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 March 31, 2009





Commission
File Number 333-105903




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.)




Kun Tai International Mansion
Building, Suite 2315


Yi
No. 12, Chaoyangmenwai Avenue


Chaoyang
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 ý No o




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 o
            
            Accelerated filer ý
            
            Non-accelerated filer o
            Smaller reportingcompany o





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




As of May 8, 2009, 38,627,071 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.Consolidated
      Balance Sheets as of March 31, 2009 (Unaudited) and December 31,
      2008
                        
                        2Consolidated
      Statements of Income and Other Comprehensive Income (Unaudited) for the
      Three Months Ended March 31, 2009 and 2008
                        
                        3Consolidated
      Statements of Shareholders’ Equity (Unaudited)
                        
                        4Consolidated
      Statements of Cash Flows (Unaudited) for the Three Months Ended March 31,
      2009 and 2008
                        
                        5Notes
      to Consolidated Financial Statements (Unaudited)
                        
                        6Item
      2.
                        Management’s
      Discussion and Analysis of FinancialCondition
      and Results of Operations.
                        
                        38Item
      3.
                        Quantitative
      and Qualitative Disclosures About Market Risks.
                        
                        56Item
      4.
                        Controls
      and Procedures
                        
                        56Part
      II. OTHER INFORMATIONItem
      1.
                        Legal
      Proceedings.
                        
                        57Item
      1A.
                        Risk
      Factors
                        
                        57Item
      2.
                        Unregistered
      Sales of Equity Securities and Use of Proceeds
                        
                        67Item
      3.
                        Defaults
      on Senior Securities
                        
                        68Item
      4.
                        Submission
      of Matters to a Vote of Security Holders
                        
                        68Item
      5.
                        Other
      Information
                        
                        68Item
      6.
                        Exhibits
                        
                        68Signatures
                        
                        68





PART
I – FINANCIAL INFORMATION





ITEM
1. FINANCIAL STATEMENTS





GENERAL
STEEL HOLDINGS INC. AND SUBSIDIARIES





CONSOLIDATED
BALANCE SHEETS


AS OF
MARCH 31, 2009 AND DECEMBER 31, 2008





March 31,
                                                
                                                
                                                December 31,2009
                                                
                                                
                                                2008UnauditedASSETSCURRENT
      ASSETS:Cash
                                                
                                                $
                                                39,128,494
                                                
                                                
                                                $
                                                14,895,442Restricted
      cash
                                                
                                                
                                                174,321,481
                                                
                                                
                                                
                                                130,700,335Notes
      receivable
                                                
                                                
                                                17,318,812
                                                
                                                
                                                
                                                38,207,312Accounts
      receivable, net of allowance for doubtful accounts of $400,571 and
      $401,109 as of March 31, 2009 and December 31, 2008,
      respectively
                                                
                                                
                                                20,082,659
                                                
                                                
                                                
                                                8,329,040Other
      receivables, net of allowance for doubtful accounts of $683,826 and
      $684,767 as of March 31, 2009 and December 31, 2008,
      respectively
                                                
                                                
                                                2,479,717
                                                
                                                
                                                
                                                5,099,469Other
      receivables - related parties
                                                
                                                
                                                1,395,616
                                                
                                                
                                                
                                                523,024Dividend
      receivable
                                                
                                                
                                                629,621
                                                
                                                
                                                
                                                630,481Inventories
                                                
                                                
                                                107,858,572
                                                
                                                
                                                
                                                59,548,915Advances
      on inventory purchases
                                                
                                                
                                                36,840,793
                                                
                                                
                                                
                                                47,153,869Advances
      on inventory purchases - related parties
                                                
                                                
                                                13,863,922
                                                
                                                
                                                
                                                2,374,637Prepaid
      expenses - current
                                                
                                                
                                                704,162
                                                
                                                
                                                
                                                494,370Deferred
      tax assets
                                                
                                                
                                                6,488,093
                                                
                                                
                                                
                                                7,487,380421,111,942
                                                
                                                
                                                
                                                315,444,274PLANT
      AND EQUIPMENT, net
                                                
                                                
                                                527,298,591
                                                
                                                
                                                
                                                491,705,028OTHER
      ASSETS:Advances
      on equipment purchases
                                                
                                                
                                                7,755,163
                                                
                                                
                                                
                                                8,965,382Investment
      in unconsolidated subsidiaries
                                                
                                                
                                                20,476,409
                                                
                                                
                                                
                                                13,959,432Prepaid
      expenses - non current
                                                
                                                
                                                1,153,027
                                                
                                                
                                                
                                                1,195,073Prepaid
      expenses related party - non current
                                                
                                                
                                                197,775
                                                
                                                
                                                
                                                211,248Long
      term other receivable
                                                
                                                
                                                4,563,423
                                                
                                                
                                                
                                                4,872,584Intangible
      assets, net of accumulated amortization
                                                
                                                
                                                24,461,096
                                                
                                                
                                                
                                                24,555,655Note
      issuance cost
                                                
                                                
                                                4,197,058
                                                
                                                
                                                
                                                4,217,974Plant
      and equipment to be disposed
                                                
                                                
                                                -
                                                
                                                
                                                
                                                586,508Total
      other assets
                                                
                                                
                                                62,803,951
                                                
                                                
                                                
                                                58,563,856Total
      assets
                                                
                                                $
                                                1,011,214,484
                                                
                                                
                                                $
                                                865,713,158LIABILITIES
      AND SHAREHOLDERS' EQUITYCURRENT
      LIABILITIES:Short
      term notes payable
                                                
                                                $
                                                244,428,086
                                                
                                                
                                                $
                                                206,040,150Accounts
      payable
                                                
                                                
                                                150,364,523
                                                
                                                
                                                
                                                149,239,317Accounts
      payable - related parties
                                                
                                                
                                                32,026,694
                                                
                                                
                                                
                                                15,326,524Short
      term loans - bank
                                                
                                                
                                                85,931,040
                                                
                                                
                                                
                                                67,840,256Short
      term loans - others
                                                
                                                
                                                90,928,371
                                                
                                                
                                                
                                                87,833,706Short
      term loans - related parties
                                                
                                                
                                                7,339,650
                                                
                                                
                                                
                                                7,349,670Other
      payables
                                                
                                                
                                                10,407,709
                                                
                                                
                                                
                                                3,182,661Other
      payable - related parties
                                                
                                                
                                                8,191,474
                                                
                                                
                                                
                                                677,013Accrued
      liabilities
                                                
                                                
                                                11,652,374
                                                
                                                
                                                
                                                7,779,488Customer
      deposits
                                                
                                                
                                                147,012,299
                                                
                                                
                                                
                                                141,101,584Customer
      deposits - related parties
                                                
                                                
                                                6,690,802
                                                
                                                
                                                
                                                7,216,319Deposits
      due to sales representatives
                                                
                                                
                                                43,858,305
                                                
                                                
                                                
                                                8,149,279Taxes
      payable
                                                
                                                
                                                14,087,859
                                                
                                                
                                                
                                                13,916,636Distribution
      payable to former shareholders
                                                
                                                
                                                18,739,625
                                                
                                                
                                                
                                                18,765,209Total
      current liabilities
                                                
                                                
                                                871,658,811
                                                
                                                
                                                
                                                734,417,812CONVERTIBLE
      NOTES PAYABLE, net of debt discount of $25,625,326 and $26,094,942 as of
      March 31, 2009 and December 31, 2008, respectively
                                                
                                                
                                                7,624,674
                                                
                                                
                                                
                                                7,155,058DERIVATIVE
      LIABILITIES
                                                
                                                
                                                5,788,442
                                                
                                                
                                                
                                                9,903,010COMMITMENT
      AND CONTINGENCIESTotal
      liabilities
                                                
                                                
                                                885,071,927
                                                
                                                
                                                
                                                751,475,880SHAREHOLDERS'
      EQUITY:Preferred
      stock, $0.001 par value, 50,000,000 shares authorized, 3,092,899 shares
       issued and outstanding
                                                
                                                
                                                3,093
                                                
                                                
                                                
                                                3,093Common
      Stock, $0.001 par value, 200,000,000 shares authorized, 36,390,323 and
       36,128,833 shares issued and outstanding as of March 31, 2009 and
      December 31, 2008, respectively
                                                
                                                
                                                36,390
                                                
                                                
                                                
                                                36,129Paid-in-capital
                                                
                                                
                                                37,957,453
                                                
                                                
                                                
                                                37,128,641Retained
      earnings
                                                
                                                
                                                17,166,701
                                                
                                                
                                                
                                                10,091,829Statutory
      reserves
                                                
                                                
                                                5,162,401
                                                
                                                
                                                
                                                4,902,641Contribution
      receivable
                                                
                                                
                                                (959,700
                                                )
                                                
                                                
                                                (959,700
                                                )Accumulated
      other comprehensive income
                                                
                                                
                                                8,230,428
                                                
                                                
                                                
                                                8,407,359Total
      shareholders' equity
                                                
                                                
                                                67,596,766
                                                
                                                
                                                
                                                59,609,992NONCONTROLLING
      INTERESTS
                                                
                                                
                                                58,545,791
                                                
                                                
                                                
                                                54,627,286Total
      equity
                                                
                                                
                                                126,142,557
                                                
                                                
                                                
                                                114,237,278Total
      liabilities and shareholders' equity
                                                
                                                $
                                                1,011,214,484
                                                
                                                
                                                $
                                                865,713,158




The
accompanying notes are an integral part of these
statements.


- 2
-





GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES





CONSOLIDATED
STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME


FOR THE
THREE MONTHS ENDED MARCH 31


(UNAUDITED)





2009
                                                    
                                                    
                                                    2008REVENUES
                                                    
                                                    $
                                                    262,414,416
                                                    
                                                    
                                                    $
                                                    178,492,167REVENUES
      - RELATED PARTIES
                                                    
                                                    
                                                    60,379,480
                                                    
                                                    
                                                    
                                                    113,073,832TOTAL
      REVENUES
                                                    
                                                    
                                                    322,793,896
                                                    
                                                    
                                                    
                                                    291,565,999COST
      OF SALES
                                                    
                                                    
                                                    252,002,104
                                                    
                                                    
                                                    
                                                    166,714,663COST
      OF SALES - RELATED PARTIES
                                                    
                                                    
                                                    57,869,673
                                                    
                                                    
                                                    
                                                    111,869,221TOTAL
      COST OF SALES
                                                    
                                                    
                                                    309,871,777
                                                    
                                                    
                                                    
                                                    278,583,884GROSS
      PROFIT
                                                    
                                                    
                                                    12,922,119
                                                    
                                                    
                                                    
                                                    12,982,115SELLING,
      GENERAL AND  ADMINISTRATIVE EXPENSES
                                                    
                                                    
                                                    9,168,261
                                                    
                                                    
                                                    
                                                    6,532,821INCOME
      FROM OPERATIONS
                                                    
                                                    
                                                    3,753,858
                                                    
                                                    
                                                    
                                                    6,449,294OTHER
      INCOME (EXPENSE), NETInterest
      income
                                                    
                                                    
                                                    878,633
                                                    
                                                    
                                                    
                                                    580,318Finance/interest
      (expense)
                                                    
                                                    
                                                    (2,938,778
                                                    )
                                                    
                                                    
                                                    (5,986,507
                                                    )Change
      in fair value of derivative liabilities
                                                    
                                                    
                                                    4,114,568
                                                    
                                                    
                                                    
                                                    2,670,764Gain
      from debt extinguishment
                                                    
                                                    
                                                    2,930,200
                                                    
                                                    
                                                    
                                                    -Government
      grant
                                                    
                                                    
                                                    3,519,890
                                                    
                                                    
                                                    
                                                    -Income
      from equity investments
                                                    
                                                    
                                                    (54,632
                                                    )
                                                    
                                                    
                                                    -Other
      non-operating income (expense), net
                                                    
                                                    
                                                    510,216
                                                    
                                                    
                                                    
                                                    369,270Total
      other income (expense), net
                                                    
                                                    
                                                    8,960,097
                                                    
                                                    
                                                    
                                                    (2,366,155
                                                    )INCOME
      BEFORE PROVISION FOR INCOME TAXESAND
      NONCONTROLLING INTEREST
                                                    
                                                    
                                                    12,713,955
                                                    
                                                    
                                                    
                                                    4,083,139PROVISION
      FOR INCOME TAXESCurrent
                                                    
                                                    
                                                    164,221
                                                    
                                                    
                                                    
                                                    666,356Deferred
                                                    
                                                    
                                                    1,221,850
                                                    
                                                    
                                                    
                                                    (216,533
                                                    )Total
      provision for income taxes
                                                    
                                                    
                                                    1,386,071
                                                    
                                                    
                                                    
                                                    449,823NET
      INCOME BEFORE NONCONTROLLING INTEREST
                                                    
                                                    
                                                    11,327,884
                                                    
                                                    
                                                    
                                                    3,633,316Less:
      Net income attributable to noncontrolling interest
                                                    
                                                    
                                                    3,993,252
                                                    
                                                    
                                                    
                                                    1,444,856NET
      INCOME ATTRIBUTABLE TO CONTROLLING INTEREST
                                                    
                                                    
                                                    7,334,632
                                                    
                                                    
                                                    
                                                    2,188,460OTHER
      COMPREHENSIVE (LOSS) INCOME:Foreign
      currency translation adjustments
                                                    
                                                    
                                                    (176,931
                                                    )
                                                    
                                                    
                                                    1,615,950Comprehensive
      (loss)income attributable to noncontrolling interest
                                                    
                                                    
                                                    (74,746
                                                    )
                                                    
                                                    
                                                    2,706,989COMPREHENSIVE
      INCOME
                                                    
                                                    $
                                                    7,082,955
                                                    
                                                    
                                                    $
                                                    6,511,399WEIGHTED
      AVERAGE NUMBER OF SHARESBasic
                                                    
                                                    
                                                    36,285,312
                                                    
                                                    
                                                    
                                                    34,836,394Diluted
                                                    
                                                    
                                                    36,285,312
                                                    
                                                    
                                                    
                                                    34,923,614EARNING
      PER SHAREBasic
                                                    
                                                    $
                                                    0.20
                                                    
                                                    
                                                    $
                                                    0.06Diluted
                                                    
                                                    $
                                                    0.20
                                                    
                                                    
                                                    $
                                                    0.06




The
accompanying notes are an integral part of these statements.


- 3
-





GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES





CONSOLIDATED
STATEMENTS OF SHAREHOLDERS' EQUITY





AccumulatedPreferred stock
                                          
                                          
                                          Common stock
                                          
                                          
                                          
                                          
                                          
                                          Retained earnings
                                          
                                          
                                          
                                          
                                          
                                          otherPaid-in
                                          
                                          
                                          Statutory
                                          
                                          
                                          
                                          
                                          
                                          Subscriptions
                                          
                                          
                                          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
      income
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          2,188,460
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          1,444,856
                                          
                                          
                                          
                                          3,633,316Acquired
      noncontrolling interest
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          14,973,544
                                          
                                          
                                          
                                          14,973,544Adjustment
      to statutory reserve
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          347,747
                                          
                                          
                                          
                                          (347,747
                                          )
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          -Preferred
      stock issued for acquistion of minority interest ,
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          -net
      of dividend distribution to Victory New
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          -Conversion
      of redeemable stock, $1.95
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          -Common
      stock issued for service, $1.32
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          -Common
      stock issued by $2.50
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          -Common
      stock issued for compensation, $8.16
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          76,600
                                          
                                          
                                          
                                          77
                                          
                                          
                                          
                                          548,379
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          548,456Common
      stock issued for compensation, $10.43
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          150,000
                                          
                                          
                                          
                                          150
                                          
                                          
                                          
                                          1,564,350
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          1,564,500Foreign
      currency translation adjustments
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          1,615,950
                                          
                                          
                                          
                                          2,706,989
                                          
                                          
                                          
                                          4,322,939BALANCE,
      March 31, 2008, unaudited
                                          
                                          
                                          3,092,899
                                          
                                          
                                          $
                                          3,093
                                          
                                          
                                          
                                          34,861,365
                                          
                                          
                                          $
                                          34,862
                                          
                                          
                                          $
                                          25,541,882
                                          
                                          
                                          $
                                          3,980,072
                                          
                                          
                                          $
                                          24,527,303
                                          
                                          
                                          $
                                          (959,700
                                          )
                                          
                                          $
                                          4,901,228
                                          
                                          
                                          $
                                          62,447,455
                                          
                                          
                                          $
                                          120,476,195Net
      loss
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          (13,512,905
                                          )
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          (9,986,693
                                          )
                                          
                                          
                                          (23,499,598
                                          )Acquired
      noncontrolling interest
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          921,942
                                          
                                          
                                          
                                          921,942Adjustment
      to statutory reserve
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          922,569
                                          
                                          
                                          
                                          (922,569
                                          )
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          -Common
      stock issued for compensation, $6.66
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          87,400
                                          
                                          
                                          
                                          87
                                          
                                          
                                          
                                          581,997
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          582,084Common
      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
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          207,300
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          207,300Common
      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
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          3,506,131
                                          
                                          
                                          
                                          1,244,582
                                          
                                          
                                          
                                          4,750,713BALANCE,
      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
      income
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          7,334,632
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          3,993,251
                                          
                                          
                                          
                                          11,327,883Adjustment
      to statutory reserve
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          259,760
                                          
                                          
                                          
                                          (259,760
                                          )
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          -Common
      stock issued for compensation, $1.85
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          109,250
                                          
                                          
                                          
                                          109
                                          
                                          
                                          
                                          202,003
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          202,112Common
      stock issued for interest payment, $3.66
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          152,240
                                          
                                          
                                          
                                          152
                                          
                                          
                                          
                                          557,709
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          557,861Common
      stock transferred by CEO for compensation, $6.91
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          69,100
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          69,100Foreign
      currency translation adjustments
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          (176,931
                                          )
                                          
                                          
                                          (74,746
                                          )
                                          
                                          
                                          (251,677
                                          )BALANCE,
      March 31, 2009, unaudited
                                          
                                          
                                          3,092,899
                                          
                                          
                                          $
                                          3,093
                                          
                                          
                                          
                                          36,390,323
                                          
                                          
                                          $
                                          36,390
                                          
                                          
                                          $
                                          37,957,453
                                          
                                          
                                          $
                                          5,162,401
                                          
                                          
                                          $
                                          17,166,701
                                          
                                          
                                          $
                                          (959,700
                                          )
                                          
                                          $
                                          8,230,428
                                          
                                          
                                          $
                                          58,545,791
                                          
                                          
                                          $
                                          126,142,557





The
accompanying notes are an integral part of these
statements.


- 4
-





GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES





CONSOLIDATED
STATEMENTS OF CASH FLOWS


FOR THE
THREE MONTHS ENDED MARCH 31


(UNAUDITED)





2009
                                      
                                      
                                      2008CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income attributable to controlling interest
                                      
                                      $
                                      7,334,632
                                      
                                      
                                      $
                                      2,188,460Net
      income attributable to noncontrolling interest
                                      
                                      
                                      3,993,252
                                      
                                      
                                      
                                      1,444,856Consolidated
      net income
                                      
                                      
                                      11,327,884
                                      
                                      
                                      
                                      3,633,316Adjustments
      to reconcile net income to cash provided by (used in) operating
      activities:Depreciation
                                      
                                      
                                      6,024,757
                                      
                                      
                                      
                                      4,499,873Amortization
                                      
                                      
                                      224,416
                                      
                                      
                                      
                                      205,146Debt
      waiver
                                      
                                      
                                      (2,930,200
                                      )
                                      
                                      
                                      -(Gain)Loss
      on disposal of equipment
                                      
                                      
                                      (3,517,774
                                      )
                                      
                                      
                                      9,492Stock
      issued for services and compensation
                                      
                                      
                                      271,212
                                      
                                      
                                      
                                      548,456Amortization
      of deferred note issuance cost
                                      
                                      
                                      20,917
                                      
                                      
                                      
                                      8,894Amortization
      of discount on convertible notes
                                      
                                      
                                      -
                                      
                                      
                                      
                                      697,628Change
      in fair value of derivative instrument
                                      
                                      
                                      (4,114,568
                                      )
                                      
                                      
                                      (2,670,763
                                      )Deferred
      tax assets
                                      
                                      
                                      989,146
                                      
                                      
                                      
                                      (216,533
                                      )Changes
      in operating assets and liabilitiesAccounts
      receivable
                                      
                                      
                                      (11,764,035
                                      )
                                      
                                      
                                      (1,459,682
                                      )Accounts
      receivable - related parties
                                      
                                      
                                      -
                                      
                                      
                                      
                                      7,631,355Notes
      receivable
                                      
                                      
                                      20,837,833
                                      
                                      
                                      
                                      (13,832,292
                                      )Notes
      receivable - restricted
                                      
                                      
                                      -
                                      
                                      
                                      
                                      8,491,027Other
      receivables
                                      
                                      
                                      2,915,525
                                      
                                      
                                      
                                      1,533,823Other
      receivables - related parties
                                      
                                      
                                      (1,736,108
                                      )
                                      
                                      
                                      (148,056
                                      )Inventories
                                      
                                      
                                      (48,394,144
                                      )
                                      
                                      
                                      (17,647,149
                                      )Advances
      on inventory purchases
                                      
                                      
                                      10,249,490
                                      
                                      
                                      
                                      6,516,616Advances
      on inventory purchases - related parties
                                      
                                      
                                      (7,552,281
                                      )
                                      
                                      
                                      (26,563,452
                                      )Prepaid
      expense - current
                                      
                                      
                                      (156,475
                                      )
                                      
                                      
                                      (220,516
                                      )Accounts
      payable
                                      
                                      
                                      1,285,289
                                      
                                      
                                      
                                      11,144,259Accounts
      payable - related parties
                                      
                                      
                                      21,860,581
                                      
                                      
                                      
                                      (6,951,111
                                      )Other
      payables
                                      
                                      
                                      7,229,879
                                      
                                      
                                      
                                      (2,579,136
                                      )Other
      payable - related parties
                                      
                                      
                                      8,179,890
                                      
                                      
                                      
                                      (2,118,101
                                      )Accrued
      liabilities
                                      
                                      
                                      3,882,827
                                      
                                      
                                      
                                      522,377Customer
      deposits
                                      
                                      
                                      6,103,498
                                      
                                      
                                      
                                      20,885,570Customer
      deposits - related parties
                                      
                                      
                                      (5,120,847
                                      )
                                      
                                      
                                      (9,391,133
                                      )Taxes
      payable
                                      
                                      
                                      190,208
                                      
                                      
                                      
                                      (9,585,924
                                      )Net
      cash provided by (used in) operating activities
                                      
                                      
                                      16,306,920
                                      
                                      
                                      
                                      (27,056,016
                                      )CASH
      FLOWS FROM INVESTING ACTIVITIES:Acquired
      long term investment
                                      
                                      
                                      (6,592,950
                                      )
                                      
                                      
                                      -Cash
      acquired from subsidiary
                                      
                                      
                                      -
                                      
                                      
                                      
                                      702,237Deposits
      due to sales representatives
                                      
                                      
                                      35,722,574
                                      
                                      
                                      
                                      (451,457
                                      )Advance
      on equipment purchases
                                      
                                      
                                      1,198,078
                                      
                                      
                                      
                                      416,045Cash
      proceeds from sale of equipment
                                      
                                      
                                      440
                                      
                                      
                                      
                                      -Equipment
      purchases
                                      
                                      
                                      (41,415,299
                                      )
                                      
                                      
                                      (28,097,609
                                      )Intangible
      assets purchases
                                      
                                      
                                      (163,329
                                      )
                                      
                                      
                                      143,465Net
      cash used in investing activities
                                      
                                      
                                      (11,250,486
                                      )
                                      
                                      
                                      (27,287,319
                                      )CASH
      FLOWS FINANCING ACTIVITIES:Restricted
      cash
                                      
                                      
                                      (43,802,323
                                      )
                                      
                                      
                                      (33,726,504
                                      )Borrowings
      on short term loans - bank
                                      
                                      
                                      51,732,681
                                      
                                      
                                      
                                      24,893,037Payments
      on short term loans - bank
                                      
                                      
                                      (33,548,167
                                      )
                                      
                                      
                                      (28,568,988
                                      )Borrowings
      on short term loans - related parties
                                      
                                      
                                      -
                                      
                                      
                                      
                                      6,168,050Payments
      on short term loans - related parties
                                      
                                      
                                      -
                                      
                                      
                                      
                                      (5,153,320
                                      )Borrowings
      on short term loan - others
                                      
                                      
                                      13,295,533
                                      
                                      
                                      
                                      23,147,344Payments
      on short term loans - others
                                      
                                      
                                      (7,150,703
                                      )
                                      
                                      
                                      (16,733,731
                                      )Borrowings
      on short term notes payable
                                      
                                      
                                      158,809,676
                                      
                                      
                                      
                                      62,896,500Payments
      on short term notes payable
                                      
                                      
                                      (120,138,200
                                      )
                                      
                                      
                                      (11,614,887
                                      )Borrowings
      on employee loans
                                      
                                      
                                      -
                                      
                                      
                                      
                                      2,306,205Payment
      to noncontrolling shareholders
                                      
                                      
                                      -
                                      
                                      
                                      
                                      (594,336
                                      )Net
      cash  provided by financing activities
                                      
                                      
                                      19,198,497
                                      
                                      
                                      
                                      23,019,370EFFECTS
      OF EXCHANGE RATE CHANGE IN CASH
                                      
                                      
                                      (21,879
                                      )
                                      
                                      
                                      857,715INCREASE
      (DECREASE) IN CASH
                                      
                                      
                                      24,233,052
                                      
                                      
                                      
                                      (30,466,250
                                      )CASH,
      beginning of period
                                      
                                      
                                      14,895,442
                                      
                                      
                                      
                                      43,713,346CASH,
      end of period
                                      
                                      $
                                      39,128,494
                                      
                                      
                                      $
                                      13,247,096





The
accompanying notes are an integral part of these statements.


- 5
-




GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 March 31,
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 Sheet Co., Ltd. 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
 
 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.
 
 New
developments
 
 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.
  - 6
-
 GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 March 31,
2009
 Unaudited
 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 “Henggang”), in which the Company
contributed $7.1 million (RMB 50 million) through its subsidiary, Qiu Steel, to
Henggang original shareholders in exchange for 99% of the equity of Henggang.
The acquisition was completed and became effective June 30, 2008. See Note 17 –
Business combinations.  Henggang 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.
 
 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
                  %Tianjin
      Daqiuzhuang Metal Sheet 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.
  - 7
-
  GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 March 31,
2009
 Unaudited
 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.
 
 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 March
31, 2009 and December 31, 2008 amounted to $213,449,975 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, all distributors, which represented
approximately 30%, and 53% of the Company’s total sales for the three months
ended March 31, 2009 and 2008, respectively. Five customers accounted for 0% and
39% of total accounts receivable as of March 31, 2009 and 2008,
respectively.
 
 For the
three months ended March 31, 2009 and 2008, the Company purchased approximately
24% and 40%, respectively, of their raw materials from five major suppliers.
Five vendors accounted for 15% and 67% of total accounts payable as of
March 31, 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.
  - 8
-
 GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 March 31,
2009
 Unaudited
  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 $8,230,428, $8,407,359 as of March 31, 2009, and December 31, 2008,
respectively. The balance sheet amounts, with the exception of equity at March
31, 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 three
months ended March 31, 2009 and 2008 were 6.83 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.
 
 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.
  - 9
-
 GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 March 31,
2009
 Unaudited
 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
$20,476,409 as of March 31, 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 March 31, 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 3 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
March 31, 2009, the outstanding principal amounted to $33,250,000, and the
carrying value of the convertible note amounted to $7,624,674. 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 $5.79 million due to the decrease in the Company’s common stock
price.
 
 Carrying Value as of
                          March 31, 2009
                        
                        
                        Fair Value Measurements at March 31,
                          2009 Using Fair Value HierarchyLevel 1
                        
                        
                        Level 2
                        
                        
                        Level 3Long
      term investments
                        
                        $
                        20,476,409
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        $
                        20,476,409Derivative
      liabilities
                        
                        $
                        $5,788,442
                        
                        
                        
                        
                        
                        
                        $
                        5,788,442Convertible
      notes payable
                        
                        $
                        $7,624,674
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        $
                        6,045,490
  - 10
-
  GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 March 31,
2009
 Unaudited
  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.
 
 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.
 
 Receivable 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.
 
 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 $17,318,812 and $38,207,312 of notes receivable
outstanding as of March 31, 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 March 31, 2009 and 2008 amounted to $562,298 and
$703,072, respectively.
  - 11
-
  GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 March 31,
2009
 Unaudited
 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.
 
 Henggang
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 March 31, 2009, the Company expects these assets to be
fully recoverable.
 
 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
  - 12
-
 GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 March 31,
2009
 Unaudited
 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 March 31, 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
                      
                      
                      
                      8,398,408
                      
                      
                      
                      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
                      
                      
                      
                      148,555
                      
                      
                      
                      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
                      
                      
                      
                      936,680
                      
                      
                      
                      27Total
                      
                      
                      
                      
                      
                      $
                      20,476,409
  - 13
-
 GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 March 31,
2009
 Unaudited
 Total
investment in unconsolidated subsidiaries amounted to $20,476,409 and
$13,959,432 as of March 31, 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.
  - 14
-
 GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 March 31,
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.
 
 Noncontrolling
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.
  - 15
-
  GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 March 31,
2009
 Unaudited
  Reclassification
 
 As a
result of adoption of SFAS 160, we reclassified noncontrolling interests in the
amounts of $59 million and $55 million from the mezzanine section to equity in
the March 31, 2009 and December 31, 2008 balance sheets,
respectively.
 
 Recently issued accounting
pronouncements
 
 In May
2008, the FASB issued SFAS 162, “The Hierarchy of Generally Accepted Accounting
Principles.” This Statement identifies the sources of accounting principles and
the framework for selecting the principles to be used in the preparation of
financial statements of nongovernmental entities that are presented in
conformity with generally accepted accounting principles (GAAP) in the United
States (the GAAP hierarchy). The adoption of SFAS No. 162 will have no effect on
the Company’s  financial statements.
 
 In June
2008, FASB issued EITF 08-4, “Transition Guidance for Conforming Changes to
Issue No. 98-5”. The objective of EITF 08-4 is to provide transition
guidance for conforming changes made to EITF 98-5, “Accounting for Convertible
Securities with Beneficial Conversion Features or Contingently Adjustable
Conversion Ratios”, that result from EITF 00-27 “Application of Issue No. 98-5
to Certain Convertible Instruments”, and SFAS 150, “Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity”. This
Issue is effective for financial statements issued for fiscal years ending after
December 15, 2008. Early application is permitted. This new pronouncement
has no effect on the Company’s financial statements.
 
 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.
  - 16
-
 GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 March 31,
2009
 Unaudited
 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. We are currently evaluating this new FSP but do not believe that it will
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. We are currently evaluating
this new FSP but do not believe that it will 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
 March 31,
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. We are
currently evaluating the disclosure requirements of this new FSP.
 
 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:
 
 March 31,
                    2009
                  
                  
                  December 31,
                    2008UnauditedAccounts
      receivable
                  
                  $
                  20,483,230
                  
                  
                  $
                  8,730,149Less:
      allowance for doubtful accounts
                  
                  
                  400,571
                  
                  
                  
                  401,109Net
      accounts receivable
                  
                  $
                  20,082,659
                  
                  
                  $
                  8,329,040
 
 Movement
of allowance for doubtful accounts is as follows:
 
 March 31,
                    2009
                  
                  
                  December 31,
                    2008UnauditedBeginning
      balance
                  
                  $
                  401,109
                  
                  
                  $
                  148,224Charge
      to expense
                  
                  
                  -
                  
                  
                  
                  124,727Addition
      from acquisition
                  
                  
                  -
                  
                  
                  
                  238,259Less
      Written-off
                  
                  
                  -
                  
                  
                  
                  (119,022
                  )Exchange
      rate effect
                  
                  
                  (538
                  )
                  
                  
                  8,921Ending
      balance
                  
                  $
                  400,571
                  
                  
                  $
                  401,109
 
 Note
4 – Inventory
 
 Inventory
consists of the following:
 
 March 31,
                    2009
                  
                  
                  December 31,
                    2008UnauditedSupplies
                  
                  $
                  1,788,636
                  
                  
                  $
                  1,884,387Raw
      materials
                  
                  
                  58,023,033
                  
                  
                  
                  41,083,743Work
      in process
                  
                  
                  -
                  
                  
                  
                  333,611Finished
      goods
                  
                  
                  48,046,903
                  
                  
                  
                  16,247,174Totals
                  
                  $
                  107,858,572
                  
                  
                  $
                  59,548,915
  - 18
-
 GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 March 31,
2009
 Unaudited
 Raw
materials consist primarily of iron ore and coke at Longmen Joint Venture, steel
strip at Daqiuzhuang Metal and billet at Henggang. 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 March 31, 2009, and
December 31, 2008, management determined the carrying amount of inventory
exceeded net realizable value, therefore $217,823 and $2,243,232 had been
written down, respectively, and the amounts have been included in cost of goods
sold.
 
 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 $50,704,715 and $49,528,506 as of
March 31, 2009 and December 31, 2008, respectively.
 
 Note 6 – Plant and equipment,
net
 
 Plant and
equipment consist of the following:
 
 March
      31,
                      2009
                    
                    
                    December
      31,
                      2008UnauditedBuildings
      and improvements
                    
                    $
                    118,000,296
                    
                    
                    $
                    118,143,847Machinery
                    
                    
                    232,415,920
                    
                    
                    
                    226,594,341Transportation
      equipment
                    
                    
                    7,438,484
                    
                    
                    
                    7,299,240Other
      equipment
                    
                    
                    2,752,055
                    
                    
                    
                    2,755,129Construction
      in process
                    
                    
                    235,486,249
                    
                    
                    
                    199,818,052Totals
                    
                    
                    596,093,004
                    
                    
                    
                    554,610,609Less
      accumulated depreciation
                    
                    
                    (68,794,413
                    )
                    
                    
                    (62,905,581
                    )Totals
                    
                    $
                    527,298,591
                    
                    
                    $
                    491,705,028
 
  - 19
-
 GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 March 31,
2009
 Unaudited
 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 $216,161,341 and $180,471,238 as of
March 31, 2009 and December 31, 2008, respectively. Interest of $13,931,349 has
been capitalized into the construction costs.
 
 Depreciation,
including amounts in cost of sales, for the three months ended March 31, 2009
and 2008 amounted to $6,024,757 and $4,499,873, respectively.
 
 Note
7 – Intangible assets
 
 Intangible
assets consist of the following:
 
 March 31,
                            2009
                          
                          
                          December 31,
                            2008UnauditedLand
      use right
                          
                          $
                          27,476,538
                          
                          
                          $
                          27,467,031Software
                          
                          
                          408,659
                          
                          
                          
                          292,693Totals
                          
                          
                          27,885,197
                          
                          
                          
                          27,759,724Accumulated
      Amortization
                          
                          
                          (3,424,101
                          )
                          
                          
                          (3,204,069
                          )Totals
                          
                          $
                          24,461,096
                          
                          
                          $
                          24,555,655
 
 Total
amortization expense for the three months ended March 31, 2009 and 2008,
amounted to $224,416 and $205,146, respectively.
 
 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.
  - 20
-
 GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 March 31,
2009
 Unaudited
 Short
term loans due banks, related parties and other parties consisted of the
following:
 
 March 31,
                                  2009
                                
                                
                                December
                                  31, 2008UnauditedDaqiuzhuang:
      Loan from banks in China, due various dates from April 2009 to March 2010.
      Weighted average interest rate 6.92% per annum, either guaranteed by
      another company or secured by equipment/inventory.
                                
                                $
                                26,613,190
                                
                                
                                $
                                27,383,022Longmen
      Joint Venture: Loan from banks in China, due various dates from July 2009
      to February 2010. Weighted average interest rate 6.61% per annum, either
      guaranteed by another company or secured by equipment/buildings/land use
      right.
                                
                                
                                59,317,850
                                
                                
                                
                                38,875,500Baotou:
      Loan from banks in China, due March 2009. Annual interest rate of 12%,
      Guaranteed by another company and secured by equipment.
                                
                                
                                -
                                
                                
                                
                                114,734Hengda:
      Loan from banks in China, due January 2009. Annual interest rate of 7.47%,
      guaranteed by another company.
                                
                                
                                -
                                
                                
                                
                                1,467,000Total
      – bank loans
                                
                                $
                                85,931,040
                                
                                
                                $
                                67,840,256
 
 March 31,
                      2009
                    
                    
                    December 31,
                      2008UnauditedLoan
      from various unrelated companies and individuals, due various dates from
      June 2009 to January 2010, and interest rates up to 12% per
      annum.
                    
                    $
                    90,928,371
                    
                    
                    $
                    87,833,706Total
      – other loans
                    
                    $
                    90,928,371
                    
                    
                    $
                    87,833,706
 
 March 31,
                      2009
                    
                    
                    December 31,
                      2008UnauditedQiu
      Steel: Related party loan from Tianjin Heng Ying and Tianjin Da Zhan, due
      June 2009. Annual interest rate of 5%-10%, and interest starts accrual on
      July, 2008.
                    
                    $
                    7,339,650
                    
                    
                    $
                    7,349,670Total
      – related loans
                    
                    $
                    7,339,650
                    
                    
                    $
                    7,349,670
  - 21
-
 GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 March 31,
2009
 Unaudited
 The
Company had various loans from unrelated companies and individuals. The balances
amounted to $90,928,371 and $87,833,706 as of March 31, 2009 and December 31,
2008, respectively. Out of the $90,928,371 current period balance, $25,420,220
carries no interest, and the remaining $65,508,150 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.
 
 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:
 
 March 31,
                      2009
                    
                    
                    December 31,
                      2008UnauditedDaqiuzhuang:
      Notes payable from banks in China, due various dates from April 2009 to
      September 2009. Restricted cash required of $14,972,300 and $15,727,914
      for March 31, 2009 and December 31, 2008, respectively and either
      guaranteed by another company or secured by buildings.
                    
                    $
                    18,605,500
                    
                    
                    $
                    18,630,900Longmen
      Joint Venture: Notes payable from banks in China, due various dates from
      April 2009 to September 2009.. Restricted cash of
      $133,307,836  and $98,073,410 for March 31, 2009 and December
      31, 2008, respectively and either guaranteed by another company or secured
      by equipment, or no guarantee.
                    
                    
                    182,971,336
                    
                    
                    
                    159,536,250Bao
      Tou: Notes payable from banks in China, due July 2009. Restricted cash of
      $5,127,500 and $5,134,500 for March 31, 2009 and December 31, 2008,
      respectively and guaranteed by buildings.
                    
                    
                    7,325,000
                    
                    
                    
                    7,335,000Hengda:
      Notes payable from banks in China, due various dates from May 2009 to
      September 2009. Restricted cash of $20,876,250 and $11,764,512 for March
      31, 2009  and December 31, 2008 and guaranteed by
      buildings.
                    
                    
                    35,526,250
                    
                    
                    
                    20,538,000Grand
      totals
                    
                    $
                    244,428,086
                    
                    
                    $
                    206,040,150
  - 22
-
 GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 March 31,
2009
 Unaudited
 Total
interest expense for the three months ended March 31, 2009 and 2008 on the debt
listed above amounted to $3,089,512 and $2,872,865, respectively. Capitalized
interest amounted to $2,276,911 and $811,505 for the three months ended March
31, 2009, and 2008, respectively.
 
 Note
9 – Customer deposits
 
 Customer
deposits represent amounts advanced by customers on product orders. The product
normally is shipped within six months after receipt of the advance payment, and
the related sale is recognized in accordance with the Company’s revenue
recognition policy. As of March 31,2009 and December 31, 2008, customer deposits
amounted to $153,703,101 and $148,317,903, including related parties deposits
$6,690,802 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 $43,858,305 and
$8,149,279 in deposits due to sales representatives outstanding as of March 31,
2009 and December 31, 2008, respectively. Due to increase in demand in first
quarter 2009, the Company received additional deposit amounted $34million 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.
  - 23
-
 GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 March 31,
2009
 Unaudited
 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
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%
  - 24
-
  GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 March 31,
2009
 Unaudited
  ·
              Expected
      dividend yield of 0%
 ·
              Risk-free
      interest rate of 1.41%
 ·
              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, and recorded $21,090,722 gain from
changes in fair value of derivative. 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.
 
 As of
March 31, 2009, in accordance with SFAS 133, the fair value of derivative
liabilities was recalculated and decreased by $4,114,568 during the period,
including $1,261,690 for the decrease in fair value of the warrants and
$2,852,878 for the decrease in fair value of the conversion option.
 
 As of
March 31, 2009, the balance of derivative liabilities was $5,788,442, which
consisted of $1,817,216 for the warrants and $3,971,226 for the conversion
option, and the carrying value of the notes was $7,624,674. The effective
interest charges on notes totaled $1,027,477 and $159,478 for the three months
ended March 31, 2009 and 2008, respectively. As of March 31, 2009, the
unamortized note issuance cost was $4,197,058, including $1,564,500 for
additional issuance of 150,000 shares of the common stock to the placement agent
in January 2008. Note issuance cost was amortized to interest expense at $20,917
and $8,894 for the three months ended March 31, 2009 and 2008,
respectively.
 
 Note
12 – Supplemental disclosure of cash flow information
 
 Interest
paid amounted to $2,620,752 and $3,038,348 for the three months ended March 31,
2009 and 2008, respectively.
 
 Income
tax payments amounted to $543,079 and $1,105,053 for the three months ended
March 31, 2009 and 2008, respectively.
  - 25
-
  GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 March 31,
2009
 Unaudited
  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
January 14, 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 $69,100 of
compensation expense and additional paid in capital has been recorded for the
three months ended March 31, 2009.
 
 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
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 three months ended March 31,
2009.
 
 Note
13 - Gain from debt extinguishment and Government grant
 
 Debt
extinguishment
 
 For the
three months ended March 31, 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 (RMB 20,000,000) of the
total $23,955,220 (RMB 163,516,860) 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.
  - 26
-
  GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 March 31,
2009
 Unaudited
  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 (RMB 29 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 (RMB 5 million), and recorded other
income of $3,519,890 for the three months ended March 31, 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.
 
 Significant
components of the provision for income taxes on earnings and deferred taxes on
net operating losses from operation for the three months ended March 31,
2009  and 2008 are as follows:
 
 March 31,
                              2009
                            
                            
                            March 31,
                              2008Unaudited
                            
                            
                            UnauditedCurrent
                            
                            $
                            164,221
                            
                            
                            
                            666,356Deferred
                            
                            
                            1,221,850
                            
                            
                            
                            (216,533
                            )Total
      income taxes
                            
                            $
                            1,386,071
                            
                            
                            
                            449,823
 
 Some of
the Company’s Chinese operating entities suffered operating
losses.  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:
 
 March 31,
                                            2009
                                          
                                          
                                          December 31,
                                            2008UnauditedBeginning
      balance
                                          
                                          $
                                          7,487,380
                                          
                                          
                                          $
                                          399,751Xi’an
      Rolling Mill’s ,YuXin,  YuTeng, HuaLong and
TongXing
                                            Net
      operating loss carry-forward
                                          
                                          
                                          996,788
                                          
                                          
                                          
                                          4,945,752Effective
      tax rate
                                          
                                          
                                          25
                                          %
                                          
                                          
                                          24.76
                                          %Deferred
      tax asset
                                          
                                          $
                                          249,197
                                          
                                          
                                          $
                                          1,224,626Long
      Gang Headquarter’s Net operating loss carry-forward
                                          
                                          
                                          (8,255,393
                                          )
                                          
                                          
                                          36,809,350Effective
      tax rate
                                          
                                          
                                          15
                                          %
                                          
                                          
                                          15.24
                                          %Deferred
      tax asset
                                          
                                          $
                                          (1,238,309
                                          )
                                          
                                          $
                                          5,610,223Exchange
      difference
                                          
                                          
                                          (10,175
                                          )
                                          
                                          
                                          252,780Totals
                                          
                                          $
                                          6,488,093
                                          
                                          
                                          $
                                          7,487,380
  - 27
-
 GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 March 31,
2009
 Unaudited
 The
following table reconciles the U.S. statutory rates to the Company’s effective
tax rate for the three months ended March 31, 2009 and 2008 as
follows:
 
 March 31, 2009
                    
                    
                    March 31, 2008Unaudited
                    
                    
                    UnauditedU.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
                    
                    
                    (2.19
                    )%
                    
                    
                    (3.86
                    )%Effect
      of different tax rate of subsidiaries operating in other
      jurisdictions
                    
                    
                    (10.22
                    )%
                    
                    
                    (10.12
                    )%Total
      provision for income taxes
                    
                    
                    12.59
                    %
                    
                    
                    11.02
                    %
 
 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.
  - 28
-
  GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 March 31,
2009
 Unaudited
  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%.
 
 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 $86,075,816  and $67,671,338
for the three months ended March 31, 2009, $70,973,599 and $65,859,199 for the
three months ended March 31, 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:
 
 March 31,
                      2009
                    
                    
                    December 31,
                      2008UnauditedVAT
      taxes payable
                    
                    $
                    9,770,698
                    
                    
                    $
                    8,985,278Income
      taxes payable
                    
                    
                    2,197,100
                    
                    
                    
                    2,509,520Misc
      taxes
                    
                    
                    2,120,061
                    
                    
                    
                    2,421,838Totals
                    
                    $
                    14,087,859
                    
                    
                    $
                    13,916,636
 
 Note
15 – Earnings per share
 
 The
calculation of earnings per share is as follows:
 
 March 31,2009
                    
                    
                    March 31,2008Unaudited
                    
                    
                    UnauditedIncome
      attributable to holders of common shares
                    
                    $
                    7,334,632
                    
                    
                    $
                    2,188,460Basic
      weighted average number of common shares outstanding
                    
                    
                    36,285,312
                    
                    
                    
                    34,836,394Diluted
      weighted average number of common shares outstanding
                    
                    
                    36,285,312
                    
                    
                    
                    34,923,614Net
      income (Loss) per shareBasic
                    
                    $
                    0.202
                    
                    
                    $
                    0.0628Diluted
                    
                    $
                    0.202
                    
                    
                    $
                    0.0627
  - 29
-
 GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 March 31,
2009
 Unaudited
  For the
three months ended March 31, 2009, 1,154,958 warrants with exercise price of
$13.51 and $32,500,000 convertible notes with conversion price of $12.47 were
excluded from the diluted income per share due to anti-diluted
effect.
 
 For the
three months ended March 31, 2008, 233,330 warrants with exercise price of $5.00
were included for the diluted income per share calculation due to their dilutive
effect; and 1154,958 warrants with exercise price of $13.51 and $32,500,000
convertible notes with conversion price of $12.47 were excluded from the diluted
earnings per share due to their anti-dilutive effect.
 
 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 three months ended
                      March 31,2009
                    
                    
                    For the three months
                      ended March 31,2008Unaudited
                    
                    
                    UnauditedRental
      Income
                    
                    $
                    439,530
                    
                    
                    $
                    419,310
 
 The
Company’s short term loan of $2,197,500 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.
 
 For the three months
                      ended March 31,2009
                    
                    
                    For the three months
                      ended March 31,2008Unaudited
                    
                    
                    UnauditedPurchase
      from Hengying and Dazhan
                    
                    $
                    6,829,080
                    
                    
                    $
                    28,434,046Sales
      to Hengying and Dazhan
                    
                    $
                    510,153
                    
                    
                    $
                    1,279,813
  - 30
-
  GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 March 31,
2009
 Unaudited
  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 March 31, 2009
and December 31, 2008.
 
 a.
              Other
      receivables - related parties
 
 Name of related parties
                      
                      March 31,
                        2009
                      
                      
                      December 31,
                        2008Unaudited
                      
                      
                      UnauditedBeijing
      Wendlar
                      
                      $
                      674,166
                      
                      
                      $
                      376,324De
      Long Fen Ti
                      
                      
                      574,950
                      
                      
                      
                      -Tianjin
      Jin Qiu Steel Market
                      
                      
                      146,500
                      
                      
                      
                      146,700Total
                      
                      $
                      1,395,616
                      
                      
                      $
                      523,024
 
 b.
              Advances
      on inventory purchases – related
parties
 
 Name of related parties
                      
                      March 31,
                        2009
                      
                      
                      December 31,
                        2008UnauditedLiyuan
      Ximei
                      
                      $
                      7,616,588
                      
                      
                      $
                      502,336Daishang
      trading Co., Ltd.
                      
                      
                      2,448,417
                      
                      
                      
                      1,872,301Maoming
      Shengze Trading
                      
                      
                      3,798,917
                      
                      
                      
                      -Total
                      
                      $
                      13,863,922
                      
                      
                      $
                      2,374,637
 
 c.
              Accounts
      payable due to related parties
 
 Name of related parties
                    
                    March 31,
                      2009
                    
                    
                    December 31,
                      2008UnauditedLong
      Men Group
                    
                    $
                    21,354,671
                    
                    
                    $
                    10,630,309Henan
      Xinmi Kanghua
                    
                    
                    1,392,878
                    
                    
                    
                    1,500,987Zhengzhou
      Shenglong
                    
                    
                    131,912
                    
                    
                    
                    -Baotou
      Shengda Steel Pipe
                    
                    
                    1,568,050
                    
                    
                    
                    1,558,228ShanXi  Fangxin
                    
                    
                    1,492,855
                    
                    
                    
                    1,451,336Baogang
      Jianan Group
                    
                    
                    74,153
                    
                    
                    
                    185,664Jingma
      Jiaohua
                    
                    
                    6,012,175
                    
                    
                    
                    -Total
                    
                    $
                    32,026,694
                    
                    
                    $
                    15,326,524
 
  - 31
-
  GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 March 31,
2009
 Unaudited
 d.
              Short
      term loan due to related parties
 
 Name of related parties
                  
                  March 31,
                    2009
                  
                  
                  December 31,
                    2008UnauditedDazhan
                  
                  $
                  3,940,850
                  
                  
                  $
                  3,946,230Hengying
                  
                  
                  3,398,800
                  
                  
                  
                  3,403,440Total
                  
                  $
                  7,339,650
                  
                  
                  $
                  7,349,670
 
 e.
              Other
      payables due to related parties
 
 Name of related parties
                    
                    March 31,
                      2009
                    
                    
                    December 31,
                      2008UnauditedGolden
      Glister
                    
                    $
                    600,000
                    
                    
                    $
                    600,000Hengying
                    
                    
                    7,481,339
                    
                    
                    
                    -Baogang
      Jianan Group
                    
                    
                    110,135
                    
                    
                    
                    -Baotou
      Shengda Steel Pipe
                    
                    
                    -
                    
                    
                    
                    77,013Total
                    
                    $
                    8,191,474
                    
                    
                    $
                    677,013
 
 f.
              Customer
      deposits – related parties
 
 Name of related parties
                  
                  March 31,
                    2009
                  
                  
                  December 31,
                    2008UnauditedDazhan
                  
                  $
                  6,690,802
                  
                  
                  $
                  2,759,964Haiyan
                  
                  
                  -
                  
                  
                  1,522,355Maoming
      Heng Da Materials
                  
                  
                  -
                  
                  
                  
                  2,934,000Total
                  
                  $
                  6,690,802
                  
                  
                  $
                  7,216,319
 
 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.
  - 32
-
 GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 March 31,
2009
 Unaudited
 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 Henggang to acquire 99% equity of Henggang.
The total purchase price for the acquisition is $7.3 million (RMB 50 million).
The fair value of Henggang 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 byHenggang
                  
                  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
 
 The
financial data of Henggang 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 $18,739,625
and $18,765,209 as of March 31, 2009 and December 31, 2008,
respectively.
 
 Note
18 - Shareholder’s equity
 
 On
January 14, 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.
  - 33
-
 GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 March 31,
2009
 Unaudited
 
 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 March 31, 2009.
 
 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. See
note 11 for details.
 
 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. $90,000 of
public relationship expense had been recorded for the three months ended March
31, 2009.
 
 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.
  - 34
-
 GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 March 31,
2009
 Unaudited
 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 three months ended March 31,
2009.
 
 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
                      
                      
                      1,154,958GrantedForfeitedExercisedOutstanding
      As of March 31, 2009
                      
                      
                      1,154,958
 
 Outstanding Warrants
                          
                          
                          Exercisable WarrantsExercise
                            Price
                          
                          Number
                          
                          
                          Average
                            Remaining
                            Contractual
                            Life
                          
                          
                          Average
                            Exercise
                            Price
                          
                          
                          Number
                          
                          
                          Average
                            Remaining
                            Contractual
                            Life$                   
      13.51
                          
                          
                          1,154,958
                          
                          
                          
                          4.12
                          
                          
                          $
                          13.51
                          
                          
                          
                          1,154,958
                          
                          
                          
                          4.12
 
 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 $812,306 and $512,966 for the three months  ended
March 31, 2009, and 2008, respectively.
  - 35
-
 GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 March 31,
2009
 Unaudited
 Note20–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
 
 The
company is obligated to contribute $5,130,000 (RMB 40 million), as registered
capital to Baotou Steel Pipe Joint Venture. The Company contributed
approximately $1,734,200 through December 31, 2008, and the balance will be
contributed in the first half of 2009, from Daqiuzhuang Metal.
 
 Hancheng
Tongxing Metallurgy Co., Ltd., one subsidiary of Longmen Joint Venture, is
obligated to contribute $32,962,500 (RMB 225 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 March 31, 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 RMB
8,067,400).
 
 Baotou
Steel Pipe Joint Venture has 5 years rental agreement with Bao Gang Jian An for
property and buildings. The agreement began June 2007 for $263,700 (or
RMB1,800,000) per year.
  - 36
-
 GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 March 31,
2009
 Unaudited
 As of
March 31, 2009, total future minimum lease payments for the unpaid portion under
an operating lease were as follows:
  Year ended December 31,
                          
                          Amount2009
                          
                          $
                          922,6982010
                          
                          
                          263,7002011
                          
                          
                          263,7002012
                          
                          
                          131,8502013
                          
                          
                          -Thereafter
                          
                          
                          -Total
                          
                          $
                          1,581,948
 Total
rental expense for the three months ended March 31, 2009 and 2008 amounted to
$85,021 and $98,798, respectively.
 
 Long Men
Joint Venture is constructing two blast furnaces in 2008, the total contract
cost was $216,161,341, of which $208,741,132 was paid, and $7,420,209 will be
paid within one year.
  Note 22 – Subsequent
Event
  - 37
-




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





Net Income swung to a $7.3 million
profit for the first quarter of 2009 from a full-year 2008 net loss of $11.3
million. Earnings per share for the first quarter were $0.20 per
share.





Sales volume at our Longmen Joint
Venture increase 38.3% to 649,327 metric tons compared to 469,600 metric tons
for the same period last year.





Our Longmen Joint Venture comprises 91%
of our total revenue and this management team deserves recognition for their
profitable operating performance in a challenging environment.





Market





Our Longmen Joint Venture is focused
primarily on the markets of Shaanxi and Sichuan provinces. These relatively less
developed economies of western China are a key focus of China’s infrastructure
investment. Demand in this region for construction steel has been boosted by
infrastructure-related projects in first quarter of 2009.  Our markets
have proven the ability to absorb the additional capacity from our two new blast
furnaces which were brought on line at the end of 2008 and January
2009.





First quarter is traditionally the
slowest quarter of the year owing to a general weather-related slowing in
construction projects and the Chinese New Year holiday. In the months of January
and February, selling prices trended up likely due to distributor loading,
however, the trend was not sustainable and sales prices dropped in March.
Fortunately, the demand in our addressable markets has been stable allowing us
to enjoy a price premium of nearly $29 per metric ton compared with rebar prices
in Shanghai or Beijing.


- 38
-





Economic
Stimulus Spending





According to the National Development
and Reform Commission (NDRC), the Chinese central government economic stimulus
plan is expected to spend $586 billion, of which $259 billion is allocated for
rural infrastructure, earthquake reconstruction and public
housing.  Another $219 billion is allocated for transport and power
infrastructure. As the largest construction steel producer and dominant supplier
in Shaanxi province,our Longmen
JV has already begun to see the impact of the stimulus plan. In the first
quarter, in addition to distributor contracts, we signed direct-supply
stimulus-related contracts totaling 560,000 metric tons. This figure represents
approximately 30% of our Longmen JV’s total production volume in
2008.





With the stimulus plan gaining traction
in the first quarter, we expect to see continued stimulus-related spending in
the months and years ahead.





Operations





Production volume of crude steel for
the first quarter of 2009 increased 39% to 655,000 metric tons from 470,000
metric tons in the same quarter last year. This increase is largely traced to
our two new 1,280 cubic meter blast furnaces which became operational at the end
of 2008 and January 2009 and are still in the fine-tuning process. On April 21,
2009 daily production of crude steel set a new daily record exceeding 10,000
metric tons.





Doubling daily crude steel production
from 5,000 to 10,000 metric tons requires a range of operational activities to
be keenly managed.





Raw material procurement – Our
blast furnaces run 24 hours a day, 7 days a week, 365 days a year.  We
now require approximately 23,000 metric tons of raw materials each day. Strict
purchasing and shipping lead-times must be synchronized to ensure continuous
production.





Logistics – Each day we now
consume approximately 18,000 metric tons of iron ore - the equivalent of 300 dry
bulk railcars, accept delivery of over 140 truckloads of coal and load 285 out
bound trucks with our billets.  A normal day now requires the
coordination of more than 425 trucks and 300 railcars entering and leaving our
facility.





Financing – Financing the
construction and working capital requirements of the two new blast furnaces and
support facilities without going to the western capital markets for financing
assistance has been a tremendous achievement for our organization. The cost of
the blast furnaces and support facilities was approximately $200 million. All of
this financing has been done during a period of the tightest credit since the
Great Depression. The management team at Longmen has done an excellent job of
managing cash flow utilizing vendor financing, prepayments from customers and
short-term loans to build and operate these large income producing assets. A
large part of the first quarter 2009 profits is the result of their hard work
and effort.





Merger
and Acquisition





The current global economic slow down
is a two-edged sword. On one edge, it has brought severe hardship for many in
the steel industry; on the other edge it has created an unprecedented
opportunity to pursue mergers and acquisitions within the industry.





Several factors have aligned to form
this favorable environment.





The economic slow down has made it
challenging for steel companies to operate profitably. In this difficult
environment, private steel company owners welcome a partner to help them. This
attitude is different from one year ago when the steel industry was booming. At
that time, private steel company owners asked for high valuations and tough
terms. Now when business is difficult, valuations are more attractive and we are
in a much better position to negotiate favorable terms.


- 39
-





The central government has implemented
economic support programs for the steel industry, but they are only available
for state-owned steel companies. In addition, the government is pushing harder
for consolidation. These actions have sent a clear signal to independent steel
companies that it will be harder to operate alone.





These concerns have led us to our
current two-step acquisition strategy. In the first step, we pay only a minimum
down payment and take control of the target company. This allows us to manage
and operate the entity with an insider’s view of the company.





Only if the target company proves to be
accretive will we proceed to step two which is taking a majority equity stake in
the target company. This two-step process allows us to minimize risk and
maximize shareholder value.





It has always been our two-pronged
strategy to grow through merger and acquisition activities along with upgrading
existing operations. We continue to follow our strategy and actively evaluate
merger and acquisition opportunities arising from the economic downturn. Our
greatest concern is not finding attractive candidates, but ensuring risks are
minimized and shareholder value is maximized.





Summary





There are two points which stand out
from the challenging first quarter of 2009. First, we were able to be profitable
in the midst of the global economic downturn. Second, the environment for merger
and acquisitions has never looked better as we move forward with our
strategy.





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:





• 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).


- 40
-





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.





•
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.





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.


- 41
-





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.





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 Xian
Steel Market Statistics dated April 7, 2009.





An established regional network of 24
agents and two sales offices sell the Longemn 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.





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.


- 42
-


•  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.





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.


- 43
-


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.





Longmen Joint Venture represents four
million tons of our aggregate 6.3 million metric ton 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, of which less than one million metric tons have been
excavated. 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.


- 44
-





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.





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.





·           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 March 31, 2009 compared with three months ended March 31,
2008





Sales revenue for the three months
ended March 31, 2009 increased 10.7% to $322.8 million compared to $291.6
million for the same period last year.





The increase in sales revenue is due to
production volume increase of 38.3% at our Longmen JV which offset declines at
Daqiuzhuang Metal and Baotou Steel Pipe Joint Venture.





The Sales Revenue increase is also
attributed to our Maoming acquisition which was acquired June 25, 2008. First
quarter March 31, 2009 Sales Revenue result reflect a full three months of
operations whereas this subsidiary did not exist for the same period last
year.


- 45
-





Sale
      Revenue
                            
                            First Quarter EndingMarch 31st, 2009
                            
                            
                            March 31st, 2008Volume
                            
                            
                            Revenue
                            
                            
                            %
                            
                            
                            Volume
                            
                            
                            Revenue
                            
                            
                            %
                            
                            
                            Volume %
                            
                            
                            Revenue %Longmen
      JV
                            
                            
                            649,327
                            
                            
                            $
                            292,714,691
                            
                            
                            
                            91
                            %
                            
                            
                            469,600
                            
                            
                            $
                            256,451,812
                            
                            
                            
                            88
                            %
                            
                            
                            38.3
                            %
                            
                            
                            14.1
                            %Maoming
                            
                            
                            42,369
                            
                            
                            $
                            17,249,993
                            
                            
                            
                            5
                            %
                            
                            NA
                            
                            
                            NA
                            
                            
                            
                            0
                            %Daqiuzhuang
      Metal
                            
                            
                            25,672
                            
                            
                            $
                            12,698,109
                            
                            
                            
                            4
                            %
                            
                            
                            53,739
                            
                            
                            $
                            34,017,390
                            
                            
                            
                            12
                            %
                            
                            
                            -52.2
                            %
                            
                            
                            -62.7
                            %Baotou
      Steel Pipe JV
                            
                            
                            768
                            
                            
                            $
                            131,103
                            
                            
                            
                            0
                            %
                            
                            
                            1,832
                            
                            
                            $
                            1,096,797
                            
                            
                            
                            0
                            %
                            
                            
                            -58.1
                            %
                            
                            
                            -88.0
                            %Total
                            
                            
                            718,136
                            
                            
                            $
                            322,793,896
                            
                            
                            
                            100
                            %
                            
                            
                            525,171
                            
                            
                            $
                            291,565,999
                            
                            
                            
                            100
                            %
                            
                            
                            36.7
                            %
                            
                            
                            10.7
                            %





Longmen Joint Venture - Comprised 91%
of total sales. These sales were fueled by stable demand for construction steel
in our addressable markets and increased production contributed by our two new
1,280 cubic meter blast furnaces.





Maoming – Acquired June 25,
2008.





Daqiuzhuang Metal – Due to economic
slowdown, demand for 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 – Due to harsh
winter conditions in northern China, many construction projects are in
hibernation until April.





Gross
Profit





Three
months ended March 31, 2009 compared with three months ended March 31,
2008





Gross profit for the three months ended
March 31, 2009 decreased 0.5% to $12.92 million from $12.98 million for the same
period last year.





The industry conditions in the first
quarter 2009 were extremely different from the first quarter of
2008.  The first three months of last year were highlighted by rapidly
escalating commodities markets and the central government’s effort to prevent
inflation and cool down the economy.  In the first three months of
this year, the commodities market had dramatically fallen from its earlier
heights, the banking and credit crisis had brought down prices for most assets
and the central government was now concerned with implementing ways to stimulate
the economy.  Against this backdrop, it is a noteworthy accomplishment
that our first quarter 2009 gross profit is only 0.5% less than for the same
period last year.





It is meaningful to notice that gross
profit for the first quarter 2009 has swung from a loss to a gain, increasing to
$12.9 million from a loss of $21.6 million for the fourth quarter 2008. This
large gross profit improvement shows that our inventory purchased during the
period of rising commodity prices has been cleared out.





GROSS PROFIT1st Quarter 2009
                            
                            
                            4th Quarter 2008
                            
                            
                            1st Quarter 2008Gross Profit
                            
                            
                            
                            
                            
                            Gross Profit
                            
                            
                            
                            
                            
                            Gross ProfitGross Profit
                            
                            
                            Margin %
                            
                            
                            Gross Profit
                            
                            
                            Margin %
                            
                            
                            Gross Profit
                            
                            
                            Margin %Longmen
      JV
                            
                            
                            14,736,380
                            
                            
                            
                            5.03
                            %
                            
                            $
                            (17,179,873
                            )
                            
                            
                            -7.33
                            %
                            
                            $
                            11,024,153
                            
                            
                            
                            4.3
                            %Maoming
                            
                            
                            (2,242,177
                            )
                            
                            
                            -13.00
                            %
                            
                            $
                            (2,621,671
                            )
                            
                            
                            -29.45
                            %Daqiuzhuang
      Metal
                            
                            
                            421,828
                            
                            
                            
                            3.32
                            %
                            
                            $
                            (2,815,061
                            )
                            
                            
                            -19.47
                            %
                            
                            $
                            1,924,305
                            
                            
                            
                            5.7
                            %Baotou
      Steel Pipe JV
                            
                            
                            6,090
                            
                            
                            
                            4.65
                            %
                            
                            $
                            1,041,070
                            
                            
                            
                            30.08
                            %
                            
                            $
                            33,657
                            
                            
                            
                            3.1
                            %Total
                            
                            
                            12,922,119
                            
                            
                            
                            4.0
                            %
                            
                            $
                            (21,575,535
                            )
                            
                            
                            -8.26
                            %
                            
                            $
                            12,982,115
                            
                            
                            
                            4.5
                            %




- 46
-


Selling,
General and Administrative Expenses





Three
months ended March 31, 2009 compared with three months ended March 31,
2008





Selling, general and administrative
expenses, such as executive compensation, office expenses, legal and accounting
charges, travel charges, and various taxes were $9.2 million for the three
months ended March 31, 2009, compared to $6.5 million for the same period of
2008. This increase is attributed to greater production volume at our Longmen
Joint Venture and the addition of our Maoming subsidiary which did not exist in
the same period 2008.





Other
income (expense)





Three
months ended March 31, 2009 compared with three months ended March 31,
2008





Other income (expense) for the three
months ended March 31, 2009 increased to income of $9.0 million from an expense
of $2.4 million for the same period last year.





OTHER INCOME (EXPENSE), NET
                          
                          1st Quarter 2009
                          
                          
                          1st Quarter 2008Interest
      income
                          
                          $
                          878,633
                          
                          
                          $
                          580,318Finance/interest
      (expense)
                          
                          
                          (2,938,778
                          )
                          
                          
                          (5,986,507
                          )Change
      in fair value of derivative liabilities
                          
                          
                          4,114,568
                          
                          
                          
                          2,670,764Gain
      from debt extinguishment
                          
                          
                          2,930,200
                          
                          
                          
                          -Government
      grant
                          
                          
                          3,519,890
                          
                          
                          
                          -Income
      from equity investment
                          
                          
                          (54,632
                          )
                          
                          
                          -Other
      non-operating income (expense), net
                          
                          
                          510,216
                          
                          
                          
                          369,270Total
      other income (expense), net
                          
                          $
                          8,960,097
                          
                          
                          $
                          (2,366,155
                          )





- 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


- Change in fair value of derivative
liabilities: related to valuation of 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.Our Chairman has worked very hard examining every area to improve our
liquidity position.


-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:mostly rental income of excess land at Daqiuzhuang Metal for land
use rights





On December 13, 2007, the Company
entered into a Securities Purchase Agreement to sell senior convertible notes in
the aggregate principal amount of $40,000,000 and warrants to purchase an
additional aggregate amount of 1,154,958.




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.


- 47
-


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, and recorded $21,090,722 gain from changes in fair value of
derivative. 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.





On March 31, 2009, in accordance with
SFAS 133, the fair value of derivative liabilities was recalculated and
decreased by $4,114,568 during the period, including $1,261,690 for the decrease
in fair value of the warrants and $2,852,878 for the decrease in fair value of
the conversion option.




As of March 31, 2009, the balance of
derivative liabilities was $5,788,442, which consisted of $1,817,216 for the
warrants and $3,971,226 for the conversion option, and the carrying value of the
notes was 7,624,674. The effective interest charges on notes totaled $1,027,477
and $159,478 for the three months ended March 31, 2009 and 2008, respectively.
As of March 31, 2009, the unamortized note issuance cost was $4,197,058,
including $1,564,500 for additional issuance of 150,000 shares of the common
stock to the placement agent in January 2008. Note issuance cost was amortized
to interest expense at $20,917 and $8,894 for the three months ended March 31,
2009 and 2008, respectively.




Net
income





Three
months ended March 31, 2009 compared with three months ended March 31,
2008





Net income for the three months ended
March 31, 2009 increased 235% to $7.3 million compared to $2.2 million for the
same period of last year.





Earnings
per share





Earning per share for the three months
ended March 31, 2009 increased 233% to 0.20 per share compared to $0.06 per
share for the same period last year.





1st Quarter 2009
                  
                  
                  1st Quarter 2008
                  
                  
                  %NET
      INCOME
                  
                  $
                  7,334,632
                  
                  
                  $
                  2,188,460
                  
                  
                  
                  235
                  %SHARESBasic
                  
                  
                  36,285,312
                  
                  
                  
                  34,836,394Diluted
                  
                  
                  36,285,312
                  
                  
                  
                  34,923,614EARNINGS
      PER SHAREBasic
                  
                  $
                  0.20
                  
                  
                  $
                  0.06
                  
                  
                  
                  222
                  %Diluted
                  
                  $
                  0.20
                  
                  
                  $
                  0.06
                  
                  
                  
                  223
                  %





The first quarter March 31, 2009
earnings per share was positively impacted by the gain on derivative instrument
which is a non-operating, non-cash gain. Management believes that Net Income
less derivative impact is a better measurement of management
performance.   .


- 48
-




NET INCOME (LOSS)
      LESS DERIVATIVE IMPACT1stQuarter2009
                  
                  
                  1stQuarter2008NET
      INCOME
                  
                  $
                  7,334,632
                  
                  
                  $
                  2,188,460less
      gain on derivative instrument
                  
                  $
                  4,114,568
                  
                  
                  $
                  2,670,764NET
      INCOME (LOSS) LESS DERIVATIVE IMPACT
                  
                  $
                  3,220,064
                  
                  
                  $
                  (482,304
                  )WEIGHTED
      AVERAGE NUMBER OF SHARESBasic
                  
                  
                  36,285,312
                  
                  
                  
                  34,836,394Diluted
                  
                  
                  36,285,312
                  
                  
                  
                  34,923,614EARNINGS
      (LOSS) PER SHARE LESS DERIVATIVE IMPACTBasic
                  
                  $
                  0.09
                  
                  
                  $
                  (0.01
                  )Diluted
                  
                  $
                  0.09
                  
                  
                  $
                  (0.01
                  )





The derivative instrument gain is a
non-operating, non-cash gain related to the convertible bond and related
warrants issued December 2007. According to accounting rules, the derivative
instrument value and associated gain or loss is linked to the stock price of
General Steel Holdings, Inc. The gain or loss of this instrument has no impact
on cash (no cash was paid out or received in).





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 March 31, 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.





Pursuant to the relevant laws and
regulations in the People's Republic of China, Daqiuzhuang Metal, as a foreign
owned enterprise in the People's Republic of China, is entitled to an exemption
from the PRC enterprise income tax for two years commencing from its first
profitable year. Daqiuzhuang Metal has been approved for this tax benefit and
was exempt from income tax for the years ended December 31, 2005 and 2006 and is
eligible for a 50% income tax reduction for the years ended December 31, 2007,
2008 and 2009. The current effective income tax rate is 12%.





The effective income tax rate at our
Baotou Steel Pipe Joint Venture is 25%.





Our Longmen Joint Venture is located in
the mid-west region of China. The National Development and Reform Commission
(the “NDRC”) granted it qualification approval to attain the “Go West” special
tax treatment. This national tax treatment rewards companies contributing to the
economic development of the Western Region by lowering their effective corporate
tax rate from 33% to 15%. This change was effective July 1, 2007 and is
reflected from our financial results.





Maoming is located in Guangdong
province, is subject to an income tax at effective rate of 25%.





For the three months ended March 31,
2009, we had a tax expense of $1.4 million.





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.


- 49
-


Accounts
Receivable





Accounts receivable and accounts
receivable-related party were $20.1 million as of March 31, 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 March 31, 2009, we reserved $0.4 million for bad debt allowance
based on our reasonable estimate.





Liquidity
and capital resources




Due to the strong market demand for our
products and our new Longmen Joint Venture, we plan to maintain a
higher-than-average debt to equity ratio to better position ourselves in this
fast growing market. Our bank loans are considered short term for the purpose of
the preparation of the financial statements though they are renewable with the
banks yearly. Cash balance including restricted cash amounted to $213.4 million
and $145.6 million as of March 31, 2009 and December 31, 2008,
respectively.





Operating
activities





Net cash provided by operating
activities for the three months ended March 31, 2009 was $16.3million compared
to cash used in operating activities of $27.1 million in the same period of
2008. This change was mainly due to the combination of the following
factors:





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, minority interest and deferred tax assets, totaled of
$8.3 million.





Cash inflow due to the increase in
accounts payable, other payables, accrued liabilities, customer deposits and tax
payable totaled of $43.6 million. We have recently completed construction of two
new blast furnaces at Longmen Joint Venture. We have been financing this
construction using vendor financing and working capital provided by our
suppliers and customers.





Cash inflow resulting from increase in
accounts receivable, notes receivable, other receivables and other
receivables-related parties which was $10.3 million.





Cash outflow due to increase in
inventory, advances on inventory purchases and prepaid expense of $45.9
million.





Investing
activities





Net cash used in investing activities
was $11.3 million for three months of 2009 compared to $27.3 million used in the
same period of 2008. This decrease in cash used in investing activities mainly
resulted from $35.7 million cash inflow which was from deposits due to sales
representatives. The Company spent $41.4 million on equipment purchase and $6.6
million in long term investment.





Financing
activities





Net cash provided by financing
activities was $19.2 million for three months of 2009 compared to $23.0 million
in the same period of 2008. This was mainly attributable to net cash inflows of
$18.2 million on short term bank loan, $38.7 million on short term notes payable
and $6.1million of other short term loan, and outflow of $43.8 million on
restricted cash.


- 50
-





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.




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 March 31, 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.


- 51
-


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.




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.


- 52
-





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.”





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.


- 53
-


The
Company’s investment in unconsolidated subsidiaries amounted to $20,476,409 as
of March 31, 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 March 31, 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 3 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
March 31, 2009, the outstanding principal amounted to $33,250,000, and the
carrying value of the convertible note amounted to $7,624,674. 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 $5.79 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.





As a
result of adoption of SFAS 160, we reclassified noncontrolling interests in the
amounts of $59 million and $55 million from the mezzanine section to equity in
the March 31, 2009 and December 31, 2008 balance sheets,
respectively





New
Accounting Pronouncements





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. We are currently evaluating this new FSP but do not believe that it will
have a significant impact on the determination or reporting of our financial
results.


- 54
-


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. We are currently evaluating
this new FSP but do not believe that it will have a significant impact on the
determination or reporting of our financial results.





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. We are
currently evaluating the disclosure requirements of this new FSP.





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.





The following tables summarize our
contractual obligations as of March 31, 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)
                          
                          $
                          85,931
                          
                          
                          $
                          85,931
                          
                          
                          $
                          -
                          
                          
                          $
                          -Notes
      payable
                          
                          
                          244,428
                          
                          
                          
                          244,428
                          
                          
                          
                          -
                          
                          
                          
                          -Deposits
      due to sales representatives
                          
                          
                          43,858
                          
                          
                          
                          43,858
                          
                          
                          
                          -
                          
                          
                          
                          -Lease
      with Bao Gang
                          
                          
                          857
                          
                          
                          
                          264
                          
                          
                          
                          528
                          
                          
                          
                          65Blast
      Furnace construction
                          
                          
                          7,420,209
                          
                          
                          
                          7,420,209
                          
                          
                          
                          -
                          
                          
                          
                          -Convertible
      notes ( Principal plus Interest )
                          
                          
                          47,250
                          
                          
                          
                          2,071
                          
                          
                          
                          6,431
                          
                          
                          
                          38,748Total
                          
                          $
                          7,842,533
                          
                          
                          $
                          7,796,761
                          
                          
                          $
                          6,959
                          
                          
                          $
                          38,813




- 55
-





(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 $338,989 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.




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:


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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 March 31, 2009.





PART II – OTHER
INFORMATION





ITEM
1. LEGAL PROCEEDINGS





None for
the period covered by this report.





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.  The risks discussed below are those that we believe are
currently the most significant, although additional risks not presently known to
us or that we currently deem less significant may also impact our business,
financial condition and results of operations, perhaps
materially.


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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;





· 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


·


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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:





· 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.


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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.





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 March 31, 2009, approximately 30% 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.


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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.


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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.





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.


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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.





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.


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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.


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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.




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.


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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 March 31, 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.


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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 is higher than the Market Price
pursuant to the notes agreement. 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.





ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS





Issued 109,250 shares of
common stock as interim incentives to senior and mid-level
management





On March 9, 2009, the Company
granted senior management and directors 109,250 shares of common stock at $1.85
per share, as incentive compensation. The shares were valued at the quoted
market price on the date granted. The Company recorded compensation expense of
$202,003 for the three months ended March 31, 2009.


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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





On May 7, 2009, the conversion price
of the senior convertible notes issued in December 2007 was reset to
$4.2511 to the Market Price because the conversion price is higher than the
Market Price pursuant to the notes agreement. 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.





On May 8, 2009, the Company issued
300,000 shares of common stock at $6.00 per share to Ms. Yumei Ding, the sole
shareholder of Guangzhou Hengda Industrial Group Limited for the purpose of debt
repayment owed by the Company’s subsidiary, Maoming Hengda Steel Group
Limited.





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.


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:
      May 11, 2009
            By:
            /s/ Zuosheng YuZuosheng
      YuChief
      Executive Officer and ChairmanDate:
      May 11, 2009
            By:
            /s/ John ChenJohn
      ChenDirector
      and Chief Financial Officer




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