs and price. There are two types of steel and
iron companies in China: state-owned enterprises and privately owned
companies.
 
 Criteria
important to our customers when selecting a steel supplier include:
 
 ·
Quality;
 
 · Price/cost
competitiveness;
  ·System and product
performance;
 
 · Reliability and
timeliness of delivery;
 
 · New product and
technology development capability;
 
 · Excellence and
flexibility in operations;
 
 · Degree of global
and local presence;
 
 · Effectiveness of
customer service; and
 
 · Overall management
capability.
  We
compete with both SOEs and privately owned steel manufacturers. While we believe
that our price and quality are superior to other manufacturers, many of our
competitors are better capitalized, more experienced, and have deeper ties in
the Chinese marketplace. We consider there to be the following ten major
competitors of similar size, production capability and product line in the
market place competing against our four operating subsidiaries as
indicated:
 
 · Competitors of
Daqiuzhuang Metal include: Tianjin No. 1 Rolling Steel Plant, Tianjin Yinze
Metal Sheet Plant and Tangshan Fengrun Metal Sheet Plant;
  72
  · Competitors of
Longmen Joint Venture include: Shanxi Haixin Iron and Steel Co., Ltd. and Gansu
Jiuquan Iron and Steel Co., Ltd.;
 
 · Competitors of
Baotou Steel Pipe Joint Venture include: Tianjin Bo Ai Steel Pipe Co., Hebei
Cangzhou Zhong Yuan Steel Pipe Co., and Shanxi Taiyuan Guo Lian Steel Pipe Co.;
and
  ·Competitors of Maoming include:
Guangdong Shao Guan Iron and Steel Group and Zhuhai Yue Yu Feng Iron and Steel
Co., Ltd.
 
 In
addition, with China’s entry into the World Trade Organization and China’s
agreements to lift many of the barriers to foreign competition, we believe that
competition will increase as a whole with the entry of foreign companies into
this market. This may limit our opportunities for growth, lead to price pressure
and reduce our profitability. We may not be able to compete favorably and this
increased competition may harm our business, our business prospects and results
of operations.
 
 Our
limited operating history may not serve as an adequate basis to judge our future
prospects and results of operations.
 
 Our
limited operating history may not provide a meaningful basis on which to
evaluate our business. Although our revenues have grown rapidly since inception,
we might not be able to maintain our profitability or we may incur net losses in
the future. We expect that our operating expenses will increase as we expand.
Any significant failure to realize anticipated revenue growth could result in
significant operating losses. We will continue to encounter risks and
difficulties frequently experienced by companies at a similar stage of
development, including our potential failure to:
 
 · Implement our
business model and strategy and adapt and modify them as needed;
 
 · Increase awareness
of our brands, protect our reputation and develop customer loyalty;
 
 ·Manage our expanding operations
and service offerings, including the integration of any future
acquisitions;
  · Maintain
adequate control of our expenses;
 
 · Anticipate and
adapt to changing conditions in the markets in which we operate as well as the
impact of any changes in government regulation; and
 
 · Anticipate
mergers and acquisitions, technological developments and other significant
competitive and market dynamics involving our competitors. Our business,
business prospects and results of operations will be affected if we are not
successful in addressing any or all of these risks and
difficulties.
 
 Our
inability to fund our capital expenditure requirements may adversely affect our
growth and profitability.
 
 Our
continued growth is dependent upon our ability to raise additional capital from
outside sources. Our strategy is to grow through aggressive mergers, joint
ventures and acquisitions targeting SOE steel companies and selected entities
with outstanding potential. Our growth strategy will require us to obtain
additional financing through capital markets. In the future, we may be unable to
obtain the necessary financing on a timely basis and on favorable terms, and our
failure to do so may weaken our financial position, reduce our competitiveness,
limit our growth and reduce our profitability. Our ability to obtain acceptable
financing at any given time may depend on a number of factors,
including:
  73
  · Our financial
condition and results of operations;
  · The condition of
the Chinese economy and the industry sectors in which we operate;
and
 
 · Conditions in
relevant financial markets in the United States, China and elsewhere in the
world.
 
 Disruptions in world financial markets
and the resulting governmental action of the United States and other countries
could have a material adverse impact on our ability to obtain financing, our
results of operations, financial condition and cash flows and could cause the
market price of our common shares to decline.
  The current deep and potentially
prolonged global recession that officially began in the United States in
December 2007 has, since the beginning of the third quarter of 2008, had a
material adverse effect on demand for our products and consequently the results
of our operations, financial condition and cash flows. In mid-February 2009, the
Federal Reserve warned that the United States economy faces an “unusually
gradual and prolonged” period of recovery from this deep and recessionary
period.
 
 The credit markets worldwide and in the
United States have experienced significant contraction, de-leveraging and
reduced liquidity, and the United States government and foreign governments have
either implemented or are considering a broad variety of governmental action
and/or new regulation of the financial markets. Securities and futures markets
and the credit markets are subject to comprehensive statutes, regulations and
other requirements.
 
 The uncertainty surrounding the future
of the global credit markets has resulted in reduced access to credit worldwide.
Major market disruptions and the current adverse changes in global market
conditions, and the regulatory climate in the United States and worldwide, may
adversely affect our business or impair our ability to borrow funds as needed.
The current market conditions may last longer than we anticipate. These recent
and developing economic and governmental factors may have a material adverse
effect on our results of operations, financial condition or cash flows and could
cause the price of our common stock to decline significantly.
 
 We have made and may continue to make
acquisitions which could divert management's attention, cause ownership dilution
to our stockholders, or be difficult to integrate, which may adversely affect
our financial results.
 
 We have made several acquisitions, and
it is our current plan to continue to acquire companies and technologies that we
believe are strategic to our future business. Integrating newly acquired
businesses or technologies could put a strain on our resources, could be costly
and time consuming, and might not be successful. Such acquisitions could divert
our management's attention from other business concerns. In addition, we might
lose key employees while integrating new organizations. Acquisitions could also
result in customer dissatisfaction, performance problems with an acquired
company or technology, potentially dilutive issuances of equity securities or
the incurrence of debt, the assumption or incurrence of contingent liabilities,
possible impairment charges related to goodwill or other intangible assets or
other unanticipated events or circumstances, any of which could harm our
business. We might not be successful in integrating any acquired businesses,
products or technologies, and might not achieve anticipated revenues and cost
benefits.
 
 We
may not be able to effectively control and manage our growth.
 
 If our
business and markets grow and develop, it will be necessary for us to finance
and manage such an expansion in an orderly fashion. This growth will lead to an
increase in the responsibilities of existing personnel, the hiring of additional
personnel and expansion of our scope of operations. It is possible that we may
not be able to obtain the required financing under terms that are acceptable to
us or hire additional personnel to meet the needs of our expansion.
  74
  Our
business, revenues and profitability are dependent on a limited number of large
customers.
 
 Our
revenue is dependent, in large part, on significant contracts with a limited
number of large customers. On June 30, 2009, approximately 13.4% of our sales
were to five customers and these customers accounted for 0% of total account
receivables.  We believe that revenue derived from our current and future
large customers will continue to represent a significant portion of our total
revenue. Our inability to continue to secure and maintain a sufficient number of
large contracts or the loss of, or significant reduction in purchases by, one or
more of our major customers would have the effect of reducing our revenues and
profitability.
 
 Moreover,
our success will depend in part upon our ability to obtain orders from new
customers, as well as the financial condition and success of our customers and
general economic conditions in China.
 
 Steel
consumption is cyclical and worldwide overcapacity in the steel industry and the
availability of alternative products have resulted in intense competition, which
may have an adverse effect on profitability and cash flow.
 
 Steel consumption is highly cyclical
and follows general economic and industrial conditions both worldwide and in
regional markets. The steel industry has historically been characterized by
excess world supply, which has led to substantial price decreases during periods
of economic weakness. Future economic downturns could decrease the demand for
our products. Substitute materials are increasingly available for many steel
products, which further reduces demand for steel.
  We
may not be able to pass on to customers the increases in the costs of our raw
materials, particularly iron ore and steel coil.
 
 The major
raw materials that we purchase for production are iron ore and steel coil. The
price and availability of these raw materials are subject to market conditions
affecting supply and demand. Our financial condition or results of operations
may be impaired by further increases in raw material costs to the extent we are
unable to pass those increases to our customers. In addition, if these materials
are not available on a timely basis or at all, we may not be able to produce our
products and our sales may decline.
 
 The
price of steel may decline due to an overproduction by Chinese steel
companies.
 
 According
to the survey conducted by the China Iron and Steel Association, there are
approximately 1000 steel companies in China. Among those, approximately 25
companies have over 5 million metric tons of crude steel production capacity.
Each steel company has its own production plan. The Chinese government posted
this guidance on the steel industry to encourage consolidation within the
fragmented steel sector to mitigate problems of low-end repetitive production
and inefficient use of resources. The current situation of overproduction may
not be solved by these measures posted by the Chinese government and result in
consolidation within the fragmented steel sector. If the current state of
overproduction continues, our product shipments could decline, our inventory
could build up and eventually we may be required to decrease our sales price,
which may eventually decrease our profitability.
  Disruptions
to our manufacturing processes could adversely affect our operations, customer
service and financial results.
  Steel
manufacturing processes are dependent on critical steel-making equipment, such
as furnaces, continuous casters, rolling mills and electrical equipment (such as
transformers), and such equipment may incur downtime as a result of
unanticipated malfunctions or other events, such as fires or furnace breakdowns.
Although our manufacturing plants have not experienced plant shutdowns or
periods of reduced production as a result of such equipment failures or other
events, we may experience such problems in the future. To the extent that lost
production as a result of such a disruption could not be recovered by unaffected
facilities, such disruptions could have an adverse effect on our operations,
customer service and financial results.
  75
  Because
we are a holding company with substantially all of our operations conducted
through our subsidiaries, our performance will be affected by the performance of
our subsidiaries.
 
 We have
no operations independent of those of Daqiuzhuang Metal, Baotou Steel Pipe Joint
Venture, Longmen Joint Venture and Maoming and our principal assets are our
investments in these subsidiaries. As a result, we are dependent upon the
performance of Daqiuzhuang Metal, Baotou Steel Pipe Joint Venture, Longmen Joint
Venture and Maoming and we will be subject to the financial, business and other
factors affecting our subsidiaries as well as general economic and financial
conditions. As substantially all of our operations are and will be conducted
through our subsidiaries, we will be dependent on the cash flow of our
subsidiaries to meet our obligations.
 
 Because
virtually all of our assets are and will be held by operating subsidiaries, the
claims of our stockholders will be structurally subordinate to all existing and
future liabilities and obligations, and trade payables of such subsidiaries. In
the event of our bankruptcy, liquidation or reorganization, our assets and those
of our subsidiaries will be available to satisfy the claims of our stockholders
only after all of our subsidiaries’ liabilities and obligations have been paid
in full.
  We
depend on acquiring companies to fulfill our growth plan.
 
 An
important element of our planned growth strategy is the pursuit and acquisitions
of other businesses that increase our existing production capacity. However,
acquiring and integrating businesses involves a number of special risks,
including the possibility that management may be distracted from regular
business concerns by the need to integrate operations, unforeseen difficulties
in integrating operations and systems, problems relating to assimilating and
retaining employees of the acquired businesses, challenges in retaining
customers, and potential adverse short-term effects on operation results. If we
are unable to successfully complete and integrate strategic acquisitions in a
timely manner, our growth strategy may be adversely impacted.
 
 We
depend on bank financing for our working capital needs.
 
 We have
various financing facilities which are due on demand or within one year.So far, we have not
experienced any difficulties in repaying such financing facilities. However, we
may in the future encounter difficulties to repay or refinance such loans on
time and may face severe difficulties in our operations and financial
position.
 
 We
rely on Mr. Zuosheng Yu for important business leadership.
 
 We
depend, to a large extent, on the abilities and operations of our current
management team. However, we have a particular reliance upon Mr. Zuosheng Yu,
our Chairman, Chief Executive Officer and majority shareholder, for the
direction of our business and leadership in our growth effort. The loss of the
services of Mr. Yu, for any reason, may have a material adverse effect on our
business and prospects. We cannot guarantee that Mr. Yu will continue to be
available to us, or that we will be able to find a suitable replacement for Mr.
Yu on a timely basis.
  76
  There
have been historical deficiencies with our internal controls which require
further improvements, and we are exposed to potential risks from legislation
requiring companies to evaluate controls under Section 404 of the Sarbanes-Oxley
Act of 2002.
 
 While we
believe that we currently have adequate internal control procedures in place, we
are still exposed to potential risks from legislation requiring companies to
evaluate controls under Section 404 of the Sarbanes-Oxley Act of 2002. Under the
supervision and with the participation of our management, we have evaluated our
internal controls systems in order to allow management to report on, and our
registered independent public accounting firm to attest to, our internal
controls, as required by Section 404 of the Sarbanes-Oxley Act. We have
performed the system and process evaluation and testing required in an effort to
comply with the management certification and auditor attestation requirements of
Section 404. As a result, we have incurred additional expenses and a diversion
of management’s time. If we are not able to continue to meet the requirements of
Section 404 in a timely manner or with adequate compliance, we might be subject
to sanctions or investigation by regulatory authorities, such as the SEC or the
NYSE Market. Any such action could adversely affect our financial results and
the market price of our stock.
  We
do not presently maintain product liability insurance in China, and our property
and equipment insurance does not cover the full value of our property and
equipment, which leaves us with exposure in the event of loss or damage to our
properties or claims filed against us.
 
 We
currently do not carry any product liability or other similar insurance in
China. We cannot assure you that we would not face liability in the event of the
failure of any of our products.
 
 We have
purchased automobile insurance with third party liability coverage for our
vehicles. In addition, we have purchased property insurance from China United
Property Insurance Company to cover real property and plant. Except for property
and automobile insurance, we do not have other insurance such as business
liability or disruption insurance coverage for our operations in China. In the
event of a significant product liability claim or other uninsured event, our
financial results and the price of our common stock may be adversely
affected.
 
 Risks
Related to Operating Our Business in China
 
 We
face the risk that changes in the policies of the Chinese government could have
significant impact upon the business we may be able to conduct in China and the
profitability of such business.
 
 The
economy of China is transitioning from a planned economy to a market oriented
economy subject to five-year and annual plans adopted by the government that set
down national economic development goals. Policies of the Chinese government can
have significant effects on the economic conditions of China. The Chinese
government has confirmed that economic development will follow a model of market
economy under socialism. Under this direction, we believe that China will
continue to strengthen its economic and trading relationships with foreign
countries and business development in China will follow market forces. While we
believe that this trend will continue, there can be no assurance that such will
be the case. A change in policies by the Chinese government could adversely
affect our interests through, among other factors: changes in laws, regulations
or the interpretation thereof; confiscatory taxation; restrictions on currency
conversion, imports or sources of supplies; or the expropriation or
nationalization of private enterprises. Although the Chinese government has been
pursuing economic reform policies for approximately two decades, the Chinese
government may significantly alter such policies, especially in the event of a
change in leadership, social or political disruption, or other circumstances
affecting China’s political, economic and social life.
  77
  The
Chinese laws and regulations governing our current business operations and
contractual arrangements are uncertain, and if we are found to be in violation,
we could be subject to sanctions. In addition, any changes in such Chinese laws
and regulations may have a material and adverse effect on our
business.
  There are
substantial uncertainties regarding the interpretation and application of
Chinese laws and regulations, including but not limited to the laws and
regulations governing our business, or the enforcement and performance of our
arrangements with customers in the event of the imposition of statutory liens,
death, bankruptcy and criminal proceedings. Along with our subsidiaries, we are
considered foreign persons or foreign funded enterprises under Chinese laws, and
as a result, we are required to comply with Chinese laws and regulations. These
laws and regulations are relatively new and may be subject to future changes,
and their official interpretation and enforcement may involve substantial
uncertainty. The effectiveness of newly enacted laws, regulations or amendments
may be delayed, resulting in detrimental reliance by foreign investors. New laws
and regulations that affect existing and proposed future businesses may also be
applied retroactively. In addition, the Chinese authorities retain broad
discretion in dealing with violations of laws and regulations, including levying
fines, revoking business licenses and requiring actions necessary for
compliance. In particular, licenses, permits and beneficial treatment issued or
granted to us by relevant governmental bodies may be revoked at a later time
under contrary findings of higher regulatory bodies. We cannot predict what
effect the interpretation of existing or new Chinese laws or regulations may
have on our businesses. We may be subject to sanctions, including fines, and
could be required to restructure our operations. Such restructuring may not be
deemed effective or encounter similar or other difficulties. As a result of
these substantial uncertainties, there is a risk that we may be found in
violation of any current or future Chinese laws or regulations.
 
 A
slowdown or other adverse developments in the Chinese economy may materially and
adversely affect our customers, demand for our services and our
business.
 
 All of
our operations are conducted in China and all of our revenues are generated from
sales to businesses operating in China. Although the Chinese economy has grown
significantly in recent years, such growth may not continue. We do not know how
sensitive we are to a slowdown in economic growth or other adverse changes in
the Chinese economy which may affect demand for our products. A slowdown in
overall economic growth, an economic downturn or recession or other adverse
economic developments in China may materially reduce the demand for our products
and in turn adversely affect our results of operations and our
productivity.
  Inflation
in China could negatively affect our profitability and growth.
 
 While the
Chinese economy has experienced rapid growth, such growth has been uneven among
various sectors of the economy and in different geographical areas of the
country. Rapid economic growth can lead to growth in the money supply and rising
inflation. If prices for our products rise at a rate that is insufficient to
compensate for the rise in the costs of supplies, it may have an adverse effect
on profitability. In order to control inflation in the past, the Chinese
government has imposed controls on bank credits, limits on loans for fixed
assets and restrictions on state bank lending. Such an austerity policy can lead
to a slowing of economic growth.
 
 If
relations between the United States and China deteriorate, our stock price may
decrease and we may experience difficulties accessing the United States capital
markets.
 
 At
various times during recent years, the United States and China have had
disagreements over political and economic issues. Controversies may arise in the
future between these two countries. Any political or trade controversies between
the United States and China could impact the market price of our common stock
and our ability to access United States capital markets.
 
 The
Chinese Government could change its policies toward private enterprises, which
could result in the total loss of our investments in China.
 
 Our
business is subject to political and economic uncertainties in China and may be
adversely affected by its political, economic and social developments. Over the
past several years, the Chinese government has pursued economic reform policies
including the encouragement of private economic activity and greater economic
decentralization. The Chinese government may not continue to pursue these
policies or may alter them to our detriment from time to time. Conducting our
business might become more difficult or costly due to changes in policies, laws
and regulations, or in their interpretation or the imposition of confiscatory
taxation, restrictions on currency conversion, restrictions or prohibitions on
dividend payments to stockholders, devaluations of currency or the
nationalization or other expropriation of private enterprises. In addition,
nationalization or expropriation could result in the total loss of our
investments in China.
  78
  The
Chinese State Administration of Foreign Exchange, or SAFE, requires Chinese
residents to register with, or obtain approval from SAFE regarding their direct
or indirect offshore investment activities.
 
 China’s
State Administration of Foreign Exchange Regulations regarding offshore
financing activities by Chinese residents has undertaken continuous changes
which may increase the administrative burden we face and create regulatory
uncertainties that could adversely affect the implementation of our acquisition
strategy. A failure by our shareholders who are Chinese residents to make any
required applications and filings pursuant to such regulations may prevent us
from being able to distribute profits and could expose us and our Chinese
resident shareholders to liability under Chinese law.
  Our
business, results of operations and overall profitability are linked to the
economic, political and social conditions in China.
 
 All of
our business, assets and operations are located in China. The economy of China
differs from the economies of most developed countries in many respects,
including government involvement, level of development, growth rate, control of
foreign exchange, and allocation of resources. The economy of China has been
transitioning from a planned economy to a more market-oriented economy. Although
the Chinese government has implemented measures recently emphasizing the
utilization of market forces for economic reform, the reduction of state
ownership of productive assets and the establishment of sound corporate
governance in business enterprises, a substantial portion of productive assets
in China is still owned by the Chinese government. In addition, the Chinese
government continues to play a significant role in regulating industry by
imposing industrial policies. It also exercises significant control over China’s
economic growth through the allocation of resources, controlling payment of
foreign currency denominated obligations, setting monetary policy and providing
preferential treatment to particular industries or companies. Therefore, the
Chinese government’s involvement in the economy may negatively affect our
business operations, results of operations and our financial
condition.
 
 Governmental
control of currency conversion may cause the value of your investment in our
common stock to decrease.
 
 The
Chinese government imposes controls on the convertibility of Renminbi into
foreign currencies and, in certain cases, the remittance of currency out of
China. We receive substantially all of our revenues in Renminbi, which is
currently not a freely convertible currency. Shortages in the availability of
foreign currency may restrict our ability to remit sufficient foreign currency
to pay dividends, or otherwise satisfy foreign currency denominated obligations.
Under existing Chinese foreign exchange regulations, payments of current account
items, including profit distributions, interest payments and expenditures from
the transaction, can be made in foreign currencies without prior approval from
China’s State Administration of Foreign Exchange by complying with certain
procedural requirements. However, approval from appropriate governmental
authorities is required where Renminbi is to be converted into foreign currency
and remitted out of China to pay capital expenses such as the repayment of bank
loans denominated in foreign currencies.
 
 The
Chinese government may also at its discretion restrict access in the future to
foreign currencies for current account transactions. If the foreign exchange
control system prevents us from obtaining sufficient foreign currency to satisfy
our currency demands, we may not be able to pay certain of our expenses as they
come due.
  79
  The
fluctuation of the Renminbi may cause the value of your investment in our common
stock to decrease.
 
 The value
of the Renminbi against the U.S. dollar and other currencies may fluctuate and
is affected by, among other things, changes in China’s political and economic
conditions. As we rely entirely on revenues earned in China, our cash flows,
revenues and financial condition will be affected by any significant revaluation
of the Renminbi. For example, to the extent that we need to convert U.S. dollars
we receive from an offering of our securities into Renminbi for our operations,
if the Renminbi appreciates against the U.S. dollar, the Renminbi equivalent of
the US dollar we convert would be reduced. Conversely, if we decide to convert
our Renminbi into U.S. dollars for the purpose of making payments for dividends
on our common shares or for other business purposes and the U.S. dollar
appreciates against the Renminbi, the U.S. dollar equivalent of the Renminbi we
convert would be reduced. To date, however, we have not engaged in transactions
of either type. In addition, the depreciation of significant U.S. dollar
denominated assets could result in a charge to our income statement and a
reduction in the value of these assets.
 
 Since
1994, China pegged the value of the Renminbi to the U.S. dollar. We do not
believe that this policy has affected our business. However, there have been
indications that the Chinese government may be reconsidering its monetary policy
in light of the overall devaluation of the U.S. dollar against the Euro and
other currencies during the last two years. In July 2005, the Chinese government
revalued the Renminbi by 2.1% against the U.S. dollar, moving from Renminbi 8.28
to Renminbi 8.11 per dollar. If the pegging of the Renminbi to the U.S. dollar
is loosened, we anticipate that the value of the Renminbi will appreciate
against the dollar with the consequences discussed above. As of June 30, 2009,
the exchange rate of the Renminbi to the U.S. dollar was 6.83 yuan to 1
dollar.
  We
are subject to environmental and safety regulations, which may increase our
compliance costs and reduce our overall profitability.
 
 We are
subject to the requirements of environmental and occupational safety and health
laws and regulations in China. We may incur substantial costs or liabilities in
connection with these requirements. Additionally, these regulations may become
stricter, which will increase our costs of compliance in a manner that could
reduce our overall profitability. The capital requirements and other
expenditures that may be necessary to comply with environmental requirements
could increase and become a significant expense linked to the conduct of our
business.
 
 Our
operating subsidiaries must comply with environmental protection laws that could
adversely affect our profitability.
 
 We are
required to comply with the environmental protection laws and regulations
promulgated by the national and local governments of China. Yearly inspections
of waste treatment systems require the payment of a license fee which could
become a penalty fee if standards are not maintained. If we fail to comply with
any of these environmental laws and regulations in China, depending on the types
and seriousness of the violation, we may be subject to, among other things,
warning from relevant authorities, imposition of fines, specific performance
and/or criminal liability, forfeiture of profits made, being ordered to close
down our business operations and suspension of relevant permits.
 
 Because
the Chinese legal system is not fully developed, our legal protections may be
limited.
 
 The
Chinese legal system is based upon written statutes. Prior court decisions may
be cited for reference but are not binding on subsequent cases and have limited
value as precedents. Since 1979, China’s legislative bodies have promulgated
laws and regulations dealing with economic matters such as foreign investment,
corporate organization and governance, commerce, taxation and trade. However,
China has not developed a fully integrated legal system and the array of new
laws and regulations may not be sufficient to cover all aspects of economic
activities in China. In particular, because these laws and regulations are
relatively new, and because of the limited volume of published decisions and
their non-binding nature, the interpretation and enforcement of these laws and
regulations involve uncertainties. In addition, published government policies
and internal rules may have retroactive effects and, in some cases, the policies
and rules are not published at all. As a result, we may be unaware of our
violation of these policies and rules until some time later. The laws of China
govern our contractual arrangements with our affiliated entities. The
enforcement of these contracts and the interpretation of the laws governing
these relationships are subject to uncertainty. For the above reasons, legal
compliance in China may be more difficult or expensive.
  80
  Risks
Related to Our Common Stock
 
 Our
officers, directors and affiliates control us through their positions and stock
ownership and their interests may differ from other stockholders.
 
 Our
officers, directors and affiliates beneficially own approximately 60% of our
common stock. Mr. Zuosheng Yu, our major shareholder, beneficially owns
approximately 58% of our common stock. Mr. Yu can effectively control us and his
interests may differ from other stockholders.
 
 All our
subsidiaries are located in China and substantially all of our assets are
located outside the United States. It may therefore be difficult for investors
in the United States to enforce their legal rights based on the civil liability
provisions of the U.S. federal securities laws against us in the courts of
either the United States and China and, even if civil judgments are obtained in
United States courts, such judgments may not be enforceable in Chinese courts.
All our directors and officers reside outside of the United States. It is
unclear if extradition treaties now in effect between the United States and
China would permit effective enforcement against us or our officers and
directors of criminal penalties under the U.S. federal securities laws or
otherwise.
  We
have never paid cash dividends and are not likely to do so in the foreseeable
future.
 
 We
currently intend to retain any future earnings for use in the operation and
expansion of our business. We do not expect to pay any cash dividends in the
foreseeable future but will review this policy as circumstances
dictate.
 
 Our
common stock is subject to price volatility unrelated to our
operations.
 
 The
market price of our common stock could fluctuate substantially due to a variety
of factors, including market perception of our ability to achieve our planned
growth, quarterly operating results of other steel makers, trading volume in our
common stock, changes in general conditions in the economy and the financial
markets or other developments affecting our competitors or us. In addition, the
stock market is subject to extreme price and volume fluctuations. This
volatility has had a significant effect on the market price of securities issued
by many companies for reasons unrelated to their operating performance and could
have the same effect on our common stock.
 
 Investors
may experience dilution from any conversion of the senior convertible notes and
the exercise of warrants we issued in December 2007.
  We
registered the shares of our common stock issuable upon conversion of
approximately $40,000,000 worth of senior convertible notes convertible into
4,170,009 shares of our common stock with a conversion price of $12.47 per share
and applicable interest rates and upon the exercise of warrants to purchase an
additional aggregate amount of 1,154,958 shares of our common stock at an
exercise price of $13.51 per share, both issued in December 2007. The issuance
of shares of our common stock upon  conversion of the notes and
exercise of the warrants will dilute current shareholders’ holdings in our
company. The senior convertible notes have a five year term through December 12,
2012, and the warrants are exercisable from May 13, 2008, to May 13, 2013. The
conversion price was reset to $4.2511 to the Market Price on May 7,
2009  because the conversion price was higher than the Market Price
pursuant to the notes and warrants agreements. Market Price means, for any given
date, the lower of (x) the arithmetic average of the Weighted Average Price of
the Common Stock for the thirty (30) consecutive Trading Day period ending on
the Trading Day immediately preceding such date and (y) the Weighted Average
Price of the Common Stock on the Trading Day immediately preceding such
date.
  81
  ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 
 Issued 106,750 shares of
common stock as interim incentives to senior and mid-level
management
 
 On April 7, 2009, the Company granted
senior management and directors 106,750 shares of common stock at $2.77 per
share, as incentive compensation. The shares were valued at the quoted market
price on the date granted. The Company recorded compensation expense of $295,590
for the three months ended June 30, 2009.
 
 The Company awarded unregistered
securities to keep with other issuer’s practice and for employee retention
purposes.
 
 ITEM
3. DEFAULTS UPON SENIOR SECURITIES
 
 Not applicable.
 
 ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
 Not applicable.
 
 ITEM
5. OTHER INFORMATION
 As of
August 7, 2009 a total of $33.39 million of CB debt have been converted to
equity.
  ITEM
6. EXHIBITS
 
 (a)
              Exhibits
 
 31.1
                
                Certification
      of the CEO pursuant to 18 U.S.C. Section 1350 adopted pursuant to Section
      302 of the Sarbanes-Oxley Act of 2002, as filed
  herewith.31.2
                
                Certification
      of the CFO pursuant to 18 U.S.C. Section 1350 adopted pursuant to Section
      302 of the Sarbanes-Oxley Act of 2002, as filed
  herewith.32.1
                
                Certification
      of the CEO pursuant to 18 U.S.C. Section 1350 adopted pursuant to Section
      906 of the Sarbanes-Oxley Act of 2002, as filed
  herewith.32.2
                
                Certification
      of the CFO pursuant to 18 U.S.C. Section 1350 adopted pursuant to Section
      906 of the Sarbanes-Oxley Act of 2002, as filed
  herewith.
  82
  SIGNATURES
 
 Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
 
 General
      Steel Holdings, Inc.Date:
      August 10, 2009
              By:
      /s/ Zuosheng YuZuosheng
      YuChief
      Executive Officer and ChairmanDate:
      August 10, 2009
              By:
      /s/ John ChenJohn
      ChenDirector
      and Chief Financial Officer
  83