UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549




FORM
10-Q





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





For
the quarterly period ended June 30, 2010





or





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





For the transition period from
________________ to _______________________





Commission
File Number 001-33717




General
Steel Holdings, Inc.


(Exact
name of registrant as specified in its charter)




Nevada
              41-2079252(State or other Jurisdiction of
              (I.R.S. Employer Identification No.)Incorporation or Organization)





Room
2315, Kuntai International Mansion Building,


Yi
No. 12, Chaoyangmenwai Ave.


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 Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.    Yes x No  ̈




Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405
of this chapter) during the preceding 12 months (or for shorter period that
the registrant was required to submit and post such files).  Yes 
 ̈ No 
 ̈




Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a non-accelerated
filer or a smaller reporting company. See definition of “large accelerated
filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2
of the Exchange Act.




Large accelerated
      filer  ̈
                      
                      Accelerated filer x
                      
                      Non-accelerated filer  ̈
                        (Do not check if a smallerreporting company)
                      
                      Smaller reportingcompany  ̈





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




As of August 9, 2010, 54,512,183 shares
of common stock, par value $0.001 per share, were issued and
outstanding.










Table
of Contents


PagePart
      I: FINANCIAL INFORMATIONItem
      1.
                    Financial
      Statements.
                    3Consolidated
      Balance Sheets as of June 30, 2010 (Unaudited) and December 31,
      2009.
                    3Consolidated
      Statements of Operation and Other Comprehensive Income (loss) for the
      Three Months and Six Months Ended June 30, 2010 and 2009
      (Unaudited).
                    4Consolidated
      Statements of Changes In Equity (Unaudited).
                    5Consolidated
      Statements of Cash Flows for the Six Months Ended June 30, 2010 and 2009
      (Unaudited).
                    6Notes to
      Consolidate Financial Statements (Unaudited).
                    7Item
      2.
                    Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations.
                    39Item
      3.
                    Quantitative
      and Qualitative Disclosures About Market Risk.
                    58Item
      4.
                    Controls
      and Procedures.
                    58Part
      II. OTHER INFORMATIONItem
      1.
                    Legal
      Proceedings.
                    59Item
      6.
                    Exhibits.
                    59Signatures
                    
                    60


2


PART
I – FINANCIAL INFORMATION





ITEM
1. FINANCIAL STATEMENTS.




GENERAL STEEL HOLDINGS INC. AND SUBSIDIARIES
 
 CONSOLIDATED
BALANCE SHEETS
 AS OF
JUNE 30, 2010 AND DECEMBER 31, 2009
 (In
thousands, except per share data)
 
 June 30,
                                                      
                                                      
                                                      December 31,2010
                                                      
                                                      
                                                      2009(Unaudited)ASSETSCURRENT
      ASSETS:Cash
                                                      
                                                      $
                                                      50,772
                                                      
                                                      
                                                      $
                                                      82,118Restricted
      cash
                                                      
                                                      
                                                      269,670
                                                      
                                                      
                                                      
                                                      192,041Notes
      receivable
                                                      
                                                      
                                                      56,355
                                                      
                                                      
                                                      
                                                      29,185Restricted
      notes receivable
                                                      
                                                      
                                                      24,324
                                                      
                                                      
                                                      
                                                      -Accounts
      receivable, net
                                                      
                                                      
                                                      20,759
                                                      
                                                      
                                                      
                                                      8,525Accounts
      receivable - related party
                                                      
                                                      
                                                      734
                                                      
                                                      
                                                      
                                                      -Other
      receivables, net
                                                      
                                                      
                                                      8,887
                                                      
                                                      
                                                      
                                                      5,357Other
      receivables - related parties
                                                      
                                                      
                                                      30,556
                                                      
                                                      
                                                      
                                                      32,670Dividend
      receivable
                                                      
                                                      
                                                      5,940
                                                      
                                                      
                                                      
                                                      2,372Inventories
                                                      
                                                      
                                                      281,276
                                                      
                                                      
                                                      
                                                      208,087Advances
      on inventory purchase
                                                      
                                                      
                                                      40,085
                                                      
                                                      
                                                      
                                                      28,407Advances
      on inventory purchase - related parties
                                                      
                                                      
                                                      8,798
                                                      
                                                      
                                                      
                                                      2,995Prepaid
      expense
                                                      
                                                      
                                                      5,409
                                                      
                                                      
                                                      
                                                      690Prepaid
      value added tax
                                                      
                                                      
                                                      17,075
                                                      
                                                      
                                                      
                                                      19,488Deferred
      tax assets
                                                      
                                                      
                                                      8,775
                                                      
                                                      
                                                      
                                                      3,341Total
      current assets
                                                      
                                                      
                                                      829,415
                                                      
                                                      
                                                      
                                                      615,276PLANT
      AND EQUIPMENT, net
                                                      
                                                      
                                                      566,202
                                                      
                                                      
                                                      
                                                      555,111OTHER
      ASSETS:Advances
      on equipment purchase
                                                      
                                                      
                                                      18,618
                                                      
                                                      
                                                      
                                                      8,419Investment
      in unconsolidated subsidiaries
                                                      
                                                      
                                                      12,751
                                                      
                                                      
                                                      
                                                      20,022Long-term
      deferred expense
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      2,069Intangible
      assets, net of accumulated amortization
                                                      
                                                      
                                                      23,400
                                                      
                                                      
                                                      
                                                      23,733Note
      issuance cost
                                                      
                                                      
                                                      392
                                                      
                                                      
                                                      
                                                      406Plant
      and equipment to be disposed
                                                      
                                                      
                                                      2,800
                                                      
                                                      
                                                      
                                                      3,026Total
      other assets
                                                      
                                                      
                                                      57,961
                                                      
                                                      
                                                      
                                                      57,675TOTAL
      ASSETS
                                                      
                                                      $
                                                      1,453,578
                                                      
                                                      
                                                      $
                                                      1,228,062LIABILITIES AND
    EQUITYCURRENT
      LIABILITIES:Short
      term notes payable
                                                      
                                                      $
                                                      388,080
                                                      
                                                      
                                                      $
                                                      254,608Accounts
      payable
                                                      
                                                      
                                                      194,478
                                                      
                                                      
                                                      
                                                      158,126Accounts
      payable - related parties
                                                      
                                                      
                                                      85,128
                                                      
                                                      
                                                      
                                                      48,151Short
      term loans - bank
                                                      
                                                      
                                                      177,404
                                                      
                                                      
                                                      
                                                      148,968Short
      term loans - others
                                                      
                                                      
                                                      97,902
                                                      
                                                      
                                                      
                                                      110,358Short
      term loans - related parties
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      11,751Other
      payables and accrued liabilities
                                                      
                                                      
                                                      19,769
                                                      
                                                      
                                                      
                                                      16,222Other
      payable - related parties
                                                      
                                                      
                                                      24,085
                                                      
                                                      
                                                      
                                                      3,706Customer
      deposit
                                                      
                                                      
                                                      186,589
                                                      
                                                      
                                                      
                                                      208,765Customer
      deposit - related parties
                                                      
                                                      
                                                      28,514
                                                      
                                                      
                                                      
                                                      3,791Deposit
      due to sales representatives
                                                      
                                                      
                                                      67,884
                                                      
                                                      
                                                      
                                                      49,544Taxes
      payable
                                                      
                                                      
                                                      6,020
                                                      
                                                      
                                                      
                                                      6,921Distribution
      payable to former shareholders
                                                      
                                                      
                                                      12,862
                                                      
                                                      
                                                      
                                                      16,434Total
      current liabilities
                                                      
                                                      
                                                      1,288,715
                                                      
                                                      
                                                      
                                                      1,037,345CONVERTIBLE
      NOTES PAYABLE, net of debt discount of $2,019 and $2,250 as of June 30,
      2010 and December 31, 2009, respectively
                                                      
                                                      
                                                      1,281
                                                      
                                                      
                                                      
                                                      1,050DERIVATIVE
      LIABILITIES
                                                      
                                                      
                                                      8,672
                                                      
                                                      
                                                      
                                                      23,340Total
      liabilities
                                                      
                                                      
                                                      1,298,668
                                                      
                                                      
                                                      
                                                      1,061,735COMMITMENT
      AND CONTINGENCIESEQUITY:Preferred
      stock, $0.001 par value, 50,000,000 shares authorized, 3,092,899 shares
      issued and outstanding as of June 30, 2010 and December 31, 2009,
      respectively
                                                      
                                                      
                                                      3
                                                      
                                                      
                                                      
                                                      3Common
      Stock, $0.001 par value, 200,000,000 shares authorized, 52,952,508 and
      51,618,595 shares  issued and outstanding as of June 30, 2010
      and December 31, 2009, respectively
                                                      
                                                      
                                                      53
                                                      
                                                      
                                                      
                                                      52Paid-in-capital
                                                      
                                                      
                                                      99,498
                                                      
                                                      
                                                      
                                                      95,588Statutory
      reserves
                                                      
                                                      
                                                      6,541
                                                      
                                                      
                                                      
                                                      6,162Accumulated
      deficits
                                                      
                                                      
                                                      (24,047
                                                      )
                                                      
                                                      
                                                      (16,412
                                                      )Accumulated
      other comprehensive income
                                                      
                                                      
                                                      8,398
                                                      
                                                      
                                                      
                                                      8,336Total
      shareholders' equity
                                                      
                                                      
                                                      90,446
                                                      
                                                      
                                                      
                                                      93,729NONCONTROLLING
      INTERESTS
                                                      
                                                      
                                                      64,465
                                                      
                                                      
                                                      
                                                      72,598Total
      equity
                                                      
                                                      
                                                      154,911
                                                      
                                                      
                                                      
                                                      166,327TOTAL
      LIABILITIES AND EQUITY
                                                      
                                                      $
                                                      1,453,578
                                                      
                                                      
                                                      $
                                                      1,228,062
  The
accompanying notes are an integral part of these consolidated financial
statements.
  3
  GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 CONSOLIDATED
STATEMENTS OF OPERATION AND OTHER COMPREHENSIVE INCOME (LOSS)
 (UNAUDITED)
 (In
thousands, except per share data)
 
 Three months ended June 30,
                    
                    
                    Six months ended June 30,2010
                    
                    
                    2009
                    
                    
                    2010
                    
                    
                    2009REVENUES
                    
                    $
                    383,173
                    
                    
                    $
                    324,461
                    
                    
                    $
                    700,801
                    
                    
                    $
                    586,875REVENUES
      - RELATED PARTIES
                    
                    
                    118,506
                    
                    
                    
                    84,486
                    
                    
                    
                    253,901
                    
                    
                    
                    144,866TOTAL
      REVENUES
                    
                    
                    501,679
                    
                    
                    
                    408,947
                    
                    
                    
                    954,702
                    
                    
                    
                    731,741COST
      OF REVENUES
                    
                    
                    369,437
                    
                    
                    
                    301,849
                    
                    
                    
                    687,013
                    
                    
                    
                    553,851COST
      OF REVENUES - RELATED PARTIES
                    
                    
                    124,882
                    
                    
                    
                    84,599
                    
                    
                    
                    254,596
                    
                    
                    
                    142,469TOTAL
      COST OF REVENUES
                    
                    
                    494,319
                    
                    
                    
                    386,448
                    
                    
                    
                    941,609
                    
                    
                    
                    696,320GROSS
      PROFIT
                    
                    
                    7,360
                    
                    
                    
                    22,499
                    
                    
                    
                    13,093
                    
                    
                    
                    35,421SELLING,
      GENERAL AND  ADMINISTRATIVE EXPENSES
                    
                    
                    13,677
                    
                    
                    
                    9,564
                    
                    
                    
                    25,818
                    
                    
                    
                    18,732(LOSS)
      INCOME FROM OPERATIONS
                    
                    
                    (6,317
                    )
                    
                    
                    12,935
                    
                    
                    
                    (12,725
                    )
                    
                    
                    16,689OTHER
      INCOME(EXPENSE)Interest
      income
                    
                    
                    617
                    
                    
                    
                    764
                    
                    
                    
                    1,737
                    
                    
                    
                    1,642Finance/interest
      expense
                    
                    
                    (16,464
                    )
                    
                    
                    (11,309
                    )
                    
                    
                    (27,427
                    )
                    
                    
                    (14,247
                    )Change
      in fair value of derivative liabilities
                    
                    
                    10,729
                    
                    
                    
                    (26,726
                    )
                    
                    
                    14,668
                    
                    
                    
                    (22,611
                    )Gain
      from debt extinguishment
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    2,930Government
      grant
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    3,520Income
      from equity investments
                    
                    
                    3,074
                    
                    
                    
                    2,753
                    
                    
                    
                    4,756
                    
                    
                    
                    2,698Other
      non-operating income, net
                    
                    
                    571
                    
                    
                    
                    142
                    
                    
                    
                    567
                    
                    
                    
                    653Total
      other expense, net
                    
                    
                    (1,473
                    )
                    
                    
                    (34,376
                    )
                    
                    
                    (5,699
                    )
                    
                    
                    (25,416
                    )LOSS
      BEFORE PROVISION FOR INCOME TAXES AND NONCONTROLLING
    INTEREST
                    
                    
                    (7,790
                    )
                    
                    
                    (21,441
                    )
                    
                    
                    (18,424
                    )
                    
                    
                    (8,727
                    )PROVISION
      FOR INCOME TAXESCurrent
                    
                    
                    (5,093
                    )
                    
                    
                    3,230
                    
                    
                    
                    (4,472
                    )
                    
                    
                    3,395Deferred
                    
                    
                    2,253
                    
                    
                    
                    (1,222
                    )
                    
                    
                    (335
                    )
                    
                    
                    -Total
      (benefit) provision for income taxes
                    
                    
                    (2,840
                    )
                    
                    
                    2,008
                    
                    
                    
                    (4,807
                    )
                    
                    
                    3,395NET
      LOSS BEFORE NONCONTROLLING INTEREST
                    
                    
                    (4,950
                    )
                    
                    
                    (23,449
                    )
                    
                    
                    (13,617
                    )
                    
                    
                    (12,122
                    )Less:
      Net (Loss) income attributable to noncontrolling interest
                    
                    
                    (2,822
                    )
                    
                    
                    8,340
                    
                    
                    
                    (5,982
                    )
                    
                    
                    12,333NET
      LOSS ATTRIBUTABLE TO CONTROLLING INTEREST
                    
                    
                    (2,128
                    )
                    
                    
                    (31,789
                    )
                    
                    
                    (7,635
                    )
                    
                    
                    (24,455
                    )OTHER
      COMPREHENSIVE INCOME (LOSS)Foreign
      currency translation adjustments
                    
                    
                    361
                    
                    
                    
                    163
                    
                    
                    
                    62
                    
                    
                    
                    (14
                    )Comprehensive
      income (loss) attributable to noncontrolling interest
                    
                    
                    (1
                    )
                    
                    
                    (1,031
                    )
                    
                    
                    164
                    
                    
                    
                    (1,106
                    )COMPREHENSIVE
      LOSS
                    
                    $
                    (1,768
                    )
                    
                    $
                    (32,657
                    )
                    
                    $
                    (7,409
                    )
                    
                    $
                    (25,574
                    )WEIGHTED
      AVERAGE NUMBER OF SHARESBasic
      & Diluted
                    
                    
                    52,111,605
                    
                    
                    
                    39,533,099
                    
                    
                    
                    51,883,491
                    
                    
                    
                    37,918,177LOSS
      PER SHAREBasic
      & Diluted
                    
                    $
                    (0.04
                    )
                    
                    $
                    (0.80
                    )
                    
                    $
                    (0.15
                    )
                    
                    $
                    (0.64
                    )
 
 The
accompanying notes are an integral part of these consolidated financial
statements.
 
 4
  GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
  CONSOLIDATED
STATEMENTS OF CHANGES IN EQUITY
 (In
thousands, except per share data)
 
 Preferred stock
                                      
                                      
                                      Common stock
                                      
                                      
                                      
                                      
                                      
                                      Retained earnings / Accumulated deficits
                                      
                                      
                                      
                                      
                                      
                                      AccumulatedotherStatutory
                                      
                                      
                                      
                                      
                                      
                                      Contribution
                                      
                                      
                                      comprehensive
                                      
                                      
                                      NoncontrollingShares
                                      
                                      
                                      Par value
                                      
                                      
                                      Shares
                                      
                                      
                                      Par value
                                      
                                      
                                      Paid-in capital
                                      
                                      
                                      reserves
                                      
                                      
                                      Unrestricted
                                      
                                      
                                      receivable
                                      
                                      
                                      income
                                      
                                      
                                      interest
                                      
                                      
                                      TotalsBALANCE,
      December 31, 2008
                                      
                                      
                                      3,092,899
                                      
                                      
                                      $
                                      3
                                      
                                      
                                      
                                      36,128,833
                                      
                                      
                                      $
                                      36
                                      
                                      
                                      $
                                      37,129
                                      
                                      
                                      $
                                      4,902
                                      
                                      
                                      $
                                      10,092
                                      
                                      
                                      $
                                      (960
                                      )
                                      
                                      $
                                      8,705
                                      
                                      
                                      $
                                      54,330
                                      
                                      
                                      $
                                      114,237Net
      loss attributable to controlling interest
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      (24,455
                                      )
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      (24,455
                                      )Net
      income attributable to noncontrolling interest
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      12,333
                                      
                                      
                                      
                                      12,333Disposal
      of subsidiaries
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      (293
                                      )
                                      
                                      
                                      (293
                                      )Distribution
      of dividend to noncontrolling shareholders
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      (556
                                      )
                                      
                                      
                                      (556
                                      )Adjustment
      to statutory reserve
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      260
                                      
                                      
                                      
                                      (260
                                      )
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      -Common
      stocks issued for compensation
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      216,000
                                      
                                      
                                      
                                      0.22
                                      
                                      
                                      
                                      498
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      498Common
      stock issued for interest payment
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      152,240
                                      
                                      
                                      
                                      0.15
                                      
                                      
                                      
                                      558
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      558Common
      stock issued for repayment of debt
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      300,000
                                      
                                      
                                      
                                      0.30
                                      
                                      
                                      
                                      1,800
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      1,800Common
      stock transferred by CEO for compensation
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      138
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      138Notes
      converted to common stock
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      5,104,596
                                      
                                      
                                      
                                      5.11
                                      
                                      
                                      
                                      24,125
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      24,130Make
      whole shares issued on notes conversion
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      1,399,759
                                      
                                      
                                      
                                      1.40
                                      
                                      
                                      
                                      5,565
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      5,566Reduction
      of Registered Capital
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      960
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      960Foreign
      currency translation adjustments
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      (14
                                      )
                                      
                                      
                                      (1,106
                                      )
                                      
                                      
                                      (1,120
                                      )BALANCE,
      June 30, 2009, unaudited
                                      
                                      
                                      3,092,899
                                      
                                      
                                      $
                                      3
                                      
                                      
                                      
                                      43,301,428
                                      
                                      
                                      $
                                      43
                                      
                                      
                                      $
                                      69,813
                                      
                                      
                                      $
                                      5,162
                                      
                                      
                                      $
                                      (14,623
                                      )
                                      
                                      $
                                      -
                                      
                                      
                                      $
                                      8,691
                                      
                                      
                                      $
                                      64,708
                                      
                                      
                                      $
                                      133,797Net
      loss attributable to controlling interest
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      (789
                                      )
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      (789
                                      )Net
      income attributable to noncontrolling interest
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      9,230
                                      
                                      
                                      
                                      9,230Distribution
      of dividend to noncontrolling shareholders
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      (2,749
                                      )
                                      
                                      
                                      (2,749
                                      )Adjustment
      to statutory reserve
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      1,000
                                      
                                      
                                      
                                      (1,000
                                      )
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      -Common
      stock issued for compensation
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      380,650
                                      
                                      
                                      
                                      0.55
                                      
                                      
                                      
                                      1,377
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      1,378Common
      stock issued for interest payments
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      44,065
                                      
                                      
                                      
                                      0.05
                                      
                                      
                                      
                                      187
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      187Common
      stock transferred by CEO for compensation
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      138
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      138Notes
      converted to common stock
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      1,940,678
                                      
                                      
                                      
                                      1.95
                                      
                                      
                                      
                                      7,947
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      7,949Make
      whole shares issued on notes conversion
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      396,218
                                      
                                      
                                      
                                      0.40
                                      
                                      
                                      
                                      1,520
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      1,520Common
      stock issued for private placement
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      5,555,556
                                      
                                      
                                      
                                      5.56
                                      
                                      
                                      
                                      14,606
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      14,612Foreign
      currency translation adjustments
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      (355
                                      )
                                      
                                      
                                      1,409
                                      
                                      
                                      
                                      1,054BALANCE,
      December 31, 2009
                                      
                                      
                                      3,092,899
                                      
                                      
                                      $
                                      3
                                      
                                      
                                      
                                      51,618,595
                                      
                                      
                                      $
                                      52
                                      
                                      
                                      $
                                      95,588
                                      
                                      
                                      $
                                      6,162
                                      
                                      
                                      $
                                      (16,412
                                      )
                                      
                                      $
                                      -
                                      
                                      
                                      $
                                      8,336
                                      
                                      
                                      $
                                      72,598
                                      
                                      
                                      $
                                      166,327Net
      loss attributable to controlling interest
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      (7,635
                                      )
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      (7,635
                                      )Net
      loss attributable to noncontrolling interest
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      (5,982
                                      )
                                      
                                      
                                      (5,982
                                      )Distribution
      of dividend to noncontrolling shareholders
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      (1,045
                                      )
                                      
                                      
                                      (1,045
                                      )Noncontrolling
      interest acquired
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      (1,270
                                      )
                                      
                                      
                                      (1,270
                                      )Adjustment
      to special reserve
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      379
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      379Common
      stock issued for compensation
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      405,750
                                      
                                      
                                      
                                      0.41
                                      
                                      
                                      
                                      1,369
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      1,369Common
      stock issued for repayment of debt
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      928,163
                                      
                                      
                                      
                                      0.93
                                      
                                      
                                      
                                      2,403
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      2,404Common
      stock transferred by CEO for compensation
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      138
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      138Foreign
      currency translation adjustments
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      62
                                      
                                      
                                      
                                      164
                                      
                                      
                                      
                                      226BALANCE,
      June 30, 2010, unaudited
                                      
                                      
                                      3,092,899
                                      
                                      
                                      $
                                      3
                                      
                                      
                                      
                                      52,952,508
                                      
                                      
                                      $
                                      53
                                      
                                      
                                      $
                                      99,498
                                      
                                      
                                      $
                                      6,541
                                      
                                      
                                      $
                                      (24,047
                                      )
                                      
                                      $
                                      -
                                      
                                      
                                      $
                                      8,398
                                      
                                      
                                      $
                                      64,465
                                      
                                      
                                      $
                                      154,911
 
 The
accompanying notes are an integral part of these consolidated financial
statements.
  5
  GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
  CONSOLIDATED
STATEMENTS OF CASH FLOWS
 FOR THE
SIX MONTHS ENDED JUNE 30,
 (UNAUDITED)
 (In
thousands, except per share data)
 
 Six months ended June 30,2010
                                              
                                              
                                              2009CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      loss attributable to controlling interest
                                              
                                              $
                                              (7,635
                                              )
                                              
                                              $
                                              (24,454
                                              )Net
      (loss) income attributable to noncontrolling interest
                                              
                                              
                                              (5,982
                                              )
                                              
                                              
                                              12,333Consolidated
      net loss
                                              
                                              
                                              (13,617
                                              )
                                              
                                              
                                              (12,121
                                              )Adjustments
      to reconcile net loss to cash (used in) provided by operating
      activities:Depreciation
      and amortization
                                              
                                              
                                              19,334
                                              
                                              
                                              
                                              13,478Debt
      extinguishment
                                              
                                              
                                              -
                                              
                                              
                                              
                                              (2,930
                                              )Impairment
      of long-lived assets
                                              
                                              
                                              1,733
                                              
                                              
                                              
                                              -(Gain)
      Loss on disposal of equipment
                                              
                                              
                                              123
                                              
                                              
                                              
                                              (3,431
                                              )Stock
      issued for services and compensation
                                              
                                              
                                              1,507
                                              
                                              
                                              
                                              636Make
      whole shares interest expense on notes conversion
                                              
                                              
                                              
                                              
                                              
                                              
                                              6,455Income
      from investment
                                              
                                              
                                              (4,756
                                              )
                                              
                                              
                                              (2,699
                                              )Amortization
      of deferred note issuance cost and discount on convertible
      notes
                                              
                                              
                                              13
                                              
                                              
                                              
                                              43Change
      in fair value of derivative instrument
                                              
                                              
                                              (14,668
                                              )
                                              
                                              
                                              22,612Deferred
      tax assets
                                              
                                              
                                              (5,501
                                              )
                                              
                                              
                                              2,166Changes
      in operating assets and liabilitiesNotes
      receivable
                                              
                                              
                                              (26,939
                                              )
                                              
                                              
                                              4,915Accounts
      receivable
                                              
                                              
                                              (12,161
                                              )
                                              
                                              
                                              (7,924
                                              )Accounts
      receivable - related parties
                                              
                                              
                                              (1,015
                                              )
                                              
                                              
                                              -Other
      receivables
                                              
                                              
                                              (1,570
                                              )
                                              
                                              
                                              (362
                                              )Other
      receivables - related parties
                                              
                                              
                                              2,300
                                              
                                              
                                              
                                              (14,993
                                              )Inventories
                                              
                                              
                                              (79,299
                                              )
                                              
                                              
                                              (84,204
                                              )Advances
      on inventory purchases
                                              
                                              
                                              (11,512
                                              )
                                              
                                              
                                              11,271Advances
      on inventory purchases - related parties
                                              
                                              
                                              (5,431
                                              )
                                              
                                              
                                              (13,021
                                              )Accounts
      payable
                                              
                                              
                                              35,734
                                              
                                              
                                              
                                              59,067Accounts
      payable - related parties
                                              
                                              
                                              37,605
                                              
                                              
                                              
                                              15,283Other
      payables and accrued liabilities
                                              
                                              
                                              2,426
                                              
                                              
                                              
                                              19,183Other
      payables - related parties
                                              
                                              
                                              20,495
                                              
                                              
                                              
                                              15,749Customer
      deposits
                                              
                                              
                                              (20,269
                                              )
                                              
                                              
                                              16,160Customer
      deposits - related parties
                                              
                                              
                                              25,081
                                              
                                              
                                              
                                              (3,574
                                              )Taxes
      payable
                                              
                                              
                                              4,966
                                              
                                              
                                              
                                              (12,769
                                              )Net
      cash (used in) provided by operating activities
                                              
                                              
                                              (45,421
                                              )
                                              
                                              
                                              28,990CASH
      FLOWS FROM INVESTING ACTIVITIES:Acquired
      long term investment
                                              
                                              
                                              (1,273
                                              )
                                              
                                              
                                              (6,593
                                              )Cash
      proceeds from disposal of long-term investment
                                              
                                              
                                              3,667
                                              
                                              
                                              
                                              -Dividend
      receivable
                                              
                                              
                                              (1,554
                                              )
                                              
                                              
                                              -Long
      term other receivables
                                              
                                              
                                              -
                                              
                                              
                                              
                                              1,215Deposits
      due to sales representatives
                                              
                                              
                                              18,663
                                              
                                              
                                              
                                              31,933Cash
      proceeds from sales of equipment
                                              
                                              
                                              60
                                              
                                              
                                              
                                              4,414Advance
      on equipment purchases
                                              
                                              
                                              (10,268
                                              )
                                              
                                              
                                              3,065Equipments
      purchase and intangible assets
                                              
                                              
                                              (29,240
                                              )
                                              
                                              
                                              (60,388
                                              )Payments
      to original shareholders
                                              
                                              
                                              (2,460
                                              )
                                              
                                              
                                              -Net
      cash used in investing activities
                                              
                                              
                                              (22,405
                                              )
                                              
                                              
                                              (26,354
                                              )CASH
      FLOWS FINANCING ACTIVITIES:Restricted
      cash
                                              
                                              
                                              (76,526
                                              )
                                              
                                              
                                              -Notes
      receivable - restricted
                                              
                                              
                                              (24,223
                                              )
                                              
                                              
                                              (69,727
                                              )Borrowings
      on short term loans - bank
                                              
                                              
                                              133,196
                                              
                                              
                                              
                                              72,816Payments
      on short term loans - bank
                                              
                                              
                                              (105,485
                                              )
                                              
                                              
                                              (43,353
                                              )Borrowings
      on short term loan - others
                                              
                                              
                                              72,083
                                              
                                              
                                              
                                              79,354Payments
      on short term loans - others
                                              
                                              
                                              (89,878
                                              )
                                              
                                              
                                              (63,899
                                              )Payments
      on short term loans - others-related parties
                                              
                                              
                                              (4,401
                                              )
                                              
                                              
                                              2,931Borrowings
      on short term notes payable
                                              
                                              
                                              408,476
                                              
                                              
                                              
                                              371,614Payments
      on short term notes payable
                                              
                                              
                                              (276,594
                                              )
                                              
                                              
                                              (303,327
                                              )Net
      cash provided by financing activities
                                              
                                              
                                              36,648
                                              
                                              
                                              
                                              46,409EFFECTS
      OF EXCHANGE RATE CHANGE IN CASH
                                              
                                              
                                              (168
                                              )
                                              
                                              
                                              (9
                                              )(DECREASE)
      INCREASE IN CASH
                                              
                                              
                                              (31,346
                                              )
                                              
                                              
                                              49,036CASH,
      beginning of period
                                              
                                              
                                              82,118
                                              
                                              
                                              
                                              14,895CASH,
      end of period
                                              
                                              $
                                              50,772
                                              
                                              
                                              $
                                              63,931Noncash transactions of investing and
      financing activities:Share
      issuance for debt settlement
                                              
                                              $
                                              2,410
                                              
                                              
                                              
                                              -
 
 The
accompanying notes are an integral part of these consolidated financial
statements.
  6




GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 June 30,
2010
 (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 steel companies serving various industries
in the People’s Republic of China (“PRC”). The Company’s main operation is
manufacturing and sales of steel products such as steel rebar, hot-rolled carbon
and silicon sheets and spiral-weld pipes.
 
 Started
on January 1, 2010, one of the Company’s subsidiaries, General Steel (China) Co.
Ltd. changed its business model from a direct operations model to a lease
operations model which will provide a steady revenue stream in the form of fixed
monthly lease revenue.  See note 16 for details of the lease
transaction.
 
 Note
2 – Summary of significant accounting policies
 
 Basis of
presentation
 
 The
consolidated financial statements of the Company reflect the activities of the
following directly and indirectly owned subsidiaries:
 PercentageSubsidiary
                    
                    of OwnershipGeneral
      Steel Investment Co., Ltd.
                    
                    British
      Virgin
                      Islands
                    
                    
                    100.0
                    %General
      Steel (China) Co., Ltd.(“GS (China)”)
                    
                    PRC
                    
                    
                    100.0
                    %Baotou
      Steel – General Steel Special SteelPipe
      Joint Venture Co., Ltd.
                    
                    PRC
                    
                    
                    80.0
                    %Yangpu
      Shengtong Investment Co., Ltd.
                    
                    PRC
                    
                    
                    99.1
                    %Qiu
      Steel Investment Co., Ltd. (“Qiu Steel”)
                    
                    PRC
                    
                    
                    98.7
                    %Shaanxi
      Longmen Iron and Steel Co. Ltd.(“Longmen Joint Venture”)
                    
                    PRC
                    
                    
                    60.0
                    %Maoming
      Hengda Steel Group Co., Ltd. (“Maoming Hengda”)
                    
                    PRC
                    
                    
                    99.0
                    %
 
 The
accompanying consolidated 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.
 
 Management
has included all adjustments, consisting only of normal recurring adjustments,
considered necessary to give a fair presentation of operating results for the
periods presented. Interim results are not necessarily indicative of results for
a full year. The information included in this Form 10-Q should be read in
conjunction with information included in the 2009 annual report filed on Form
10-K.
 
 Use of
estimates
 
 The
preparation of financial statements in conformity with generally accepted
accounting principles of the United States 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
 June 30,
2010
 (Unaudited)
 
 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 demand deposits in accounts maintained with banks within PRC, Hong Kong
and the United States. Total cash (including restricted cash balances) in these
banks on June 30, 2010 and December 31, 2009 amounted to $320.2million and
$274.2 million, respectively. As of June 30, 2010, $1.2 million cash in the bank
was 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’s five major customers are all distributors and collectively represented
approximately 24.5% and 27.3% of the Company’s total sales for the three months
and six months ended June 30, 2010, respectively. The Company had five major
customers, which represented approximately 13% and 21% of the Company’s total
sales for the three months and six months ended June 30, 2009, respectively.
None of these five customers accounts for more than 10% of total sales for the
three months and six months ended June 30, 2010 and 2009. No accounts receivable
was due from the five major customers as of June 30, 2010 and 2009.
 
 For the
three months and six months ended June 30, 2010, the Company purchased
approximately 47.2% and 48.5% of its raw materials from five major suppliers,
respectively, of which two of the five vendors account individually more than
10% of the total purchase. The purchase from the five major suppliers represents
approximately 32% and 41% of Company’s total purchase for the three months and
six months ended June 30, 2009, respectively. The top five vendors accounted for
23.1% and 20.5% of total accounts payable as of June 30, 2010 and 2009,
respectively.
 
 Revenue
recognition
 
 The
Company follows the generally accepted accounting principles in the United
States regarding revenue recognition. Sales revenue is recognized at the date of
shipment to customers when a formal arrangement exists, the price is fixed or
determinable, the delivery is completed, no other significant obligations of the
Company exist and collectability is reasonably assured. Payments received before
all of the relevant criteria for revenue recognition are recorded as customer
deposits. 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 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
 June 30,
2010
 (Unaudited)
 
 Foreign currency translation
and other comprehensive income
 
 The
reporting currency of the Company is the US dollar. The Company’s subsidiaries
in China use the local currency, Renminbi (RMB), as their 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 changes in 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 included in accumulated other comprehensive income amounted to $8.4
million and $8.3 million as of June 30, 2010 and December 31, 2009,
respectively. The balance sheet amounts, with the exception of equity at June
30, 2010 and December 31, 2009, were translated at 6.79 RMB and 6.82 RMB to
$1.00, respectively. The equity accounts were stated at their historical rate.
The average translation rates applied to income statement accounts for the six
months ended June 30, 2010 and 2009 were 6.82 RMB and 6.82 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 consolidated balance
sheet.
 
 Financial
instruments
 
 The
accounting standards regarding fair value of financial instruments and related
fair value measurements 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 analyzes all financial instruments with features of both liabilities and
equity, pursuant to which the Company’s warrants were required to be
recorded as a liability at fair value and marked to market each reporting
period.
 
 The
accounting standards define fair value, establish a three-level valuation
hierarchy for disclosures of fair value measurement and enhance disclosure
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.
 9
 GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 June 30,
2010
 (Unaudited)
 
 In
December 2007, the Company issued convertible notes totaling $40 million
(“Notes”) and 1,154,958 warrants. In December 2009, the Company issued 2,777,778
warrants in connection with a registered direct offering. The aforementioned
warrants and the conversion option embedded in the Notes meet the definition of
a derivative instrument in the accounting standards. Therefore these instruments
are accounted for as derivative liabilities and marked-to-market each reporting
period. The change in the value of the derivative liabilities is charged against
or credited to income.  The fair value was determined using the Cox
Rubenstein Binomial Model, defined in the accounting standard as level 2 inputs,
and recorded the change in earnings. As a result, the derivative liabilities are
carried on the consolidated balance sheet at their fair value.
 
 As of
June 30, 2010, the outstanding convertible note principal amounted to $3.3
million, and the carrying value of the convertible note amounted to
approximately $1.3 million. 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.
  (in thousands)
                        
                        Carrying Value as
                          of June 30, 2010
                        
                        
                        Fair Value Measurements at June 30,
                          2010Using Fair Value Hierarchy(Unaudited)
                        
                        
                        Level 1
                        
                        
                        Level 2
                        
                        
                        Level 3Derivative
      liabilities
                        
                        $
                        8,672
                        
                        
                        
                        
                        
                        
                        $
                        8,672Convertible
      notes payable
                        
                        $
                        1,281
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        $
                        768
 
 Except
for the investments, convertible notes payable 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 the accounting
standard.
 
 Level 3
Valuation Reconciliation:
  Convertible Notes(in thousands)Balance,
      December 31, 2009
                      
                      $
                      1,050Current
      period effective interest charges on notes
                      
                      
                      318Interest
      paid
                      
                      
                      (87
                      )Balance,
      June 30, 2010 (Unaudited)
                      
                      $
                      1,281
  10
  GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 June 30,
2010
 (Unaudited)
 
 Cash
 
 Cash
includes 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. The
notes payable are generally short term in nature due to its short maturity
period of six to nine months, thus restricted cash is classified as a current
asset.
 
 Accounts receivable and
allowance for doubtful accounts
 
 Accounts
receivable include trade accounts due from customers and other receivables from
cash advances to employees, related parties or third parties. An allowance for
doubtful accounts is established and recorded based on managements’ assessment
of potential losses based on the credit history and relationships 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 represents 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 $56.4 million and $29.2 million outstanding as
of June 30, 2010 and December 31, 2009, respectively.
 
 Restricted
notes receivable represents notes receivable pledged as collateral for
short-term loans from banks. As of June 30, 2010 and December 31, 2009,
restricted notes receivable amounted to $24.3 million and $0,
respectively.
 
 Inventories
 
 Inventories
are stated at the lower of cost or market using the weighted average cost
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
amounted to $2.9 million and $1.0 million for the three months ended June 30,
2010 and 2009, respectively. Shipping and handling for the six months ended June
30, 2010 and 2009 amounted to $5.0 million and $1.6 million,
respectively.
  11
  GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 June 30,
2010
 (Unaudited)
 
 Intangible
assets
 
 All land
in the People’s Republic of China is owned by the government. However, the
government grants “land use rights”.   GS (China) acquired land
use rights in 2001 for a total of $3.5 million. These land use rights are for 50
years and expire in 2050 and 2053. Management elected to amortize the land use
rights over the ten-year business term because its initial business license had
a ten-year term. Although GS (China) became a Sino-Foreign Joint Venture in
2004, and obtained a new business license for twenty years; 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 $21.8 million to the
Longmen Joint Venture. The contributed land use rights are for 50 years and
expire in 2048 to 2052.
 
 Maoming
Hengda has land use rights amounting to $2.2 million for 50 years that
expire in 2054.
 
 Entity
                      
                      Original Cost
                      
                      Expires on(in thousands)GS
      (China)
                      
                      $
                      3,481
                      
                      2050 &2053Longmen
      Joint Venture
                      
                      $
                      21,803
                      
                      2048 & 2052Maoming
      Hengda
                      
                      $
                      2,235
                      
                      2054
 
 Intangible
assets of the Company are reviewed at least annually, more often when
circumstances require, determining whether their carrying value has become
impaired. The Company considers assets to be impaired if the carrying value
exceeds the future projected cash flows from related operations. The Company
also re-evaluates the periods of amortization to determine whether subsequent
events and circumstances warrant revised estimates of useful
lives.  As of June 30, 2010, 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 a 3%-5% residual value.
 
 The
estimated useful lives are as follows:
 
 Buildings
      and Improvements
                    10-40
      YearsMachinery
                    10-30
      YearsOther
      equipment
                    5
      YearsTransportation
      Equipment
                    5
      Years
 
 Construction
in progress represents the costs incurred in connection with the construction of
buildings or new additions to the Company’s plant facilities. No depreciation is
provided for construction in progress until such time as the assets are
completed and are placed into service, maintenance, repairs and minor renewals
are charged directly to expense as incurred. Major additions and betterment to
buildings and equipment are capitalized. Interest incurred during construction
is capitalized into construction in progress. All other interest is expensed as
incurred.
  12
  GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 June 30,
2010
 (Unaudited)
 
 Long
lived assets, including buildings and improvements, equipment and intangible
assets are reviewed if events and changes in circumstances indicate that its
carrying amount may not be recoverable, 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. For the three and six months ended June 30, 2010, the Company
impaired long lived assets in the amount of $1.7 million.
 
 Investments in
unconsolidated subsidiaries
 
 Subsidiaries
in which the Company has the ability to exercise significant influence, but does
not have a controlling interest are 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 the cost method.
 
 Longmen
Joint Venture and its subsidiary - Hancheng Tongxing Metallurgy Co., Ltd.
(“Tongxing Metallurgy”) invested in several companies from 2004 to
2009.
 
 Unconsolidatedsubsidiary
                                  
                                  Year
                                    acquired
                                  
                                  
                                  Amountinvested
                                    (Inthousands)
                                  
                                  
                                  %
                                    ownedShaanxi
      Daxigou Mining Co., Ltd
                                  
                                  2004
                                  
                                  
                                  $
                                  3,567
                                  
                                  
                                  
                                  22.0Shaanxi
      Xinglong Thermoelectric Co., Ltd
                                  
                                  2004-2007
                                  
                                  
                                  
                                  6,270
                                  
                                  
                                  
                                  20.7Shaanxi
      Longgang Group Xian steel Co., Ltd
                                  
                                  2005
                                  
                                  
                                  
                                  147
                                  
                                  
                                  
                                  10.0Huashan
      Metallurgical Equipment Co. Ltd.
                                  
                                  2003
                                  
                                  
                                  
                                  1,775
                                  
                                  
                                  
                                  25.0Xian
      Delong Powder Engineering Materials Co., Ltd.
                                  
                                  2006
                                  
                                  
                                  
                                  992
                                  
                                  
                                  
                                  27.0Total
      (Unaudited)
                                  
                                  
                                  $
                                  12,751
 
 Total
investment in unconsolidated subsidiaries amounted to $12.8 million and $20.0
million as of June 30, 2010 and December 31, 2009, respectively.
 
 On May
2010, Tongxing Metallurgy disposed its long-term investment in Shanxi Longmen
Coal Chemical Industry Co., Ltd to an unrelated party for the consideration of
$8.1 million (RMB 55 million). Tongxing Metallurgy realized a $1.5 million gain
on disposal for the six months ended June 30, 2010.
 
 Short-term notes
payable
 
 Short-term
notes payable are lines of credit extended by banks. The banks in-turn issue the
Company a bankers acceptance note, which can be endorsed and assigned to vendors
as payments for purchases. The notes payable are generally payable at a
determinable period, generally three to six months. This short-term note payable
bears no interest and is guaranteed by the bank for its complete face value and
usually matures within three to six-month 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.
  13
  GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 June 30,
2010
 (Unaudited)
 
 Earningsper
share
 
 The
Company has adopted the generally accepted accounting principles in the United
States regarding earnings per share (“EPS”) which 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 accounts for income taxes in accordance with the generally accepted
accounting principles in the United States for income taxes. Under the asset and
liability method as required by this accounting standard, the recognition of
deferred income tax liabilities and assets for the expected future tax
consequences of temporary differences between the income tax basis and financial
reporting basis of assets and liabilities. Provision for income taxes consists
of taxes currently due plus deferred taxes. The generally accepted accounting
principles in the United States for accounting for uncertainty in income taxes
clarify the accounting and disclosure for uncertain tax positions.  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 consolidated 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.
 
 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 consolidated 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.
  14
  GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 June 30,
2010
 (Unaudited)
 
 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 the accounting
standards regarding accounting for stock-based compensation and 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 these
accounting standards. 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 generally accepted accounting principles in
the United States regarding noncontrolling interest in the consolidated
financial statements. 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 adopting this accounting standard, net income attributable to
noncontrolling interests is now excluded from the determination of consolidated
net income. In addition, the foreign currency translation adjustment is
allocated between controlling and noncontrolling interests.
 
 Recently issued accounting
pronouncements
 
 In
January 2010, FASB issued ASU No. 2010-02 regarding accounting and reporting for
decreases in ownership of a subsidiary.  Under this guidance, an entity is
required to deconsolidate a subsidiary when the entity ceases to have a
controlling financial interest in the subsidiary.  Upon deconsolidation of
a subsidiary, and entity recognizes a gain or loss on the transaction and
measures any retained investment in the subsidiary at fair value.  In
contrast, an entity is required to account for a decrease in its ownership
interest of a subsidiary that does not result in a change of control of the
subsidiary as an equity transaction.  This ASU clarifies the scope of the
decrease in ownership provisions, and expands the disclosures about the
deconsolidation of a subsidiary or de-recognition of a group of assets.
 This ASU is effective for beginning in the first interim or annual
reporting period ending on or after December 31, 2009. The Company does not
expect the adoption of this ASU to have a material impact on its consolidated
financial statements In January 2010, FASB issued ASU No. 2010-02 – Accounting
and Reporting for Decreases in Ownership of a Subsidiary – a Scope
Clarification. The amendments in this Update affect accounting and reporting by
an entity that experiences a decrease in ownership in a subsidiary that is a
business or nonprofit activity. The amendments also affect accounting and
reporting by an entity that exchanges a group of assets that constitutes a
business or nonprofit activity for an equity interest in another entity. 
The amendments in this update are effective beginning in the period that an
entity adopts SFAS No. 160, “Non-controlling Interests in Consolidated Financial
Statements – An Amendment of ARB No. 51.” If an entity has previously adopted
SFAS No. 160 as of the date the amendments in this update are included in the
Accounting Standards Codification, the amendments in this update are effective
beginning in the first interim or annual reporting period ending on or after
December 15, 2009. The amendments in this update should be applied
retrospectively to the first period that an entity adopted SFAS No. 160. The
Company adopted this standard and has determined the standard does not have
material effect on the Company’s consolidated financial
statements.
  15
  GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 June 30,
2010
 (Unaudited)
 
 In
January 2010, FASB issued ASU No. 2010-06 – Improving Disclosures about Fair
Value Measurements. This update provides amendments to Subtopic 820-10 that
requires new disclosure as follows: 1) Transfers in and out of Levels 1 and
2. A reporting entity should disclose separately the amounts of significant
transfers in and out of Level 1 and Level 2 fair value measurements and describe
the reasons for the transfers.  2)  Activity in Level 3 fair
value measurements.  In the reconciliation for fair value measurements
using significant unobservable inputs (Level 3), a reporting entity should
present separately information about purchases, sales, issuances, and
settlements (that is, on a gross basis rather than as one net number).This
update provides amendments to Subtopic 820-10 that clarify existing disclosures
as follows: 1) Level of disaggregation. A reporting entity should provide
fair value measurement disclosures for each class of assets and liabilities. A
class is often a subset of assets or liabilities within a line item in the
statement of financial position. A reporting entity needs to use judgment in
determining the appropriate classes of assets and liabilities.
2) Disclosures about inputs and valuation techniques. A reporting entity
should provide disclosures about the valuation techniques and inputs used to
measure fair value for both recurring and nonrecurring fair value measurements.
Those disclosures are required for fair value measurements that fall in either
Level 2 or Level 3.The new disclosures and clarifications of existing
disclosures are effective for interim and annual reporting periods beginning
after December 15, 2009, except for the disclosures about purchases, sales,
issuances, and settlements in the roll forward of activity in Level 3 fair value
measurements. Those disclosures are effective for fiscal years beginning after
December 15, 2010, and for interim periods within those fiscal years. The
Company is currently evaluating the impact of this ASU. However, the
Company does not expect the adoption of this ASU to have a material impact on
its consolidated financial statements.
 
 In
February 2010, the FASB issued Accounting Standards Update 2010-09, “Subsequent
Events (Topic 855): Amendments to Certain Recognition and Disclosure
Requirements,” or ASU 2010-09. ASU 2010-09 primarily rescinds the requirement
that, for listed companies, financial statements clearly disclose the date
through which subsequent events have been evaluated. Subsequent events must
still be evaluated through the date of financial statement issuance; however,
the disclosure requirement has been removed to avoid conflicts with other SEC
guidelines. ASU 2010-09 was effective immediately upon issuance and was adopted
in February 2010.
 
 In April
2010, the FASB issued Accounting Standards Update 2010-13, “Compensation—Stock
Compensation (Topic 718): Effect of Denominating the Exercise Price of a
Share-Based Payment Award in the Currency of the Market in Which the Underlying
Equity Security Trades,” or ASU 2010-13. ASU 2010-13 provides amendments to
Topic 718 to clarify that an employee share-based payment award with an exercise
price denominated in currency of a market in which a substantial porting of the
entity’s equity securities trades should not be considered to contain a
condition that is not a market, performance, or service condition. Therefore, an
entity would not classify such an award as a liability if it otherwise qualifies
as equity. The amendments in this Update are effective for fiscal years, and
interim periods within those fiscal years, beginning on or after December 15,
2010. The
Company does not expect the adoption of ASU 2010-17 to have a significant impact
on its consolidated financial statements.
  16
  GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 June 30,
2010
 (Unaudited)
 
 In April
2010, the FASB issued Accounting Standard Update 2010-17, “Revenue
Recognition—Milestone Method (Topic 605): Milestone Method of Revenue
Recognition” orASU 2010-17.This Update provides
guidance on the recognition of revenue under the milestone method, which allows
a vendor to adopt an accounting policy to recognize all of the arrangement
consideration that is contingent on the achievement of a substantive milestone
(milestone consideration) in the period the milestone is achieved. The
pronouncement is effective on a prospective basis for milestones achieved in
fiscal years and interim periods within those years, beginning on or after
June 15, 2010. The Company does not expect the adoption of ASU 2010-17 to
have a significant impact on its consolidated financial statements.
 
 Reclassifications
 
 Certain
prior period amounts have been reclassified to conform to the current period
presentation. These classifications have no effect on net income.
 
 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:
 June 30, 2010
                    
                    
                    December 31,
                      2009(Unaudited)(in thousands)
                    
                    
                    (in thousands)Accounts
      receivable
                    
                    $
                    21,141
                    
                    
                    $
                    9,015Less:
      allowance for doubtful accounts
                    
                    
                    (382
                    )
                    
                    
                    (490
                    )Net
      accounts receivable
                    
                    $
                    20,759
                    
                    
                    $
                    8,525
 
 Movement
of allowance for doubtful accounts is as follows:
 
 June 30, 2010
                    
                    
                    December 31,
                      2009(Unaudited)(inthousands)
                    
                    
                    (in thousands)Beginning
      balance
                    
                    $
                    490
                    
                    
                    $
                    401Charge
      to expense
                    
                    
                    -
                    
                    
                    
                    246Less
      Write-off
                    
                    
                    (110
                    )
                    
                    
                    (157
                    )Exchange
      rate effect
                    
                    
                    2
                    
                    
                    
                    -Ending
      balance
                    
                    $
                    382
                    
                    
                    $
                    490
  17
  GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 June 30,
2010
 (Unaudited)
 
 Note
4 – Inventories
 Inventories
consist of the following:
 June 30, 2010
                  
                  
                  December 31,
                    2009(Unaudited)(in thousands)
                  
                  
                  (in thousands)Supplies
                  
                  $
                  1,721
                  
                  
                  $
                  1,025Raw
      materials
                  
                  
                  219,886
                  
                  
                  
                  146,084Finished
      goods
                  
                  
                  59,669
                  
                  
                  
                  60,978Total
      inventories
                  
                  $
                  281,276
                  
                  
                  $
                  208,087
 
 Raw
materials consist primarily of iron ore and coke at Longmen Joint Venture. 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. For the three and six months
ended June 30, 2010, $6.1 million and $6.5 million of inventory has been written
off and included in cost of goods sold.
 
 Note
5 – Advances on inventory purchase
 
 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 $48.9 million and $31.4 million as of
June 30, 2010 and December 31, 2009, respectively.
 
 Note 6 – Plant and equipment,
net
 
 Plant and
equipment consist of the following:
 June30,
                      2010
                    
                    
                    December 31,
                      2009(Unaudited)(in thousands)
                    
                    
                    (in thousands)Buildings
      and improvements
                    
                    $
                    120,469
                    
                    
                    $
                    117,625Machinery
                    
                    
                    488,172
                    
                    
                    
                    467,595Transportation
      and other equipment
                    
                    
                    11,088
                    
                    
                    
                    12,824Construction
      in progress
                    
                    
                    40,185
                    
                    
                    
                    31,715Subtotal
                    
                    
                    659,914
                    
                    
                    
                    629,759Less
      accumulated depreciation
                    
                    
                    (93,712
                    )
                    
                    
                    (74,648
                    )Totals
                    
                    $
                    566,202
                    
                    
                    $
                    555,111
  18
  GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 June 30,
2010
 (Unaudited)
 
 Construction
in progress consisted of the following as of June 30, 2010:
 
 Constructioninprogress
                                  
                                  Value
                                  
                                  Estimated
                                    completion
                                  
                                  Estimated
                                    additional costdescription
                                  
                                  In thousands
                                  
                                  date
                                  
                                  In thousands(Unaudited)
                                  
                                  
                                  
                                  (Unaudited)Longmen
      employees cafeteria
                                  
                                  $
                                  1,777
                                  
                                  August,
      2010
                                  
                                  
                                  2,2003#
      lime stone grinding machine
                                  
                                  
                                  2,248
                                  
                                  July,
      2010
                                  
                                  
                                  1094#
      continuous casting
                                  
                                  
                                  4,571
                                  
                                  July,
      2010
                                  
                                  
                                  879Rebar
      production line
                                  
                                  
                                  21,422
                                  
                                  September,
      2010
                                  
                                  
                                  98,038Steel
      scrap cross
                                  
                                  
                                  1,696
                                  
                                  July,
      2010
                                  
                                  
                                  -#3
      Gangue
                                  
                                  
                                  922
                                  
                                  2012
                                  
                                  
                                  2,024Others
                                  
                                  
                                  7,549
                                  
                                  By
      the end of 2012
                                  
                                  
                                  6,924Total
                                  
                                  $
                                  40,185
                                  
                                  
                                  
                                  $
                                  110,174
 
 Long
lived assets, including construction in progress are reviewed if events and
changes in circumstances indicate that its carrying amount may not be
recoverable, to determine whether their carrying value has become impaired. The
Company determined that the construction in progress in Maoming Hengda was
impaired as of June 30, 2010. For the three and six months ended June 30, 2010,
$1.7 million construction-in-progress has been written off and included in
operating expense.
 
 Depreciation,
including amounts in cost of sales, for the three months ended June 30, 2010 and
2009 amounted to $9.5 million and $7.0 million, respectively, and for the six
months ended June 30, 2010 and 2009, amount to $18.8 and $13.1 million,
respectively.
 
 The
Company has fixed assets to be disposed amounting to $2.8 million and $3.0
million as of June 30, 2010 and December 31, 2009, respectively.
 
 Note
7 – Intangible assets, net
 
 Intangible
assets consist of the following:
 June30,
                      2010
                    
                    
                    December 31,
                      2009(Unaudited)(in thousands)
                    
                    
                    (in thousands)Land
      use rights
                    
                    $
                    27,685
                    
                    
                    $
                    27,519Software
                    
                    
                    476
                    
                    
                    
                    424Subtotal
                    
                    
                    28,161
                    
                    
                    
                    27,943Accumulated
      Amortization – Land use right
                    
                    
                    (4,649
                    )
                    
                    
                    (4,143
                    )Accumulated
      Amortization – software
                    
                    
                    (112
                    )
                    
                    
                    (67
                    )Subtotal
                    
                    
                    (4,761
                    )
                    
                    
                    (4,210
                    )Intangible
      assets, net
                    
                    $
                    23,400
                    
                    
                    $
                    23,733
  19
  GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 June 30,
2010
 (Unaudited)
 
 The gross
amount of the intangible assets amounted to $28.2 million and $27.9 million as
of June 30, 2010 and December 31, 2009, respectively. The remaining weighted
average amortization period is 35.6 years.
 
 Total
amortization expense for the three months ended June 30, 2010 and 2009 amounted
to $0.2 million, $0.2 million, respectively, and for the six months ended June
30, 2010 and 2009, amounted to $0.5 million and $0.4 million,
respectively.
 
 The
estimated aggregate amortization expense for each of the five succeeding years
is as follows:
  Years
      ended
                        
                        Estimated Amortization
                          Expense
                        
                        
                        Gross carrying
                          Amount(in thousands)
                        
                        
                        (in thousands)June
      30, 2011
                        
                        $
                        1,157
                        
                        
                        $
                        22,243June
      30, 2012
                        
                        
                        1,157
                        
                        
                        
                        21,086June
      30, 2013
                        
                        
                        817
                        
                        
                        
                        20,269June
      30, 2014
                        
                        
                        721
                        
                        
                        
                        19,548June
      30, 2015
                        
                        
                        721
                        
                        
                        
                        18,827Thereafter
                        
                        
                        18,827
                        
                        
                        
                        -Total
                        
                        $
                        23,400
 
 Note
8 – Debt
 
 Short-term notes
payable
 
 Short-term
notes payable are lines of credit extended by the banks. The banks in turn issue
the Company a bank acceptance note, which can be endorsed and assigned to
vendors as payments for purchases. The notes payable are generally payable at a
determinable period, generally three to six months. 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. Restricted cash as a guarantee for the notes
payable amounted to $269.7 million and $192.0 million as of June 30, 2010 and
December 31, 2009, respectively.
  20
  GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 June 30,
2010
 (Unaudited)
 
 The
Company had the following short-term notes payable:
 
 June 30,
                    2010
                  
                  
                  December 31,
                    2009(Unaudited)(in thousands)
                  
                  
                  (in thousands)GS
      (China): Notes payable from banks in China, due various dates from July
      2010 to September 2010. Restricted cash required of $9.6 million and $4.0
      million as of June 30, 2010 and December 31, 2009, respectively;
      guaranteed by third parties.
                  
                  $
                  13,276
                  
                  
                  $
                  7,628Longmen
      Joint Venture: Notes payable from banks in China, due various dates from
      July 2010 to December 2010. Restricted cash of $258.2 million and $162.3
      million as of June 30, 2010 and December 31, 2009, respectively; some
      notes are guaranteed by third parties while others are secured by
      equipments and land use rights.
                  
                  
                  373,847
                  
                  
                  
                  216,173Bao
      Tou: Notes payable from banks in China, due various dates on September
      2010.Restricted cash of $1.0 million and $5.1 million as of June 30, 2010
      and December 31, 2009, respectively; pledged by buildings.
                  
                  
                  957
                  
                  
                  
                  10,269Maoming
      Hengda: Notes payable from banks in China, Restricted cash of $0 and $20.6
      million as of June 30, 2010 and December 31, 2009,
      respectively
                  
                  
                  -
                  
                  
                  
                  20,538Total
      short-term notes payable
                  
                  $
                  388,080
                  
                  
                  $
                  254,608
 
 Short-term
loans
 
 Short-term
loans represent amounts due to various banks, other companies and individuals,
and related parties normally due within one year. The principles of loans are
due at maturity. However, the loans can be renewed with the banks, related
parties and other parties.
 
 Short
term loans due to banks, related parties and other parties consisted of the
following:
 
 June 30,
                            2010
                          
                          
                          December 31,
                            2009(Unaudited)(in
      thousands)
                          
                          
                          (in
      thousands)GS
      (China): Loan from banks in China, due various dates from August 2010 to
      June 2011. Weighted average interest rate 4.85% per annum; some are
      guaranteed by third parties while others are secured by equipment /
      inventory.
                          
                          $
                          24,107
                          
                          
                          $
                          25,476Longmen
      Joint Venture: Loan from banks in China, due various dates from July 2010
      to June 2011. Weighted average interest rate 5.46% per annum; some are
      guaranteed by third parties or notes receivables while others are secured
      by equipment / buildings / land use right / inventory.
                          
                          
                          153,297
                          
                          
                          
                          123,492Total
      – short-term loans - bank
                          
                          $
                          177,404
                          
                          
                          $
                          148,968
  21
  GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 June 30,
2010
 (Unaudited)
 
 June30,
                    2010
                  
                  
                  December 31,
                    2009(Unaudited)(in thousands)
                  
                  
                  (in thousands)Longmen
      Joint Venture: Loans from various unrelated companies and individuals, due
      various dates from July to December 2010, and interest rates up to 12.0%
      per annum.
                  
                  $
                  83,935
                  
                  
                  $
                  91,106Maoming
      Hengda: Loans from one unrelated parties and one related party, due on
      demand, none interest bearing.
                  
                  
                  13,967
                  
                  
                  
                  19,252Total
      – short-term loans - others
                  
                  $
                  97,902
                  
                  
                  $
                  110,358
 
 June30,
                    2010
                  
                  
                  December 31,
                    2009(Unaudited)(in thousands)
                  
                  
                  (in thousands)Longmen
      Joint Venture: Loans from Sheng An Da, due on 2010, and interest rates
      12.0% per annum.
                  
                  $
                  -
                  
                  
                  $
                  4,401Qiu
      Steel: Related party loans from Tianjin Heng Ying and Tianjin Da Zhan, due
      on 2010. Annual interest rate of 5.0%.
                  
                  
                  -
                  
                  
                  
                  7,350Total
      – related party loans
                  
                  $
                  -
                  
                  
                  $
                  11,751
 
 The
Company had various loans from unrelated companies. The balances amounted to
$97.9 million and $110.4 million as of June 30, 2010 and December 31, 2009,
respectively. Of the $97.9 million, $14.0 million loans carry no interest and
the remaining $83.9 million are subject to interest rates ranging from 3.6% to
12.0%. All short term loans from unrelated companies are due on demand and
unsecured.
 
 Total
interest expense, excluding capitalized interest, amounted to $5.6 million and
$1.6 million for the three months ended June 30, 2010, and 2009, respectively,
and interest expense amounted to $9.7 million and $4.7 million for the six
months ended June 30, 2010 and 2009, respectively.
 
 Capitalized
interest amounted to $0.7 million and $5.7 million for the three months ended
June 30, 2010 and 2009, respectively, and $1.1 million and $7.9 million for the
six months ended June 30, 2010 and 2009, respectively.
 
 Note
9 – Customer deposits
 
 Customer
deposits represent amounts advanced by customers on product orders. The product
normally is shipped within one month after receipt of the advance payment, and
the related sale is recognized in accordance with the Company’s revenue
recognition policy. As of June 30, 2010 and December 31, 2009, customer deposits
amounted to $215.1 million and $212.6 million, including deposits paid to
related parties amounted to $28.5 million and $3.8 million,
respectively.
  22
  GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 June 30,
2010
 (Unaudited)
 
 Note
10 – Deposit due to sales representatives
 
 Longmen
Joint Venture 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 $67.9 million and
$49.5 million in deposits due to sales representatives as of June 30, 2010 and
December 31, 2009, respectively. For the six months ended June 30, 2010, the
Company received deposits amounted to $18.4 million from sales representatives
to secure the sales quantity.
 
 Note
11 – Convertible notes and derivative liabilities
 
 On
December 13, 2007, the Company entered into a Securities Purchase Agreement (the
“Agreement”) with certain institutional investors (the “Buyers”) issuing $40.0
million in promissory notes (“Notes”) and 1,154,958 warrants. The warrants can
be converted to common stock through May 13, 2013 at an initial exercise price
of $13.51 per share, subject to customary anti-dilution adjustments. On December
24, 2009, the warrant exercise price was reset to $5.00 per share.
 
 The Notes
bear initial interest at 3% per annum, which will be increased each year as
specified in the Agreement, 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 Company’s common stock, subject to
customary anti-dilution adjustments. The initial conversion price was $12.47
which was reset to $4.25 on May 7, 2009. 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.
 
 Pursuant
to the generally accepted accounting standards of the United States 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 initially calculated using the
Cox Rubenstein Binomial model based on the following variables:
 
 ·
              Expected
      volatility adjusted to 125%
 ·
              Expected
      dividend yield of 0%
 ·
              Risk-free
      interest rate of 1.27%
 ·
              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
  23
  GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 June 30,
2010
 (Unaudited)
 
 Pursuant
to generally accepted accounting principles of the United States, 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 $34.7 million as derivative liability, including $9.3 million
for the fair value of the warrants and $25.4 million for fair value of the
conversion option. The initial carrying value of the Notes was $5.3 million. The
financing cost of $5.2 million was recorded as note issuance cost and is being
amortized to interest expense over the term of the Notes using the effective
interest method.
 
 Reset of Conversion
Price
 
 The
derivative liability related to the embedded conversion option was adjusted as
of May 7, 2009, based on the revised conversion price. As a result of the
reduced conversion price, the derivative liability increased as of May 7, 2009
by $27.1 million, which amount is included in the change in the value of the
derivative liability in the consolidated statement of operations and other
comprehensive income (loss).
 
 Note
Conversion
 
 $30.0
million of the Notes was converted to 7,045,274 shares of common stock at a
conversion price of $4.2511. Pursuant to generally accepted accounting
principles of the United States, the Company valued the conversion option on the
note conversion date. A total of $32.1 million of the carrying value and
derivative liability had been reclassified into equity. According to the
convertible note agreement, the Company incurred the make whole interest expense
of $8.8 million for the year ended December 31, 2009.
 
 The
carrying value of the Notes was $1.3 million and $1.1 million as of June 30,
2010 and December 31, 2009, respectively. The effective interest charges on the
Notes totaled $0.1 million and $0.8 million for the three months ended June 30,
2010 and 2009, respectively, and $0.3 million and $1.8 million for the six
months ended June 30, 2010 and 2009, respectively.
 
 Note
issuance cost was amortized to interest expense for the three months ended June
30, 2010 and 2009 amounted to $0.008 million and $0.02 million, respectively.
Note issuance cost was amortized to interest expense for the six months ended
June 30, 2010 and 2009 amounted to $0.01 million and $0.04 million,
respectively.
 
 Reset of Warrants Exercise
Price
 
 On
December 24, 2009, the holders of the existing warrants to purchase 1,154,958
shares of our common stock (See Note 11) entered into warrant reset agreements
whereby the exercise price was reset from $13.51 to $5.00 per share and the
number of shares of common stock issuable upon exercise of warrants was
increased by 2.3775 times from 1,154,958 to 3,900,871. The Company booked $10.1
million derivative loss in 2009 for this reset accordingly.
 
 As of
December 31 2009, the balance of derivative liabilities, including 2009 issued
warrants (see Note 17), was $23.3 million, which consisted of $20.8 million for
the warrants and $2.5 million for the conversion option. As of June 30 2010, the
balance of derivative liabilities was $8.7 million, which consisted of $7.7
million for the warrants and $1.0 million for the conversion
option.
 
 Note
12 – Supplemental disclosure of cash flow information
 
 Interest
paid amounted to $6.3 million and $4.1 million for the three months ended June
30, 2010 and 2009, respectively, and for the six months ended June 30, 2010
and 2009, amounted to $8.7 million and $6.7 million,
respectively.
  24
  GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 June 30,
2010
 (Unaudited)
 
 Income
tax payments amounted to $0.5 million and $1.3 million for the three months
ended June 30, 2010 and 2009, respectively, and for the six months ended June
30, 2010 and 2009, amounted to $1.3 and $1.8 million June 30, 2010 and
2009, respectively.
 
 Effective
Interest charge on the Notes of $0.3 million was capitalized into construction
in progress for the six months ended June 30, 2010.
 
 Note
13 - Gain from debt extinguishment and Government grant
 
 Debt
extinguishment
 
 For the
six months ended June 30, 2009, the Company recorded gain from debt
extinguishment totaling $2.9 million. In 2009, Maoming Hengda, a subsidiary,
entered into a Debt Waiver Agreement with Guangzhou Hengda, pursuant to which
Guangzhou Hengda agreed to waive $2.9 million (RMB 20.0 million) of debt that
Maoming Hengda owes to Guangzhou Hengda. The Company determined that the
subsequent debt settlement does not constitute a contingency at the date of
purchase as defined in the accounting standard - business Combinations and thus
should not result in a reallocation of the purchase price. The waiver is
irrevocable.
 
 Government
grant
 
 Due to an
increasing emphasis the government puts on energy savings and pollution emission
controls, the Shaanxi Province Development and Reform Commission provided
incentives for local companies to eliminate outdated iron and steel production
machineries and equipment. The Company’s subsidiary, Longmen Joint Venture,
received $4.3 million (RMB 29.2 million) in government grants for compliance in
dismantling two blast furnaces for the six months ended June 30, 2009. The
Company wrote off the residual book value of the furnaces dismantled totaling
$0.7 million (RMB 5.0 million), and recorded other income of $3.5 million for
the six months ended June 30, 2009.
 
 Note
14 – Taxes
 
 Income
tax
 
 Significant
components of the provision for income taxes on earnings and deferred taxes on
net operating losses from operation for the three and six months ended June 30,
2010 and 2009 are as follows:
  Three months ended
                  
                  
                  Six months endedIn thousands
                  
                  June30,
                    2010
                  
                  
                  June30,
                    2009
                  
                  
                  June30,
                    2010
                  
                  
                  June30,
                    2009(Unaudited)
                  
                  
                  (Unaudited)
                  
                  
                  (Unaudited)
                  
                  
                  (Unaudited)Current
                  
                  $
                  (5,093
                  )
                  
                  $
                  3,230
                  
                  
                  $
                  (4,472
                  )
                  
                  $
                  3,394Deferred
                  
                  
                  2,253
                  
                  
                  
                  (1,222
                  )
                  
                  
                  (335
                  )
                  
                  
                  -Total
      (benefit) provision for income taxes
                  
                  $
                  (2,840
                  )
                  
                  $
                  (2,008
                  )
                  
                  $
                  (4,807
                  )
                  
                  $
                  3,394
  25
  GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 June 30,
2010
 (Unaudited)
 
 Significant
components of the provision for income taxes on earnings and deferred taxes on
net operating losses from operation for the six months ended June 30, 2010 and
2009 are as follows:
 
 According
to Chinese tax regulations, the net operating loss can be carried forward to
offset with operating income for the next five years. Management believes the
deferred tax asset is fully realizable.
 
 The
principal component of the deferred income tax assets is as
follows:
 
 June 30,
                        2010
                      
                      
                      December 31,
                        2009(Unaudited)(in
      thousands)
                      
                      
                      (in
      thousands)Beginning
      balance
                      
                      $
                      3,341
                      
                      
                      $
                      7,487Net
      operating loss carry-forward (tax assets realized) for
      subsidiaries
                      
                      
                      3,973
                      
                      
                      
                      (864
                      )Effective
      tax rate
                      
                      
                      24%
      - 25
                      %
                      
                      
                      25
                      %Deferred
      tax asset
                      
                      $
                      993
                      
                      
                      $
                      (216
                      )Long
      Gang Headquarter, net operating loss carry-forward (tax asset
      realized)
                      
                      
                      29,522
                      
                      
                      
                      (26,193
                      )Effective
      tax rate
                      
                      
                      15
                      %
                      
                      
                      15
                      %Deferred
      tax asset
                      
                      $
                      4,428
                      
                      
                      $
                      (3,929
                      )Exchange
      difference
                      
                      
                      13
                      
                      
                      
                      (1
                      )Totals
                      
                      $
                      8,775
                      
                      
                      $
                      3,341
 
 Under the
Income Tax Laws of the PRC, the Company’s subsidiary, GS (China), 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. GS (China) 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. GS (China) is located in Tianjin Costal Economic Development
Zone and under the Income Tax Laws of Tianjin City of the PRC; it is eligible
for an income tax rate of 25% and 12% for the periods ended June 30, 2010 and
December 31, 2009, respectively.
 
 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 at 15% deducted rate till December
31, 2010.
 
 Baotou
Steel Pipe Joint Venture is located in Inner Mongolia and is subject to an
income tax at an effective rate of 25%.
 
 Maoming
Hengda is located in Guangdong province and is subject to an income tax at an
effective rate of 25%.
  26
  GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 June 30,
2010
 (Unaudited)
 
 The
following table reconciles the U.S. statutory rates to the Company’s effective
tax rate for the six months ended June 30, 2010 and 2009 are as
follows:
 
 June30,
                        2010
                      
                      
                      June30,
                        2009(Unaudited)
                      
                      
                      (Unaudited)U.S.
      Statutory rates
                      
                      
                      34.0
                      %
                      
                      
                      34.0
                      %Foreign
      income not recognized in the US
                      
                      
                      (34.0
                      )%
                      
                      
                      (34.0
                      )%China
      income taxes
                      
                      
                      25.0
                      %
                      
                      
                      25.0
                      %Tax
      effect of income not taxable for tax purposes (1)
                      
                      
                      10.5
                      %
                      
                      
                      (1.5
                      )%Effect
      of different tax rate of subsidiaries operating in other
      jurisdictions
                      
                      
                      (9.4
                      )%
                      
                      
                      (3.1
                      )%Total
      provision for income taxes
                      
                      
                      26.1
                      %
                      
                      
                      20.4
                      %
 
 (1)
              This
      represents derivative expenses (income) and stock compensation expenses
      incurred by the Company that are not deductible/taxable in the PRC for the
      six months ended June 30, 2010 and
2009.
 
 The
Company has cumulative undistributed earnings of foreign subsidiaries of
approximately $6.5 million as of June 30, 2010, and is included in
consolidated retained earnings and will continue to be indefinitely reinvested
in international operations. Accordingly, no provision has been made for U.S.
deferred taxes related to future repatriation of these earnings, nor is it
practicable to estimate the amount of income taxes that would have to be
provided if we concluded that such earnings will be remitted in the
future.
 
 General
Steel Holdings, Inc. was incorporated in the United States and has incurred net
operating losses for income tax purposes for the six months ended June
30, 2010 and for the year ended December 31, 2009. The net operating
loss carry forwards for United States income taxes amounted to $5.6 million
which may be available to reduce future years’ taxable income. These carry
forwards will expire, if not utilized, through 2030. Management believes that
the realization of the benefits from these losses appears uncertain due to the
Company’s limited operating history and continuing losses for United States
income tax purposes. Accordingly, the Company has provided a 100% valuation
allowance on the deferred tax asset benefit to reduce the asset to zero. The
valuation allowance as of June 30, 2010 was $1.9 million. The net change in
the valuation allowance for the six months ended June 30, 2010 was
$0.1 million. Management will review this valuation allowance periodically and
make adjustments as warranted.
 
 Value added
tax
 
 Enterprises
or individuals who sell commodities, engage in repair and maintenance or import
and export goods in the PRC are subject to a value added tax in accordance with
PRC 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.
  27
  GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 June 30,
2010
 (Unaudited)
 
 VAT on
sales and VAT on purchases amounted to $141.0 million  and $138.6
million, respectively, for the three months ended June 30, 2010
and $93.2 million and $98.2 million, respectively, for the three months
ended June 30, 2009. Sales and purchases are recorded net of VAT collected and
paid as the Company acts as an agent for the government. VAT taxes are not
impacted by the income tax holiday.
 
 VAT on
sales and VAT on purchases amounted to $258.5 million and $226.4 million,
respectively, for the six months ended June 30, 2010 and $179.2 million and
$165.9 million, respectively, for the six months ended June 30, 2009. Sales and
purchases are recorded net of VAT collected and paid as the Company acts as an
agent for the government. VAT taxes are not impacted by the income tax
holiday.
 
 Taxes
payable consisted of the following:
 June 30,
                        2010
                      
                      
                      December 31,
                        2009(Unaudited)(in thousands)
                      
                      
                      (in thousands)VAT
      taxes payable
                      
                      $
                      3,080
                      
                      
                      $
                      3,861Income
      taxes payable
                      
                      
                      700
                      
                      
                      
                      1,633Misc
      taxes
                      
                      
                      2,240
                      
                      
                      
                      1,427Totals
                      
                      $
                      6,020
                      
                      
                      $
                      6,921
 
 Note
15 – Earnings per share
 
 The
calculation of earnings per share is as follows:
 
 (in
      thousands except per share data)
                  
                  Three-month
      ended June 30,
                  
                  
                  Six-month
      ended June 30,2010
                  
                  
                  2009
                  
                  
                  2010
                  
                  
                  2009(Unaudited)
                  
                  
                  (Unaudited)
                  
                  
                  (Unaudited)
                  
                  
                  (Unaudited)Loss
      attributable to holders of common shares
                  
                  
                  (2,128
                  )
                  
                  
                  (31,789
                  )
                  
                  
                  (7,635
                  )
                  
                  
                  (24,455
                  )Basic
      and diluted weighted average number of common shares
      outstanding
                  
                  
                  52,111,605
                  
                  
                  
                  39,533,099
                  
                  
                  
                  51,883,491
                  
                  
                  
                  37,918,177Loss
      per shareBasic
      & diluted
                  
                  $
                  (0.04
                  )
                  
                  $
                  (0.80
                  )
                  
                  $
                  (0.15
                  )
                  
                  $
                  (0.64
                  )
 
 There is
no dilutive effect for its earnings per share as the Company incurred net loss
for the three and six months end June 30, 2010 and 2009.
 
 Note
16 – Related party transactions and balances
 
 Related party
transactions
 
 On March
31, 2010, GS (China), a subsidiary in which the Company holds a controlling
interest, entered into a lease agreement with Tianjin Daqiuzhuang Steel Plates
Co., Ltd. (the “Lessee”), whereby GS (China) will lease its facility located at
No. 1, Tonga Street, Daqizhuang Town, Junghai County, Tianjin City to the Lessee
(the “Lease Agreement”). The Lease Agreement provides approximately 776,078
square feet of workshops, lands, equipments and other facilities to the Lessee
and allows the Company to reduce overhead costs while providing a recurring
monthly revenue stream resulting from payments due thereunder. The term of the
Lease Agreement is from January 1, 2010 to December 31, 2011 and the monthly
base rental rate due to GS (China) is approximately $0.2 million (RMB1.68
million). The lessee partially owned by a related party Beijing Wendlar Co.,
Ltd, and is managed by the former general manager of GS (China). For the
three and six months ended June 30, 2010, GS (China) realized rental income in
the amount of $0.8 million and $1.5 million from the Lessee.
  28
  GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 June 30,
2010
 (Unaudited)
 
 The
future rental payments to be received associated with the Lease Agreement are as
follow:
 
 Year ended June 30,
                      
                      Amount(in
      thousands)2011
                      
                      $
                      2,9702012
                      
                      
                      1,484Thereafter
                      
                      
                      -Total
                      
                      $
                      4,454
 
 The
following chart summarized sales to the related party transactions for the six
months ended June 30, 2010 and 2009.
 
 Name
      of related parties
                                                        
                                                        Relationship
                                                        
                                                        June
      30, 2010
                                                        
                                                        
                                                        June
      30
                                                          2009(Unaudited)
                                                        
                                                        
                                                        (Unaudited)(in
      thousands)
                                                        
                                                        
                                                        (in
      thousands)Shaanxi
      Longmen (Group) Co, Ltd and its subsidiaries (“LG Group”)
                                                        
                                                        Noncontrolling
      shareholder of Longmen Joint Venture
                                                        
                                                        $
                                                        183,668
                                                        
                                                        
                                                        $
                                                        94,067Hengying
                                                        
                                                        Common
      control under CEO
                                                        
                                                        
                                                        19,268
                                                        
                                                        
                                                        
                                                        14,408Dazhan
                                                        
                                                        Common
      control under CEO
                                                        
                                                        
                                                        15,903
                                                        
                                                        
                                                        
                                                        12,537Hancheng
      Haiyan Coking
                                                        
                                                        Investee
      of LG Group
                                                        
                                                        
                                                        19,368
                                                        
                                                        
                                                        
                                                        23,854Shaanxi
      Steel & Iron Company
                                                        
                                                        Majority
      shareholder of Longmen Group
                                                        
                                                        
                                                        933
                                                        
                                                        
                                                        
                                                        -Beijing
      Daishang Trade Co., Ltd.
                                                        
                                                        Noncontrolling
      shareholder of Longmen Joint Venture’s subsidiary
                                                        
                                                        
                                                        5,456
                                                        
                                                        
                                                        
                                                        -Tianjin
      Daqiuzhuang Steel Plates Co., Ltd.
                                                        
                                                        Common
      control under CEO
                                                        
                                                        
                                                        8,314
                                                        
                                                        
                                                        
                                                        -Others
                                                        
                                                        
                                                        
                                                        
                                                        991
                                                        
                                                        
                                                        
                                                        -Total
                                                        
                                                        
                                                        
                                                        $
                                                        253,901
                                                        
                                                        
                                                        $
                                                        144,866
  29
  GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 June 30,
2010
 (Unaudited)
    Name of related parties
                                              
                                              Relationship
                                              
                                              June 30, 2010
                                              
                                              
                                              June 30,
                                                2009(Unaudited)
                                              
                                              
                                              (Unaudited)(in
      thousands)
                                              
                                              
                                              (in
      thousands)LG
      Group
                                              
                                              Noncontrolling
      shareholder of Longmen Joint Venture
                                              
                                              
                                              253,840
                                              
                                              
                                              
                                              146,116Hengying
      and Dazhan
                                              
                                              Common
      control under CEO
                                              
                                              
                                              -
                                              
                                              
                                              
                                              15,863Jingma
      Jiaohua
                                              
                                              Investee
      of Longmen Joint Venture’s subsidiary (unconsolidated)
                                              
                                              
                                              6,978
                                              
                                              
                                              
                                              9,274Hancheng
      Haiyan Coking
                                              
                                              Investee
      of LG Group
                                              
                                              
                                              117,835
                                              
                                              
                                              
                                              52,902Beijing
      Daishang Trade Co., Ltd.
                                              
                                              Noncontrolling
      shareholder of Longmen Joint Venture’s subsidiary
                                              
                                              
                                              1,011
                                              
                                              
                                              
                                              12,376Others
                                              
                                              
                                              
                                              
                                              315
                                              
                                              
                                              
                                              85Total
                                              
                                              
                                              
                                              $
                                              379,979
                                              
                                              
                                              $
                                              236,616
 
 Related party
balances
 
 a.
              Account  receivables
      - related parties:
 
 Name of related parties
                            
                            Relationship
                            
                            June 30, 2010
                            
                            
                            December 31,
                              2009(Unaudited)(in
      thousands)
                            
                            
                            (in
      thousands)Tianjin
      Daqiuzhuang Steel Plates Co., Ltd.
                            
                            Common
      control under CEO
                            
                            $
                            734
                            
                            
                            $
                            -Total
                            
                            
                            
                            $
                            734
                            
                            
                            $
                            -
  30
  GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 June 30,
2010
 (Unaudited)
 
 b.
              Other
      receivables - related parties:
 
 Name of related parties
                                                                                                                  
                                                                                                                  Relationship
                                                                                                                  
                                                                                                                  June 30, 2010
                                                                                                                  
                                                                                                                  
                                                                                                                  December 31,
                                                                                                                    2009(Unaudited)(in
      thousands)
                                                                                                                  
                                                                                                                  
                                                                                                                  (in
      thousands)Beijing
      Wendlar Co., Ltd
                                                                                                                  
                                                                                                                  Common
      control under CEO
                                                                                                                  
                                                                                                                  $
                                                                                                                  326
                                                                                                                  
                                                                                                                  
                                                                                                                  $
                                                                                                                  -LG
      Group
                                                                                                                  
                                                                                                                  Noncontrolling
      shareholder of Longmen Joint Venture
                                                                                                                  
                                                                                                                  
                                                                                                                  3,830
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  19,226Shaanxi
      Steel & Iron Company
                                                                                                                  
                                                                                                                  Majority
      shareholder of Longmen Group
                                                                                                                  
                                                                                                                  
                                                                                                                  9,065
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  -Mao
      Ming Sheng Zhe
                                                                                                                  
                                                                                                                  Common
      control under CEO
                                                                                                                  
                                                                                                                  
                                                                                                                  2,141
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  3,021Tianjin
      Dazhan Industry Co, Ltd
                                                                                                                  
                                                                                                                  Common
      control under CEO
                                                                                                                  
                                                                                                                  
                                                                                                                  15,140
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  10,268Baotou
      ShengdaSteel
      Pipe Co., Ltd
                                                                                                                  
                                                                                                                  Common
      control under CEO
                                                                                                                  
                                                                                                                  
                                                                                                                  54
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  -Tianjin
      Jin Qiu Steel Market
                                                                                                                  
                                                                                                                  Common
      control under CEO
                                                                                                                  
                                                                                                                  
                                                                                                                  -
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  147Tianjing
      General Steel Management Service Co., Ltd
                                                                                                                  
                                                                                                                  Common
      control under CEO
                                                                                                                  
                                                                                                                  
                                                                                                                  -
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  8Total
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  $
                                                                                                                  30,556
                                                                                                                  
                                                                                                                  
                                                                                                                  $
                                                                                                                  32,670
 
 c.
              Advances
      on inventory purchases – related
parties:
 
 Name of related parties
                                
                                Relationship
                                
                                June 30, 2010
                                
                                
                                December 31,
                                  2009(Unaudited)(in
      thousands)
                                
                                
                                (in
      thousands)Mao
      Ming Sheng Ze
                                
                                Common
      control under CEO
                                
                                $
                                8,798
                                
                                
                                $
                                -Tianjin
      Jin Qiu Steel Market
                                
                                Common
      control under CEO
                                
                                
                                -
                                
                                
                                
                                2,995Total
                                
                                
                                
                                $
                                8,798
                                
                                
                                $
                                2,995
  31
  GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 June 30,
2010
 (Unaudited)
 
 d.
              Accounts
      payable - related parties:
 
 Name
      of related parties
                                                                            
                                                                            Relationship
                                                                            
                                                                            June 30, 2010
                                                                            
                                                                            
                                                                            December 31,
                                                                              2009(Unaudited)(in
      thousands)
                                                                            
                                                                            
                                                                            (in
      thousands)Tianjin
      Hengying Trading Co., Ltd
                                                                            
                                                                            Common
      control under CEO
                                                                            
                                                                            $
                                                                            8,770
                                                                            
                                                                            
                                                                            $
                                                                            17,256Tianjin
      Dazhan Industry Co., Ltd
                                                                            
                                                                            Common
      control under CEO
                                                                            
                                                                            
                                                                            12,193
                                                                            
                                                                            
                                                                            
                                                                            6,047Henan
      Xinmi Kanghua
                                                                            
                                                                            Noncontrolling
      shareholder of Longmen Joint Venture’s subsidiary
                                                                            
                                                                            
                                                                            898
                                                                            
                                                                            
                                                                            
                                                                            960Zhengzhou
      Shenglong
                                                                            
                                                                            Noncontrolling
      shareholder of Longmen Joint Venture’s subsidiary
                                                                            
                                                                            
                                                                            91
                                                                            
                                                                            
                                                                            
                                                                            91ShanXi  Fangxin
                                                                            
                                                                            Noncontrolling
      shareholder of Longmen Joint Venture’s subsidiary
                                                                            
                                                                            
                                                                            -
                                                                            
                                                                            
                                                                            
                                                                            373Baogang
      Jianan
                                                                            
                                                                            Noncontrolling
      shareholder of Longmen Joint Venture’s subsidiary
                                                                            
                                                                            
                                                                            170
                                                                            
                                                                            
                                                                            
                                                                            38Jingma
      Jiaohua
                                                                            
                                                                            Investee
      of Longmen Joint Venture’s subsidiary (unconsolidated)
                                                                            
                                                                            
                                                                            1,210
                                                                            
                                                                            
                                                                            
                                                                            1,360Huashan
      metallurgy
                                                                            
                                                                            Investee
      of Longmen Joint Venture’s subsidiary (unconsolidated)
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            601Beijing
      Daishang Trading Co., Ltd
                                                                            
                                                                            Noncontrolling
      shareholder of Longmen Joint Venture’s subsidiary
                                                                            
                                                                            
                                                                            122
                                                                            
                                                                            
                                                                            
                                                                            1,315LG
      Group
                                                                            
                                                                            Noncontrolling
      shareholder of Longmen Joint Venture
                                                                            
                                                                            
                                                                            13,795
                                                                            
                                                                            
                                                                            
                                                                            15,310Tianjin
      General Qiugang Pipe
                                                                            
                                                                            Common
      control under CEO
                                                                            
                                                                            
                                                                            10,012
                                                                            
                                                                            
                                                                            
                                                                            4,800Hancheng
      Haiyan Coking
                                                                            
                                                                            Investee
      of LG Group
                                                                            
                                                                            
                                                                            37,867
                                                                            
                                                                            
                                                                            
                                                                            -Total
                                                                            
                                                                            
                                                                            
                                                                            $
                                                                            85,128
                                                                            
                                                                            
                                                                            $
                                                                            48,151
 
 e.
              Short-term
      loans - related parties:
 
 Name of related parties
                                    
                                    Relationship
                                    
                                    June 30, 2010
                                    
                                    
                                    December 31,
                                      2009(Unaudited)(in
      thousands)
                                    
                                    
                                    (in
      thousands)Tianjin
      Dazhan Industry Co., Ltd
                                    
                                    Common
      control under CEO
                                    
                                    $
                                    -
                                    
                                    
                                    $
                                    3,946Tianjin
      Hengying Trading Co., Ltd
                                    
                                    Common
      control under CEO
                                    
                                    
                                    -
                                    
                                    
                                    
                                    3,404Shaanxi
      Shenganda Trading Co., Ltd
                                    
                                    Common
      control under LG Group
                                    
                                    
                                    -
                                    
                                    
                                    
                                    4,401Total
                                    
                                    
                                    
                                    $
                                    -
                                    
                                    
                                    $
                                    11,751
  32
  GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 June 30,
2010
 (Unaudited)
 
 f.
              Other
      payables - related parties:
 
 Name
      of related parties
                                                      
                                                      Relationship
                                                      
                                                      June 30, 2010
                                                      
                                                      
                                                      December 31,
                                                        2009(Unaudited)(in
      thousands)
                                                      
                                                      
                                                      (in
      thousands)Tianjin
      Hengying Trading Co, Ltd
                                                      
                                                      Common
      control under CEO
                                                      
                                                      
                                                      2,510
                                                      
                                                      
                                                      
                                                      2,415Beijing
      Wendlar Co., Ltd
                                                      
                                                      Common
      control under CEO
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      704Yangpu
      Capital Automobile
                                                      
                                                      Common
      control under CEO
                                                      
                                                      
                                                      1,311
                                                      
                                                      
                                                      
                                                      587Tianjin
      General Qiugang Pipe
                                                      
                                                      Common
      control under CEO
                                                      
                                                      
                                                      18,924
                                                      
                                                      
                                                      
                                                      -Tianjin
      Jin Qiu Steel Market
                                                      
                                                      Common
      control under CEO
                                                      
                                                      
                                                      1,340
                                                      
                                                      
                                                      
                                                      -Total
                                                      
                                                      
                                                      
                                                      $
                                                      24,085
                                                      
                                                      
                                                      $
                                                      3,706
 
 g.
              Customer
      deposit – related parties:
 
 Name of related parties
                                            
                                            Relationship
                                            
                                            June 30, 2010
                                            
                                            
                                            December 31,
                                              2009(Unaudited)(in
      thousands)
                                            
                                            
                                            (in
      thousands)Tianjin
      Dazhan Industry Co., Ltd
                                            
                                            Common
      control under CEO
                                            
                                            
                                            1,567
                                            
                                            
                                            $
                                            1,544Tianjin
      Hengying Trading Co., Ltd
                                            
                                            Common
      control under CEO
                                            
                                            
                                            -
                                            
                                            
                                            
                                            203Hancheng
      Haiyan Coking
                                            
                                            Investee
      of LG Group
                                            
                                            
                                            1,995
                                            
                                            
                                            
                                            1,316LG
      Group
                                            
                                            Noncontrolling
      shareholder of Longmen Joint Venture
                                            
                                            
                                            24,952
                                            
                                            
                                            
                                            -Beijing
      Daishang Trading Co., Ltd
                                            
                                            Noncontrolling
      shareholder of Longmen Joint Venture’s subsidiary
                                            
                                            
                                            -
                                            
                                            
                                            
                                            728Total
                                            
                                            
                                            
                                            $
                                            28,514
                                            
                                            
                                            $
                                            3,791
 
 The
Company also guaranteed bank loans of related parties amounting to $54.4 million
and $93.6 million as of June 30, 2010 and December 31, 2009,
respectively.
 
 Note
17 - Equity
 
 2009
Equity Transactions
 
 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 $0.2 million.
 
 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.
  33





GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 June 30,
2010
 (Unaudited)
 
 From
April to November 2009, the Company issued 487,400 shares of common stock to
management and a consulting firm as compensation. The shares were
valued at the quoted market price on the date granted. The Company recorded
compensation expense of $1.6 million.
 
 On July
15, 2009 and August 21, 2009, the Company granted convertible notes holders
44,065 shares of common stock at price of $4.2511 as cash payments made for
interest.
 
 On May 8,
2009, the Company issued 300,000 shares of common stock to Maoming Hengda’s
debtor, Guangzhou Hengda at $6.00 per share, as cash payments made for settling
other short term loan.
 
 From May
7, 2009 to December 31, 2009, $30.0 million of notes was converted to
7,045,274 shares of common stock at a conversion price of $4.2511. According to
the convertible note agreement, the Company incurred the make whole interest
expense of $8.8 million and 1,795,977 shares of common stock were issued. See
Note 11 for details.
 
 On
December 24, 2009, the Company entered into a Securities Purchase Agreement with
certain institutional investors issuing 5,555,556 shares and 2,777,778 warrants
(the “2009 Warrants”). The 2009 Warrants can be converted to common stock from
June 24, 2010 to June 23, 2013 at $5.00 per share. The 2009 Warrants have a
strike price equal to $5.00 and a term of two and a half years. Because the 2009
Warrants are denominated in U.S. dollars and the Company’s functional currency
is the Renminbi, and the 2009 Warrants permit the holder to request cash
buy-back in the event of a Fundamental Transaction, which is a significant
change in the Company structure and/or equity. The 2009 Warrants do not meet the
requirements of the accounting standards to be indexed only to the Company’s
stock.  Accordingly, they are accounted for at fair value as
derivative liabilities and marked to market each period.
 
 The
initial value of the 2009 Warrants was determined using the Cox-Ross-Rubinstein
binomial model using the following assumptions:
 
 ·
              Expected
      volatility of 125%
 ·
              Expected
      dividend yield of 0%
 ·
              Risk-free
      interest rate of 1.28%
 ·
              Expected
      lives of two and a half years
 ·
              Market
      price at issuance date of $4.57
 ·
              Strike
      price of $5.00
 
 The 2009
Warrants were valued at $8.5 million when they were issued on December 24, 2009.
At June 30, 2010 and December 31, 2009, the estimated fair value of the warrants
was $2.8 million and $8.1 million, resulting in a gain of $5.3 million and $0.4
million, respectively. The gain was recorded in the Company’s consolidated
statement of operations and other comprehensive income (loss).
 
 The
volatility of the Company’s common stock was based on the Company’s historical
stock prices, the risk free interest rate was based on Treasury Constant
Maturity Rates published by the U.S. Federal Reserve for periods applicable to
the life of the warrants, the dividend yield was based on the Company’s current
and expected dividend policy and the expected term is equal to the contractual
life of the warrants.  The value of the warrants was based on the
Company’s common stock price on the date the warrants were issued.
  34
  GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 June 30,
2010
 (Unaudited)
 
 2010
Equity Transactions
 
 On March
19, 2010, the Company granted senior management and directors
237,100 shares of common stock at $3.91 per share as
compensation. The shares were valued at the quoted market price on the date
granted. The Company recorded compensation expense of $0.9 million.
 
 On June
7, 2010, the Company issued 928,163 shares of common stock to one
of Maoming Hengda’s creditor to settle the other short-term
loans.
 
 On June
25, 2010, the Company granted senior management and directors 168,650 shares of
common stock at $2.62 per share as compensation. The shares were
valued at the quoted market price on the date granted. The Company recorded
compensation expense of $0.4 million.
 
 The
Company has the following warrants outstanding:
  Outstanding
      as of January 1, 2009
                      
                      
                      1,154,958Granted
                      
                      
                      5,523,691Forfeited
                      
                      
                      -Exercised
                      
                      
                      -Outstanding
      As of December 31, 2009
                      
                      
                      6,678,649Granted
                      
                      
                      -Forfeited
                      
                      
                      -Exercised
                      
                      
                      -Outstanding
      As of June 30, 2010 (Unaudited)
                      
                      
                      6,678,649
 
 OutstandingWarrants
                        
                        
                        ExercisableWarrantsExercise
                          Price
                        
                        
                        Number
                        
                        
                        Average
                          Remaining
                          Contractual
                          Life
                        
                        
                        Average
                          Exercise
                          Price
                        
                        
                        Number
                        
                        
                        Average
                          Remaining
                          ContractualLife$
                        5
                        
                        
                        
                        6,678,649
                        
                        
                        
                        2.5
                        
                        
                        $
                        5
                        
                        
                        
                        6,678,649
                        
                        
                        
                        2.5
 
 Note
18 – Retirement plan
 
 Regulations
in the PRC 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
$1.1 million and $0.8 million for the three months ended June 30, 2010 and 2009,
respectively, $2.2 million and $1.6 million for the six months ended June 30,
2010 and 2009, respectively.
  35
  GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 June 30,
2010
 (Unaudited)
 
 Note19–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
20 – Commitment and contingencies
 
 Commitments
 
 GS
(China) rented land for 50 years starting September 2005. Total amount of the
rent over the 50 years period is approximately $1.2 million (or RMB 8
million).
 
 Baotou
Steel Pipe Joint Venture has 5 years rental agreement with Bao Gang Jianan for
buildings. The agreement began June 2007 for $0.3 million (or RMB1.8 million)
per year.
 
 As of
June 30, 2010, total future minimum lease payments for the unpaid portion under
an operating lease were as follows:
 
 Year ended June 30,
                      
                      Amount(in
      thousands)2011
                      
                      $
                      2642012
                      
                      
                      2642013
                      
                      
                      -2014
                      
                      
                      -2015
                      
                      
                      -Thereafter
                      
                      
                      663Total
                      
                      $
                      1,191
 
 Total
rental expense amounted to $0.07 and $0.1 million for the three months ended
June 30, 2010 and 2009, respectively and total rental expense for the six months
ended June 30, 2010 and 2009, amounted to $0.1 million and $0.2 million,
respectively,
 
 Longmen
Joint Venture has $12.3 million contractual obligations in its construction
project as of June 30 2010, see note 6.
  36
  GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 June 30,
2010
 (Unaudited)
 
 The
Company entered an agreement to build a TRT Electricity Generator (“TRT”) inside
Longmen Joint Venture’s production plant. The Company makes payments for the
cost via scheduled payments after the TRT was put into use in April 2009. The
future payment schedule associated with the arrangement is as
follow:
 
 Year ended June 30,
                      
                      Amount(in
      thousands)2011
                      
                      $
                      3,051Thereafter
                      
                      
                      -Total
                      
                      $
                      3,051
 
 On May
13, 2010, the Company entered a Joint Venture Framework Agreement with Shanxi
Meijin Energy Group Co., Ltd, a corporation formed under the laws of PRC. The
establishment of the joint venture is subject to the receipt and satisfactory
review by General Steel of a written appraisal and related due diligence
materials pertaining to Meijin Energy. As part of any consummation of the joint
venture in accordance with a definitive agreement, General Steel will
contribute RMB440 million (approximately $64.7 million) in cash or stock and
shall thereafter hold a 55% interest in Meijin Steel. Meijin Energy will
contribute facilities, inventory, equipment and land usage rights with an
aggregate value equal to RMB360 million (approximately $52.0 million) and shall
thereafter retain a 45% interest in Meijin Steel.
 
 Contingencies
 
 As of
June 30, 2010, the Company guaranteed bank loans for related parties and third
parties bank loans, including line of credit, amounting to $129.1
million.
 
 Longmen
Joint Venture had $123.2 million guarantees as of June 30, 2010.
 
 Nature
      of
                    
                    Guaranteeguarantee
                    
                    amount
                    
                    Guaranty
      period(In
      thousands)Line
      of credit
                    
                    
                    9,626
                    
                    July
      2009 to July 2010Bank
      loans
                    
                    
                    51,555
                    
                    Various
      from July 2009 to June 2011Notes
      payable
                    
                    
                    39,857
                    
                    Various
      from July 2008 to September 2012Confirming
      storage
                    
                    
                    17,812
                    
                    Various
      from September 2009 to June 2011Financing
      by the rights of goods delivery in the future
                    
                    
                    4,375
                    
                    Various
      from December 2009 to March 2011Total
                    
                    $
                    123,225
 
 Maoming
Hengda had $5.9 million in guarantees as of June 30, 2010.
 
 Nature
      of
                    
                    Guaranteeguarantee
                    
                    amount
                    
                    Guaranty
      period(In
      thousands)Bank
      loan
                    
                    $
                    5,892
                    
                    Various
      from June 2009 to October
2010
 
 The
Company has evaluated the debt guarantees and concluded that the likelihood of
having to make payments under the guarantees is remote.
  37
  GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 June 30,
2010
 (Unaudited)
 
 Note
21 – Segments
 
 The
Company sells steel which is used by customers in various
industries.  The Company’s chief operating decision-makers (i.e. chief
executive officer and his direct reports) review financial information presented
on a consolidated basis, accompanied by disaggregated information about revenues
by product lines for purposes of allocating resources and evaluating financial
performance. There are no segment managers who are held accountable for
operations, operating results and plans for levels or components below the
consolidated unit level.  Based on qualitative and quantitative
criteria established by the accounting standards, the Company considers itself
to be operating within one reportable segment.
 
 The
Company does not have long-lived assets located in foreign countries. In
accordance with the enterprise-wide disclosure requirements of the accounting
standard, the Company's net revenue from external customers by main product
lines is as follows:
 
 For
      the three months ended
                        
                        
                        For
      the six months ended(in
      thousands)
                        
                        2010
                        
                        2009
                        
                        
                        2010
                        
                        2009Products
                        
                        (Unaudited)
                        
                        (Unaudited)
                        
                        
                        (Unaudited)
                        
                        (Unaudited)Re-bar
                        
                        $
                        494,530
                        
                        $
                        364,767
                        
                        
                        $
                        934,188
                        
                        $
                        657,481Hot-Rolled
      Sheets
                        
                        
                        -
                        
                        
                        13,878
                        
                        
                        
                        8,314
                        
                        
                        26,577High
      Speed Wire
                        
                        
                        2,006
                        
                        
                        26,487
                        
                        
                        
                        5,880
                        
                        
                        43,737Spiral-Welded
      Steel Pipe
                        
                        
                        5,143
                        
                        
                        3,815
                        
                        
                        
                        6,320
                        
                        
                        3,946Total
      sales revenue
                        
                        $
                        501,679
                        
                        $
                        408,947
                        
                        
                        $
                        954,702
                        
                        $
                        731,741
 
 Note
22 – Subsequent event
 
 On August
4, 2010, the investors in the remaining outstanding Notes elected to
convert all the amounts due under the Notes into the Company’s common stock, par
value per share $0.001. These are the only remaining notes outstanding from the
Company’s December 13, 2007 private placement. The Notes were converted in
accordance with their terms resulting in the issuance of a total of 1,559,675
shares of common Stock in the aggregate to the Investors (the “Conversion”). As
a result of the Conversion, the Company has no outstanding balance for the
Notes.
  38





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




Note
Regarding 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.





Recent
Developments and Second Quarter Highlights





·
            For
      the three month period ended June 30, 2010, total revenue increased 22.7%
      to $501.7 million from $408.9 million in the second quarter of
      2009.





·
            Shipment
      volume increased 5.8% to 1.01 million metric tons from 0.96 million metric
      tons.





·
            On
      May 13, 2010, we entered into a Joint Venture Framework Agreement with
      Shanxi Meijin Energy Group Co., Ltd. (“Meijin Energy”), a corporation
      formed under the laws of the People's Republic of China.  The
      establishment of the joint venture is subject to our receipt and
      satisfactory review of a written appraisal of fixed assets  and
      related due diligence materials pertaining to Meijin
    Energy.





Our
continuing growth demonstrates the following strengths:





·
            our two-pronged growth strategy
      of upgrading our existing operations and growing through merger and
      acquisition activities has proven successful;
  and




·
            we are a direct beneficiary of
      the China economic stimulus infrastructure spending
      program.


39


Overview




We were
incorporated on August 5, 2002 in the State of Nevada.  We are
headquartered in Beijing, China and operate a diverse portfolio of Chinese
steel companies that serve several industries and produce a variety of steel
products including reinforced bars (“rebar”), spiral-weld pipes and high-speed
wire.  Our aggregate annual production capacity of steel products is
6.3 million metric tons, 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 drive demand
for all of our products.





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





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





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




Unless
the context indicates otherwise, as used herein the terms “General Steel”, the
“company”, “we”, “our” and “us” refer to General Steel Holdings,
Inc.





Steel
Related Subsidiaries





We
presently have controlling interests in four steel-related
subsidiaries:





·
            General Steel (China) Co.,
      Ltd.;


·
            Baotou Steel - General Steel
      Special Steel Pipe Joint Venture Co.,
  Ltd.;


·
            Shaanxi Longmen Iron and Steel
      Co., Ltd.; and


·
            Maoming Hengda Steel Group,
      Ltd.





General
Steel (China) Co., Ltd.





General
Steel (China) Co., Ltd., (“GS (China)”), formerly known as Tianjin
Daqiuzhuang Metal Sheet Co., Ltd., started operations in
1988.  GS (China)’s core business was manufacturing high quality
hot-rolled carbon and silicon steel sheets mainly used in low-end light
industrial applications including the production of wiring cabinets, metal
security doors, light agricultural vehicles and other specialty
markets.





On March
31, 2010, GS (China) entered into a lease agreement whereby GS (China) leased
its facility located at No. 1, Tongda Street, Daqiuzhuang town, Jinghai
County, Tianjin municipality, to Tianjin Daqiuzhuang Steel Plates Co., Ltd.
(“Lessee”).  The lease provides approximately 776,078 square feet of
workshops, land, equipment and other facilities to the Lessee and reduces
overhead costs while providing a recurring monthly revenue stream resulting from
payments due thereunder.  The term of the lease is from January 1,
2010 to December 31, 2011 and the monthly base rental rate due to GS (China) is
approximately $246,096 (RMB1.68 million).  The former General Manager
of GS (China) currently manages Tianjin Daqiuzhuang Steel Plates Co., Ltd. 
Changing the business model of this facility from a direct operations model to a
leased operations model reduces overhead costs and provides a steady revenue
stream in the form of fixed monthly lease revenue.





Baotou
Steel - General Steel Special Steel Pipe Joint Venture Co., Ltd.





On April
27, 2007, GS (China) and Baotou Iron and Steel Group Co., Ltd. (“Baotou Steel”)
entered into an Amended and Restated Joint Venture Agreement amending the Joint
Venture Agreement entered into on September 28, 2005 to increase GS (China)’s
ownership interest in the related joint venture to 80%.  The joint
venture company’s name is Baotou Steel - General Steel Special Steel Pipe Joint
Venture Co., Ltd. (“Baotou Steel Pipe Joint Venture”).  Baotou Steel
Pipe Joint Venture obtained its business license from government authorities in
China on May 25, 2007, and started regular operations in July
2007.  Baotou Steel Pipe Joint Venture has four production lines
capable of producing 100,000 metric tons of double spiral-weld pipes used mainly
in the energy sector primarily to transport oil, natural gas and
steam.  These pipes have a diameter ranging from 219mm to 1240mm, a
wall thickness ranging from 6mm to 13mm, and a length ranging from 6m to
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.


40


Shaanxi
Longmen Iron and Steel Co., Ltd.





Effective June
1, 2007, through two subsidiaries, GS (China) 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 a total of approximately $39 million cash and collectively hold
approximately 60% of the Longmen Joint Venture.





Longmen Group, located in Hancheng
city, Shaanxi province, in China’s central region, was founded in 1958 and
incorporated in 2002.  Longmen Group operates as a fully-integrated
steel production facility.  Less than 10% of steel companies in China
have fully-integrated steel production capabilities.





Currently, the Longmen Joint Venture
has five branch offices, five subsidiaries under direct control and six entities
in which it has a non-controlling interest.  It employs approximately
6,300 full-time employees.  In addition to steel production, the
Longmen Joint Venture operates transportation services through its Changlong
Branch, located at Hancheng city, Shaanxi province.  Changlong Branch
owns 154 vehicles and provides transportation services exclusively to the
Longmen Joint Venture.





Coke Operation: Longmen Joint Venture
owns 22.76% of Hancheng Tongxing Metallurgy Co., Ltd.
(“Tongxing”).  Located in Hancheng city, Shaanxi province, Tongxing
produces second grade coke used as part of the fuel for our blast
furnaces.  Its annualized coke production capacity is 200,000 metric
tons.  Tongxing sells all of its output to Longmen Joint
Venture.




Longmen Joint Venture does not own iron
pelletizing facilities.





Longmen Joint Venture’s products are
categorized within the steel industry as “longs” (referencing their shape) and
are generally considered a regional product because their weight and dimensions
make the products  ill-suited for cost-effective long-haul ground
transportation.  By our estimates, the provincial market demand for
rebar is six to eight million metric tons per year.  Slightly more
than half of this demand comes from Xi’an, the capital of Shaanxi province,
located 200km from the Longmen Joint Venture’s main steel production site. We
estimate that we currently provide the Xi’an market with approximately 72% of
its market for rebar.





An established regional network of
approximately 100 distributors and four sales offices sell the Longmen Joint
Venture’s products.  All Longmen Joint Venture products are sold under
the registered brand name of “Yulong,” which has strong regional recognition and
brand awareness.  Rebar and billet products carry ISO 9001 and 9002
certification and many other products have won national quality
awards.  Products manufactured at the facility have been used in the
construction of the Yangtze River Three Gorges Dam, Xi’an International Airport,
the Xi’an city subway system and the Xi Luo Du and the Xiang Jia Ba hydropower
projects.





Maoming
Hengda Steel Group Limited





On June 25, 2008, through our
subsidiary Qiu Steel Investment, we paid approximately $7.1 million (RMB50
million) in cash, to purchase 99% of Maoming Hengda Steel Group, Ltd.
(“Maoming”).  The total registered capital of Maoming is approximately
$77.8 million (RMB544.6 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 Maoming facility has two production lines
capable of producing 1.8 million metric tons of 5.5mm to 16mm diameter
high-speed wire and 12mm to 38mm diameter rebar annually.  The
products are sold through nine distributors targeting customers in Guangxi
province and the eastern region of Guangdong
province.


41


To take advantage of stronger market
demand in Shaanxi, in the second quarter of 2009, we relocated the 800,000
metric tons capacity rebar production line from the Maoming facility to the
Longmen Joint Venture.  In the third quarter of 2010, we intend
to relocate the 1,000,000 metric tons capacity high-speed wire production line
from the Maoming facility to the Longmen Joint Venture.





On February 3, 2010, Maoming entered
into a strategic alliance agreement with Zhuhai Yueyufeng Iron and Steel Co.,
Ltd. (“Yueyufeng”) whereby Yueyufeng will fund construction of a new 400,000
metric tons capacity rebar production line to operate at the Maoming
facility.  In exchange for the funding, Maoming will process 25,000
metric tons of rebar for Yueyufeng monthly from July 2010 to June
2012.





Production
Capacity Information Summary by Subsidiaries





GS (China)
                        
                        Baotou Steel Pipe
                          Joint Venture
                        
                        Longmen Joint
                          Venture
                        
                        MaomingAnnual
      Production Capacity (metric tons)
                        
                        400,000
                        
                        100,000
                        
                        4.8
      million
                        
                        1
      millionMain
      Products
                        
                        Hot-rolled
      sheet
                        
                        Spiral-weld
      pipe
                        
                        Rebar/High-speed
      wire
                        
                        High-speed
      wireMain
      Application
                        
                        Light
      industrial applications
                        
                        Energy
      transport
                        
                        Infrastructure and
                          construction
                        
                        Infrastructure and
                          construction





Marketing
and Customers





We sell our products primarily to
distributors, typically collecting payment from these distributors in
advance.  Our marketing efforts are mainly directed toward those
customers who have exacting requirements for on-time delivery, customer support
and product quality.  We believe that these requirements as well as
product planning are critical factors in our ability to serve this segment of
the market.





Demand
for our products





Overall, domestic economic growth is an
important demand driver of our products, especially construction and
infrastructure projects, 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 12th Five
Year National Economic and Social Development Plan (“NESDP”) (2011-2015),
development of China’s western region is one of the top-five economic priorities
of the PRC.  Shaanxi province, where the Longmen Joint Venture is
located, has been designated as a focal point for development into the western
region.  Our Longmen Joint Venture is 220 km from Xi’an and does not
have a major competitor within a 250 km radius.  According to the
information released by the Shaanxi Provincial Development and Reform
Commission, total fixed assets investment for Shaanxi province was
approximately $21.3 billion (RMB 144.9 billion) for the year ended December
31, 2009, a 73.7% increase over the same period in 2008. There are 235
construction and infrastructure projects under construction in
2010.  Among them 50 projects are scheduled to begin this year. Some
of the major projects include: nine new railways, one new airport, and expansion
of the Xi’an airport, two new ring subway systems and 4 new
dams.  Currently, our Longmen Joint Venture supplies construction
steel products to many of these projects including: the Xi’an No. 1 and 2 subway
systems and the railway lines connecting Xi’an to Chengdu and Xi’an to
Ankang.  We believe there will be sustained regional demand for
several years as the government continues to drive western region development
efforts.




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





At Maoming, infrastructure growth and
business development in Maoming city, the surrounding Guangdong cities and the
western region of Guangxi province, drive demand for our construction steel
products.  As a second tier city, the industrialization and
urbanization of Maoming is one of the focal points of economic development in
west Guangdong province.


42


Supply
of raw materials





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





Longmen
Joint Venture accounts for 4.8 million metric tons of our aggregate 6.3
million metric tons annual production capacity.  At Longmen Joint
Venture, approximately 95% of production costs are associated with raw
materials, with iron ore being the largest component.





According
to the China Iron and Steel Association, approximately 60% of the China’s
domestic steel industry demand for iron ore must be filled by
imports.  At 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 Longmen Group, our partner in the Longmen Joint Venture),
surrounding local mines and from abroad.  The Daxigou mine has 300
million metric tons of iron ore reserves.  According to the terms of
our Longmen Joint Venture Agreement with the Longmen Group, we have first rights
of refusal for sales from the mine and for its development.  We
presently purchase all of the production from this mine.




Coke





Coke,
produced from metallurgical coal (also known as coking coal), is our second most
consumed raw material, after iron ore.  It requires approximately
550kg to 600kg of coke to make one metric ton of crude steel.





Our
Longmen Joint Venture facility is located in the center of China’s coal
belt.  We source all coke used at Longmen Joint Venture from the town
in which Longmen Joint Venture is located.  This ensures dependable
supply and minimal transportation costs.





The major
suppliers of our raw materials are as follows (1):




Longmen Joint
Venture





Name of the Major Supplier
                        
                        Raw Material
                          Purchased
                        
                        % of Total Raw
                          Material
                          Purchased
                        
                        Relationship with
                          General SteelShaanxi
      Longmen Iron & Steel Group Co., Ltd.
                        
                        Iron
      Ore
                        
                        
                        22.7
                        %
                        Related
      partyShaanxi
      Haiyan Coal Chemical Industry Co., Ltd.
                        
                        Coke
                        
                        
                        11.9
                        %
                        Related
      partyShaanxi
      Huanghe Material Co., Ltd.
                        
                        Coke
                        
                        
                        6.5
                        %
                        NoneBaotou
      Bangli Industry Co., Ltd
                        
                        Iron
      Ore
                        
                        
                        3.1
                        %
                        NoneHejing
      Xinbo Commercial Trade Co., Ltd.
                        
                        Iron
      Block
                        
                        
                        3.0
                        %
                        NoneTotal
                        
                        
                        47.2
                        %





Baotou Steel Pipe Joint
Venture





Name of the Major Supplier
                        
                        Raw Material
                          Purchased
                        
                        % of Total Raw
                          Material
                          Purchased
                        
                        Relationship with
                          General SteelInner
      Monglia Chenggang Material Co., Ltd
                        
                        Steel
      Coil
                        
                        
                        23.1
                        %
                        NoneTianjin
      Dazhan Industry Co., Ltd
                        
                        Steel
      Coil
                        
                        
                        14.7
                        %
                        Related
      partyBaotou
      Shunye Material Co., Ltd
                        
                        Steel
      Coil
                        
                        
                        12.2
                        %
                        NoneTianjin
      Shengze Industry & Trade Co., Ltd
                        
                        Steel
      Coil
                        
                        
                        11.6
                        %
                        NoneTianjin
      Jinchang I&E Co., Ltd.
                        
                        Steel
      Coil
                        
                        
                        6.0
                        %
                        NoneTotal
                        
                        
                        67.6
                        %


43


Maoming





Name of the Major Supplier
                      
                      Raw Material
                        Purchased
                      
                      % of Total Raw
                        Material
                        Purchased
                      
                      Relationship with
                        General SteelMaoming
      Dazhongmao Petrochem Co., Ltd.
                      
                      Heavy
      Oil
                      
                      
                      23.5
                      %
                      NoneMaoming
      Zhenmao Development Co.,Ltd
                      
                      Heavy
      Oil
                      
                      
                      23.5
                      
                      NoneTotal
                      
                      
                      47.0
                      %







(1) For
purposes of the above tables, the term “Related Party” refers to a company over
whose operating policies we can exercise control or significantly
influence.




Industry
consolidation





The
central government has a long-stated goal to consolidate 50% of domestic steel
production among the top ten producers by 2010 and 70% by 2020.  In
September 2009, the central government published an industry target to eliminate
80 million metric tons of inefficient capacity from the steel industry by the
end of 2011.  Along with this target, the government added new steel
making operational and environmental restrictions and tasked several government
agencies with enforcing these measures.





On July
12, 2010, Ministry of Industry & Information Technology Commission issued
the Steel Industry Admittance and Operation Qualifications. The new standard
specified requirement of all aspects which include: size of blast furnace, size
of converters, emission of waster water, dust per ton of steel producing,
quantity of coal used for each process of steel making and output capacity of
year 2009.  The new policy once again confirmsthe central government’s
resolution to push forward the consolidation of this fragmented industry of more
than 800 players.  While the operational conditions become tougher and
tougher, more small and medium size players will aggressively look for valued
partners which will raise the opportunities of high quality acquisitions for
GSI.  We believe the directives indirectly strengthen our position as
an industry consolidator by creating quantitative measures we can use to better
qualify potential acquisition targets.





Results
of Operations for the Three Months Period Ended


Sales
Revenues





Three
months ended June 30, 2010 compared with three months ended June 30,
2009





The
following table sets forth sales revenue and volume in metric tons for our
Longmen Joint Venture..





SALES
                                                                    REVENUE
                                                                  
                                                                  Three months endedJune 30, 2010
                                                                  
                                                                  
                                                                  June 30, 2009
                                                                  
                                                                  
                                                                  Change
                                                                  
                                                                  
                                                                  Changein
      thousands, except metric tons
                                                                  
                                                                  Volume
                                                                  
                                                                  Revenue
                                                                  
                                                                  
                                                                  %
                                                                  
                                                                  
                                                                  Volume
                                                                  
                                                                  Revenue
                                                                  
                                                                  
                                                                  %
                                                                  
                                                                  
                                                                  Volume %
                                                                  
                                                                  
                                                                  Revenue %Unaudited
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  UnauditedLongmen
      Joint Venture
                                                                  
                                                                  
                                                                  928,380
                                                                  
                                                                  
                                                                  $
                                                                  499,361
                                                                  
                                                                  
                                                                  
                                                                  99.5
                                                                  .%
                                                                  
                                                                  
                                                                  843,291
                                                                  
                                                                  
                                                                  $
                                                                  364,767
                                                                  
                                                                  
                                                                  
                                                                  89.2
                                                                  %
                                                                  
                                                                  
                                                                  10.1
                                                                  %
                                                                  
                                                                  
                                                                  36.9
                                                                  %Other
                                                                  
                                                                  
                                                                  82,375
                                                                  
                                                                  
                                                                  $
                                                                  2,318
                                                                  
                                                                  
                                                                  
                                                                  0.5
                                                                  %
                                                                  
                                                                  
                                                                  112,213
                                                                  
                                                                  
                                                                  $
                                                                  44,180
                                                                  
                                                                  
                                                                  
                                                                  10.8
                                                                  %Total
      Revenue of General Steel
                                                                  
                                                                  
                                                                  1,010,755
                                                                  
                                                                  
                                                                  
                                                                  501,679
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  955,504
                                                                  
                                                                  
                                                                  
                                                                  408,947
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  5.8
                                                                  %
                                                                  
                                                                  
                                                                  22.7
                                                                  %


44


Total Sales Revenues for the three
months ended June 30, 2010 increased 22.7% to $501.7 million from $408.9 million
for the same period last year.





The
increase in sales revenue compared to the same period last year is predominantly
due to the sales volume increase of 5.8% and average selling price of rebar
increase of 24.6% at our Longmen Joint Venture from RMB2,950 (approximately US
$434) in the second quarter of 2009 to RMB3,666 (approximately US $540) in the
second quarter of 2010.





Longmen
Joint Venture comprised 99.5% of total sales for the second quarter of
2010.  We run at 86% of our total capacity in the second quarter of
2010 which was fueled by stable demand for construction steel in our addressable
markets.





Maoming comprised $2
million or less than 1% of total sales for the second quarter of 2010. The
decrease in sales revenue compared to the same period last year is primarily due
to a greater number of processing contracts compared to production
contracts.  In the second quarter of 2010, Maoming only completed
processing contracts, which generate less sales revenue, whereas in the second
quarter of 2009, it completed both processing and production
contracts.





Baotou
Steel Pipe Joint Venture comprised $5 million or  less than 1% of
total sales for the second quarter of 2010.  Sales
from  Baotou Steel Pipe Joint Venture increased in second quarter 2010
compared to the same period last year due to higher average selling
price.





Six
months ended June 30, 2010 compared with six months ended June 30,
2009





The
following table sets forth sales revenue and volume in metric tons for each of
our Longmen  Joint Venture





SALES
                                                                REVENUE
                                                              
                                                              Six months endedJune 30, 2010
                                                              
                                                              
                                                              June 30, 2009
                                                              
                                                              
                                                              Change
                                                              
                                                              
                                                              Changein
      thousands, except metric tons
                                                              
                                                              Volume
                                                              
                                                              Revenue
                                                              
                                                              
                                                              %
                                                              
                                                              
                                                              Volume
                                                              
                                                              Revenue
                                                              
                                                              
                                                              %
                                                              
                                                              
                                                              Volume %
                                                              
                                                              
                                                              Revenue %Unaudited
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              UnauditedLongmen
      Joint Venture
                                                              
                                                              
                                                              1,838,111
                                                              
                                                              
                                                              $
                                                              934,187
                                                              
                                                              
                                                              
                                                              97.9
                                                              %
                                                              
                                                              
                                                              1,492,618
                                                              
                                                              
                                                              $
                                                              657,482
                                                              
                                                              
                                                              
                                                              89.9
                                                              %
                                                              
                                                              
                                                              23.
                                                              %
                                                              
                                                              
                                                              42.1
                                                              %Other
                                                              
                                                              
                                                              208,014
                                                              
                                                              
                                                              $
                                                              20,515
                                                              
                                                              
                                                              
                                                              2.1
                                                              %
                                                              
                                                              
                                                              181,022
                                                              
                                                              
                                                              $
                                                              74,259
                                                              
                                                              
                                                              
                                                              10.1
                                                              %Total
      Revenue of General Steel
                                                              
                                                              
                                                              2,046,125
                                                              
                                                              
                                                              
                                                              954,702
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              1,673,640
                                                              
                                                              
                                                              
                                                              731,741
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              22.2
                                                              %
                                                              
                                                              
                                                              30.5
                                                              %





Total Sales Revenues for the six months
ended June 30, 2010 increased 30.5% to $954.7 million from $731.7 million for
the same period last year.





The
increase in sales revenue compared to the same period last year is predominantly
due to the sales volume increase of 23.1% and  and a 15.5% increase in
the average selling price of rebar of at our Longmen Joint Venture from RMB3,000
(approximately US $441) in the first half of 2009 to RMB3,465 (approximately US
$509) in the first half of 2010.


45


Longmen
Joint Venture comprised 97.9% of total sales for first half of 2010. We run at
about 86% of our total capacity in the first half of 2010 which resulted
from stable demand for our construction steel products.





Maoming comprised
$5.9 million or less than 1% of our total sales for the first half of
2010.  The decrease in sales revenue compared to the same period last
year is primarily due to the elimination of production contracts.  In
the second quarter of 2010, Maoming only completed processing contracts, which
generate less sales revenue, whereas in the second quarter of 2009, it completed
both processing and production contracts.





Baotou
Steel Pipe Joint Venture comprised $6.3 million or less than 1% of our total
sales for the first half of 2010. The 60.2% sales amount increase is due to
higher average selling prices.  Sales from Baotou Steel Steel Pipe
Joint Venture increased in the first half of 2010compared to the first half of
2009 due to higher average selling prices.





Gross
Profit





Three
months ended June 30, 2010 compared with three months ended June 30,
2009





The
following table sets forth gross profit and volume in metric tons of each of our
Longmen Joint Venture.





GROSSPROFIT
                                
                                Three months endedin
      thousands, except metric tons
                                
                                June 30, 2010
                                
                                
                                June 30, 2009
                                
                                
                                Change %Unaudited
                                
                                
                                
                                
                                
                                UnauditedVolume
                                
                                
                                Gross
                                  Profit
                                
                                
                                Margin
      %
                                
                                
                                Volume
                                
                                
                                Gross
                                  Profit
                                
                                
                                Margin
      %
                                
                                
                                Gross
                                  ProfitLongmen
      Joint Venture
                                
                                
                                928,380
                                
                                
                                $
                                8,116
                                
                                
                                
                                1.6
                                %
                                
                                
                                843,291
                                
                                
                                $
                                24,659
                                
                                
                                
                                6.8
                                %
                                
                                
                                (67.1
                                )%Total
      Gross Profit of General Steel
                                
                                
                                1,010,755
                                
                                
                                
                                7,360
                                
                                
                                
                                1.5
                                %
                                
                                
                                955,504
                                
                                
                                
                                22,499
                                
                                
                                
                                5.5
                                %
                                
                                
                                (67.3
                                )%





Longmen Joint
Venture





Gross
profit for the three months ended June 30, 2010 decreased 67.3% to $7.4 million
from $22.5 million for the same period last year.  The decrease is
primarily attributable to a drop in gross profit at our Longmen Joint
Venture.





The Gross
Profit Margin at Longmen Joint Venture was negatively affected by the following
factors.





1)
            Average
      selling prices of our products declined approximately 15% from the middle
      of April to the end of June mainly due to the implementation of a series
      of macro-control measures issued by the Chinese government to impede the
      rising price of property which slowed down real estate
      projects.





2)
            The
      price of our primary raw materials including iron ore and coke stayed at
      relatively high levels in the second quarter of
  2010.


46


Maoming





We have
not realized a gross profit at Maoming due to its relatively low utilization
rate of the products from that facility. In the second quarter of 2010, Maoming
discontinued its performance of production contracts and only performed
processing contracts, which generate less sales revenue than production
contracts,  By comparison,  in the second quarter of 2009,
Maoming completed both processing and production contracts. The decrease in
gross profit also contributed by decrease in sales revenue.





Baotou
Steel





At our
Baotou Steel Pipe Joint Venture, gross margin increased to 8.5% in the second
quarter of 2010 from -0.1% in the same period last year.  The increase
was due to higher average selling price in the second quarter of 2010 compare to
the same period last year.





Six
months ended June 30, 2010 compared with six months ended June 30,
2009





The
following table sets forth gross profit and volume in metric tons of each of our
Longmen Joint Venture.





GROSS PROFIT
                  
                  Six months endedin thousands, except metric tons
                  
                  June 30, 2010
                  
                  
                  June 30, 2009
                  
                  
                  Change %Unaudited
                  
                  
                  
                  
                  
                  UnauditedVolume
                  
                  
                  Gross
      Profit
                  
                  
                  Margin
      %
                  
                  
                  Volume
                  
                  
                  Gross
      Profit
                  
                  
                  Margin
      %
                  
                  
                  Gross
      ProfitLongmen
      Joint Venture
                  
                  
                  1,838,111
                  
                  
                  $
                  14,969
                  
                  
                  
                  1.5
                  %
                  
                  
                  1,492,618
                  
                  
                  $
                  39,395
                  
                  
                  
                  6.0
                  %
                  
                  
                  (64.1
                  )%Total
      Gross Profit of General Steel
                  
                  
                  2,046,125
                  
                  
                  
                  13,093
                  
                  
                  
                  1.4
                  %
                  
                  
                  1,673,640
                  
                  
                  
                  35,421
                  
                  
                  
                  4.8
                  %
                  
                  
                  (63.0
                  )%





Gross
profit for the six months ended June 30, 2010 decreased 64.1% to $13.1 million
from $35.4 million for the same period last year.  The decrease is
primarily attributable to a drop in gross profit at our Longmen Joint
Venture.





Selling,
General and Administrative Expenses





Three
months ended June 30, 2010 compared with three months ended June 30,
2009





in thousands
                
                Three months endedJune 30, 2010
                
                
                June 30, 2009
                
                
                Change %Unaudited
                
                
                UnauditedSELLING,
      GENERAL AND ADMINISTRATIVE EXPENSES
                
                $
                13,677
                
                
                $
                9,564
                
                
                
                43.0
                %SG&A
      EXPENSES AS A PERCENTAGE OF TOTAL REVENUE
                
                
                2.7
                %
                
                
                2.3
                %





Selling,
general and administrative expenses, such as executive compensation, office
expenses, legal and accounting charges, travel charges, equipment maintenance
and various taxes increased 43.0% to $13.7 million for the three months ended
June 30, 2010, compared to $9.6 million for the same period of 2009. The
increase is mainly due to increased transportation and agent charges at the
Longmen Joint Venture following shipping volume increases and more sales
deliveries made to markets outside of Shaanxi.





Selling,
general and administrative expenses as a percentage of revenue increased
slightly to 2.7% for the second quarter of 2010 from 2.3% for the same period in
2009.





47




Six
months ended June 30, 2010 compared with six months ended June 30,
2009




in thousands
                
                Six months endedJune 30, 2010
                
                
                June 30, 2009
                
                
                Change %Unaudited
                
                
                UnauditedSELLING,
      GENERAL AND ADMINISTRATIVE EXPENSES
                
                $
                25,818
                
                
                $
                18,732
                
                
                
                37.8
                %SG&A
      EXPENSES AS A PERCENTAGE OF TOTAL REVENUE
                
                
                2.7
                %
                
                
                2.6
                %





Selling,
general and administrative expenses, such as executive compensation, office
expenses, legal and accounting charges, travel charges, equipment maintenance
and various taxes increased 37.8% to $25.8 million for the six months ended June
30, 2010, compared to $18.7 million for the same period of 2009. The increase is
mainly due to increased transportation and agent charges at the Longmen Joint
Venture following shipping volume increases and more sales deliveries made to
markets outside of Shaanxi.





Selling,
general and administrative expenses as a percentage of revenue increased
slightly to 2.7% for the first half of 2010 from 2.6% in the same period in
2009.





(Loss)
income from operations





Three
months ended June 30, 2010 compared with three months ended June 30,
2009




in thousands
                    
                    Three months endedJune 30, 2010
                    
                    
                    June 30, 2009
                    
                    
                    Change %Unaudited
                    
                    
                    Unaudited(LOSS)
      INCOME FROM OPERATIONS
                    
                    $
                    (6,317
                    )
                    
                    $
                    12,935





Income
from operations for the three months ended June 30, 2010 decreased to a loss of
$6.3 million from $12.9 million income for the same period last
year.





in thousands
                          
                          Six months endedJune 30, 2010
                          
                          
                          June 30, 2009
                          
                          
                          Change %Unaudited
                          
                          
                          Unaudited(LOSS)
      INCOME FROM OPERATIONS
                          
                          $
                          (12,725
                          )
                          
                          $
                          16,689





Income from operations for the six
months ended June 30, 2010 decreased to a loss of $12.7 million from $16.7
million income for the same period last year.





The
decrease in income from operations for the three months and six months ended
June 30, 2010 was due to a decrease in gross profit margin caused by average
selling price decline while  cost of production stayed at relatively
high level for the senod quarter of 2010 which adversely affected our gross
margin.





Other
income (expense)





Three
months ended June 30, 2010 compared with three months ended June 30,
2009





In thousands
                    
                    Three months endedJune 30, 2010
                    
                    
                    June 30, 2009
                    
                    
                    Change %Unaudited
                    
                    
                    UnauditedOTHER
      INCOME (EXPENSES)Interest
      income
                    
                    $
                    617
                    
                    
                    $
                    764
                    
                    
                    
                    (19.2
                    )%Finance/Interest
      expense
                    
                    
                    (16,464
                    )
                    
                    
                    (11,309
                    )
                    
                    
                    45.6
                    %Change
      in fair value of derivative liabilities
                    
                    
                    10,729
                    
                    
                    
                    (26,726
                    )Income
      from equity investment
                    
                    
                    3,074
                    
                    
                    
                    2,753
                    
                    
                    
                    11.7
                    %Other
      non-operating income, net
                    
                    
                    571
                    
                    
                    
                    142Total
      other expenses, net
                    
                    $
                    (1,473
                    )
                    
                    $
                    (34,376
                    )
                    
                    
                    (95.7
                    )%


48


Total
other expense for the three months ended June 30, 2010 was $1.5 million compared
to $34.4 million for the same period last year.





The
difference between the $1.5 million expense recorded for the three months ended
June 30, 2010 and the $34.4 million expense recorded for the three months ended
June 30, 2009 was caused by the net effect of a $5.2 million increase in finance
and interest expense and a gain of $10.7 million on the change in fair value of
derivative liabilities.





Six
months ended June 30, 2010 compared with six months ended June 30,
2009





In thousands
                              
                              Six months endedJune 30, 2010
                              
                              
                              June 30, 2009
                              
                              
                              Change %Unaudited
                              
                              
                              UnauditedOTHER
      INCOME (EXPENSES)Interest
      income
                              
                              $
                              1,737
                              
                              
                              $
                              1,642
                              
                              
                              
                              5.8
                              %Finance/Interest
      expense
                              
                              
                              (27,427
                              )
                              
                              
                              (14,247
                              )
                              
                              
                              92.5
                              %Change
      in fair value of derivative liabilities
                              
                              
                              14,668
                              
                              
                              
                              (22,611
                              )Gain
      from debt extinguishment
                              
                              
                              
                              
                              
                              
                              2,930Government
      grant
                              
                              
                              
                              
                              
                              
                              3,520Income
      from equity investment
                              
                              
                              4,756
                              
                              
                              
                              2,698
                              
                              
                              
                              76.3
                              %Other
      non-operating income, net
                              
                              
                              567
                              
                              
                              
                              652
                              
                              
                              
                              (13.0
                              )%Total
      other expenses, net
                              
                              $
                              (5,699
                              )
                              
                              $
                              (25,416
                              )
                              
                              
                              (77.6
                              )%





Total
other expense for the six months ended June 30, 2010 was $5.7million compared to
$25.4 million for the same period last year.





The
difference between the $5.7 million expense recorded for the six months ended
June 30, 2010 and the $25.4 million expense recorded for the three months ended
June 30, 2009 was caused by the net effect of a $13.1 million increase in
finance and interest expense and a gain of $14.7 million in the change in fair
value of derivative liabilities.





Change
in fair value of derivative liabilities





According
to GAAP, our December 2007 Notes and the December 2007 Warrants (as defined
below) are considered a derivative and therefore must be “marked to
market.”  One of the drivers used to calculate the value of this
derivative is stock price. Changes in our stock price cause gains or losses to
this income statement item.





The
change in fair value of derivative liabilities for the three months ended June
30, 2010 was a gain of $10.7 million compared to a loss of $26.7 million
for the same period last year. The change in fair value of derivative
liabilities for the six months ended June 30, 2010 was a gain of $14.7 million
compared to a loss of $22.6 million for the same period last year.This gain
was due to a lower stock price of our common stock in the second quarter of 2010
compared to fiscal year-ended December 31, 2009. According to GAAP rules in
valuing derivatives, the drop in our share price required us to record a $10.7
million gain for the three months ended June 30, 2010 and a $14.7 million gain
for the six months ended June 30, 2010 in change in fair value of derivative
liabilities.





Net
lossbefore
noncontrolling interest




Three
months ended June 30, 2010 compared with three months ended June 30,
2009





in thousands
                  
                  Three months endedJune 30, 2010
                  
                  
                  June 30, 2009Unaudited
                  
                  
                  UnauditedNET
      LOSS BEFORE NONCONTROLLING  INTEREST
                  
                  $
                  (4,950
                  )
                  
                  $
                  (23,449)





Netloss before
noncontrolling interest for the three months ended June 30, 2010 decreased $5
million from $23.5 million for the same period last
year.


49





Six
months ended June 30, 2010 compared with six months ended June 30,
2009





in
      thousands
                                Six
      months endedJune 30, 2010
                                
                                June 30, 2009Unaudited
                                
                                UnauditedNET
      LOSS BEFORE NONCONTROLLING  INTEREST
                                $
                                (13,617
                                )
                                $
                                (12,121
                                )





Netlossbefore
noncontrolling interest for thesixmonths
ended June 30, 2010increased
to $13.6million
from $12.1million
for the same period last year.





Net
Loss
attributable to General Steel Holdings,
Inc.





Three
months ended June 30, 2010 compared with three months ended June 30,
2009





In
      thousands
                                    
                                    Three
      months endedJune 30, 2010
                                    
                                    
                                    June 30, 2009Unaudited
                                    
                                    
                                    UnauditedNET
      LOSS BEFORE NONCONTROLLING INTEREST
                                    
                                    $
                                    (4,950
                                    )
                                    
                                    $
                                    (23,449
                                    )LESS:
      Net (loss) income attributable to the noncontrolling
    interest
                                    
                                    
                                    (2,822
                                    )
                                    
                                    
                                    8,340NET
      LOSS ATTRIBUTABLE TO CONTROLLING INTEREST
                                    
                                    $
                                    (2,128
                                    )
                                    
                                    $
                                    (31,789
                                    )





Net loss attributable to General Steel
Holdings, Inc. for the three months ended June 30, 2010 decreased to a $2.1
million compared to $31.8 million for the same period of 2009.




Six
months ended June 30, 2010 compared with six months ended June 30,
2009





In
      thousands
                                  Six
      months endedJune 30, 2010
                                  
                                  
                                  June 30, 2009Unaudited
                                  
                                  
                                  UnauditedNET
      LOSS BEFORE NONCONTROLLING INTEREST
                                  $
                                  (13,617
                                  )
                                  
                                  $
                                  (12,122
                                  )LESS:
      Net (loss) income attributable to the noncontrolling
    interest
                                  
                                  (5,982
                                  )
                                  
                                  
                                  12,333NET
      LOSS ATTRIBUTABLE TO CONTROLLING INTEREST
                                  $
                                  (7,635
                                  )
                                  
                                  $
                                  (24,455
                                  )





Net loss
attributable to General Steel Holdings, Inc. for the six months ended June 30,
2010 decreased to $7.6 million compared to  $24.5 million for the same
period of 2009.




Earnings
per share





Three
months ended June 30, 2010 compared with three months ended June 30,
2009





Earning
      per Share
                    
                    Three
      months endedIn
      thousands, except earning per share
                    
                    June
      30, 2010
                    
                    
                    June
      30, 2009
                    
                    
                    Change
      %Unaudited
                    
                    
                    UnauditedNET
      LOSS ATTRIBUTABLE TO CONTROLLING INTEREST
                    
                    $
                    (2,128
                    )
                    
                    $
                    (31,789
                    )WEIGHTED
      AVERAGE NUMBER OF SHARESBasic
                    
                    
                    52,111
                    
                    
                    
                    39,533
                    
                    
                    
                    31.8
                    %Diluted
                    
                    
                    52,111
                    
                    
                    
                    39,533
                    
                    
                    
                    31.8
                    %LOSS
      PER SHAREBasic
                    
                    $
                    (0.04
                    )
                    
                    $
                    (0.80
                    )Diluted
                    
                    $
                    (0.04
                    )
                    
                    $
                    (0.80
                    )




50




Basic and diluted loss per share
for the three months ended June 30, 2010 decreased to $0.04 compared to $0.80
for the same period of 2009.





Six  months
ended June 30, 2010 compared with six  months ended June 30,
2009





Earning
      per Share
                          
                          Six
      months endedIn
      thousands, except earning per share
                          
                          June
      30, 2010
                          
                          
                          June
      30, 2009
                          
                          Change
      %Unaudited
                          
                          
                          UnauditedNET
      LOSS ATTRIBUTABLE TO CONTROLLING INTEREST
                          
                          $
                          (7,635
                          )
                          
                          $
                          (24,455
                          )WEIGHTED
      AVERAGE NUMBER OF SHARESBasic
                          
                          
                          51,883
                          
                          
                          
                          37,918
                          
                          36.8
                          %Diluted
                          
                          
                          51,883
                          
                          
                          
                          37,918
                          
                          36.8
                          %LOSS
      PER SHAREBasic
                          
                          $
                          (0.15
                          )
                          
                          $
                          (0,64
                          )Diluted
                          
                          $
                          (0.15
                          )
                          
                          $
                          (0,64
                          )





Basic and
diluted loss per share for the six months ended June 30, 2010 decreased to $0.15
from $0.64 for the same period of 2009.





Income
taxes





We did not conduct any business and did
not maintain any branch office in the United States during the three months
ended June 30, 2010 and 2009. Therefore, no provision for withholding of U.S.
federal or state income taxes or tax benefits on the undistributed earnings
and/or losses of our company has been made.





GS (China) is located in Tianjin Costal
Economic Development Zone and under the Income Tax Laws of Tianjin City of PRC,
and therefore was eligible for an income tax rate of 24%.  Thus, GS (China)
was entitled to a 50% income tax reduction of the special income tax rate of
24%, which is a rate of 12% for the years ended December 31, 2009 due to its
foreign joint venture status. Beginning in 2010, the effective income tax rate
at GS (China) becomes 25%.





Longmen Joint Venture, is located in
the mid-west region of China. It qualifies for the “Go-West” tax rate of 15%
promulgated by the government.




Baotou Steel Pipe Joint Venture is
located in Inner Mongolia Autonomous Region and is subject to an effective
income tax rate of 25%.




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




For the three months ended June 30,
2010, we had a total tax benefit of $2.8 million.





For the
six months ended June 30, 2010, we had a total tax benefit of $4.8
million.





We have cumulative undistributed
earnings of foreign subsidiaries of approximately $6.5 million as of June 30,
2010. Such earnings are included in consolidated retained earnings and will
continue to be indefinitely reinvested in internal
operations.  Accordingly, no provision has been made for U.S. deferred
taxes related to future repatriation of these earnings, nor is it practicable to
estimate the amount of income taxes that would have to be provided if we
concluded that such earnings will be remitted in the future.


51





We were
incorporated in the United States and have incurred net operating losses for
income tax purposes for the six months ended June 30, 2010 and for the year
ended December 31, 2009. The net operating loss carry forwards for United States
income taxes amounted to $5.6 million which may be available to reduce
future years’ taxable income. These carry forwards will expire, if not utilized,
through 2030. Management believes that the realization of the benefits from
these losses appears uncertain due to our limited operating history and
continuing losses for United States income tax purposes. Accordingly, we have
provided a 100% valuation allowance on the deferred tax asset benefit to reduce
the asset to zero. The valuation allowance as of June 30, 2010 was $1.9 million.
The net change in the valuation allowance for the three months ended June 30,
2010 was $0.1 million. Management will review this valuation allowance
periodically and make adjustments as warranted.





Noncontrolling
Interest




Noncontrolling
interest mainly consists of Long Steel Group’s 40% interest in Longmen Joint
Venture, Baotou Iron and Steel Group’s 20% interest in Baotou Steel Pipe Joint
Venture and 1% interest in Maoming by another entity.





Accounts
Receivable





Accounts receivable and accounts
receivable-related party were $21.5 million as of June 30, 2010 compared to $8.5
million on December 31, 2009. This increase was mainly due to Longmen Joint
Venture’s deliveries made to a major government project and this receivable will
be collected in the coming months.





We recognize revenue when we ship out
products and pass the titles of the products to our customers and distributors.
We extended short-term credit to our customers and distributors with good
reputations and long-term business relationships. We have not experienced any
bad debt in these accounts. Also, we review our accounts receivable on a regular
basis to determine if the bad debt allowance is adequate and adjust the
allowance amount if needed. We believe the accounts receivable amount is
collectible. Nevertheless, to be conservative and prudent in our management
practice, as of June 30, 2010, we reserved $0.4 million for bad debt allowance
based on our reasonable estimate.





Inventory





We had an inventory balance of $281.3
million as of June 30, 2010 compared to $208.1 million on December 31,
2009.  Such balance is comprised of raw material and finished
products. We increased our stock of raw materials in the second quarter
believing that raw material prices will increase in the upcoming
months.





Liquidity
and capital resources





The steel
business is capital intensive and we utilize leverage greater than our industry
peers which enables us to generate revenue compared to our shareholder equity at
a rate higher than our industry peers. We utilize leverage in the form of credit
from banks, vendor financing, customer deposits and others. This blended form of
financing reduces our reliance on any single source.





Short-term
notes payable





As of June 30, 2010, we had $388.1
million in short-term notes payables liabilities, which are secured by
restricted cash of $269.7 million and our assets. These are lines of credit
extended by banks for a maximum of six months and used to finance working
capital. The short-term notes payables must be paid in full at maturity and
credit availability is continued upon payment at maturity. There are no
additional significant financial covenants.





Short-term notes payable is one of the
lowest cost form of financing available in China. We pay zero interest on this
type of credit. This is a monetary tool used by China’s central bank to inject
liquidity into the Chinese monetary system.




52




Short-term
loans – banks





As of June 30, 2010, we had $177.4
million in short-term bank loans. These are bank loans with a one year maturity
and must be paid in full upon maturity. There are no additional significant
financial covenants tied to these loans. Chinese banks have not been impacted as
heavily by the financial crisis as U.S. banks and we believe our current
creditors will renew their lending to us after our loans mature as they have in
the past.





We are able to repay our short-term
notes payables and short term bank loans upon maturity using available capital
resources.





For more details about our debts,
please see note 8 in our Notes to the financial statements included in this
report.





Cash-flow





Operating
activities





Net cash used by operating activities
for the six months ended June 30, 2010 was $45.4 million compared to cash
provided by operating activities of $29.0 million in the same period of 2009.
This change was mainly due to the combination of the following
factors:





·
            Some
      non-cash items include in net income such as depreciation and
      amortization, Impairment of long-lived assets, (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, income
      from investment and deferred tax assets, totaled outflow of $2.2
      million.





·
              Cash outflow
      resulting from accounts receivable, notes receivable, inventory
      and advance on inventory purchase was $136.4 million, compared to the same
      period last year an outflow of $122.2 million. This increase of $14.2
      million cash outflow is mainly due to increase in notes
      receivable.





·
            Cash
      inflow due to the increase in accounts payable, other payables and accrued
      liabilities, other receivables, customer deposits and tax payable totaled
      of $106.8 million compared to the same period last year an inflow of
      $126.8 million. The decrease of $20.0 million is mainly due to decrease in
      other payables and customer
deposits.





Investing
activities





Net cash used in investing activities
was $22.4 million for the six months ended June 30, 2010 compared to $26.4
million used in the same period of 2009. This reduction in cash outflow is
mainly due to reduction of equipment purchases.





Financing
activities





Net cash provided by financing
activities was $36.6 million for the six months ended June 30, 2010 compared to
$46.4 million in the same period of 2009.





Shelf
Registration SEC Form S-3





On October 22, 2009, our shelf
registration statement on Form S-3 was declared effective by the Securities and
Exchange Commission (“SEC”). From time to time we may sell common stock,
preferred stock, warrants, debt securities, rights and units in one or more
offerings, for an aggregate offering price of up to $60 million.  As
discussed below, in December 2009 we consummated a registered direct offering
using the Form S-3 shelf registration statement to issue common stock and
warrants.  We may sell the remaining securities registered on the Form
S-3 shelf registration statement to or through underwriters, directly to
investors, through agents or any combination of the foregoing.


53




Each time we offer securities under our
Form S-3 shelf registration statement, we will file a prospectus supplement with
the SEC containing more specific information about the particular offering. The
prospectus supplements may also add, update or change information contained in
this prospectus. The Form S-3 shelf registration statement may not be used
to offer or sell securities without a prospectus supplement which includes a
description of the method of sale 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 (RMB580 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 (RMB33 million) on a comprehensive waste water recycling and water
treatment system. The 2,000 cubic meter/h treatment capacity system was
implemented at the end of 2005. In 2010, 1.1 metric tons of new water was
consumed per metric ton of steel produced.





Long Steel Group has one 10,000 cubic
meter coke-oven gas tank and one 50,000 cubic meter 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 25 Kilowatt 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 $7.3
million (RMB50 million) each year.





Off-balance
sheet arrangements




There was no off-balance sheet
arrangements in the fiscal quarter ended June 30, 2010.





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.


54





Revenue
recognition




We follow the generally accepted
accounting principles regarding revenue recognition. Sales revenue is recognized
at the date of shipment to customers when a formal arrangement exists, the price
is fixed or determinable, the delivery is completed, no other significant
obligations of the Company exist and collectability is reasonably assured.
Payments received before all of the relevant criteria for revenue recognition
are recorded as customer deposits. Sales revenue represents the invoiced value
of goods, net of value-added tax (VAT). All of our 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 us 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 our financial statements include the useful
lives of and impairment for property, plant and equipment, potential losses on
uncollectible receivables and convertible notes. Actual results could differ
from these estimates.





Derivative
Instruments





In December 2007, we entered into a
Securities Purchase Agreement with certain institutional investors (the
“Buyers”) whereby we agreed to sell to the Buyers (i) senior convertible notes
in the aggregate principal amount of $40 million (“December 2007 Notes”) and
(ii) warrants to purchase an additional aggregate amount of 1,154,958 shares
of common stock (the “December 2007 Warrants”), which have since been
adjusted pursuant to the terms of our warrant reset agreements as discussed
above and are now exercisable for an aggregate amount of 3,900,871 shares of
common stock. Both the December 2007 Warrants and the conversion option included
in the December 2007 Notes meet the definition of a derivative instrument as per
the accounting standard for 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





The accounting standard regarding
“Disclosures about fair value of financial instruments” defines financial
instruments and requires disclosure of the fair value of financial instruments
held by us. We consider 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, we 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.





We also analyze all financial
instruments with features of both liabilities and equity under the accounting
standard establishing, “accounting for certain financial instruments with
characteristics of both liabilities and equity,” the accounting standard
regarding “accounting for derivative instruments and hedging activities”
and “accounting for derivative financial instruments indexed to, and potentially
settled in, a company’s own stock.” Additionally, we analyze registration rights
agreements associated with any equity instruments issued to determine if
penalties triggered for late filing should be accrued under accounting
standard establishing “accounting for registration payment
arrangements.”





Fair
value measurements





The accounting standards regarding fair
value of financial instruments and related fair value measurement 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:


55





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.





In 2007, the conversion feature on the
December 2007 Notes, as well as the December 2007 Warrants and reset
warrants issued in December 2009 issued in conjunction with the
December 2007 Notes is carried at fair value. The fair value was determined
using the Cox Rubenstein Binomial Model, defined in the accounting
standard as level 2 inputs, and recorded the change in earnings. As a
result, the derivative liability is carried on the balance sheet at its fair
value.





As of June 30, 2010, the outstanding
principal amounted to $3.3 million, and the carrying value of the December 2007
Notes amounted to $1.3 million. We used Level 3 inputs for our valuation
methodology for the December 2007 Notes, 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 December 2007
Warrants and December 2009 Warrants and their conversion feature are valued by
using level 2 inputs to the Binomial Model and determined that the fair value
amounted to approximately $8.7 million due to the decrease in our common stock
price.





Noncontrolling
interest





Effective January 1, 2009, we
adopted generally accepted accounting principles regarding noncontrolling
interest in consolidated financial statements. 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 of
this accounting standard, 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.





Noncontrolling interests were
$64.5 million and $72.6 million as of the June 30, 2010 and December 31,
2009 balance sheets, respectively.





New
Accounting Pronouncements




In
January 2010, FASB issued ASU No. 2010-06 – Improving Disclosures about Fair
Value Measurements. This update provides amendments to Subtopic 820-10 that
requires new disclosure as follows: 1) Transfers in and out of Levels 1 and 2. A
reporting entity should disclose separately the amounts of significant transfers
in and out of Level 1 and Level 2 fair value measurements and describe the
reasons for the transfers. 2) Activity in Level 3 fair value measurements. In
the reconciliation for fair value measurements using significant unobservable
inputs (Level 3), a reporting entity should present separately information about
purchases, sales, issuances, and settlements (that is, on a gross basis rather
than as one net number).This update provides amendments to Subtopic 820-10 that
clarify existing disclosures as follows: 1) Level of disaggregation. A reporting
entity should provide fair value measurement disclosures for each class of
assets and liabilities. A class is often a subset of assets or liabilities
within a line item in the statement of financial position. A reporting entity
needs to use judgment in determining the appropriate classes of assets and
liabilities. 2) Disclosures about inputs and valuation techniques. A reporting
entity should provide disclosures about the valuation techniques and inputs used
to measure fair value for both recurring and nonrecurring fair value
measurements. Those disclosures are required for fair value measurements that
fall in either Level 2 or Level 3.The new disclosures and clarifications of
existing disclosures are effective for interim and annual reporting periods
beginning after December 15, 2009, except for the disclosures about purchases,
sales, issuances, and settlements in the roll forward of activity in Level 3
fair value measurements. Those disclosures are effective for fiscal years
beginning after December 15, 2010, and for interim periods within those fiscal
years. We have adopted this standard.


56





In
February 2010, the FASB issued Accounting Standards Update 2010-09, “Subsequent
Events (Topic 855): Amendments to Certain Recognition and Disclosure
Requirements,” or ASU 2010-09. ASU 2010-09 primarily rescinds the requirement
that, for listed companies, financial statements clearly disclose the date
through which subsequent events have been evaluated. Subsequent events must
still be evaluated through the date of financial statement issuance; however,
the disclosure requirement has been removed to avoid conflicts with other SEC
guidelines. ASU 2010-09 was effective immediately upon issuance and was adopted
in February 2010.





In April
2010, the FASB issued Accounting Standards Update 2010-13, “Compensation—Stock
Compensation (Topic 718): Effect of Denominating the Exercise Price of a
Share-Based Payment Award in the Currency of the Market in Which the Underlying
Equity Security Trades,” or ASU 2010-13. ASU 2010-13 provides amendments to
Topic 718 to clarify that an employee share-based payment award with an exercise
price denominated in currency of a market in which a substantial porting of the
entity’s equity securities trades should not be considered to contain a
condition that is not a market, performance, or service condition. Therefore, an
entity would not classify such an award as a liability if it otherwise qualifies
as equity. The amendments in this Update are effective for fiscal years, and
interim periods within those fiscal years, beginning on or after December 15,
2010. We do not
expect the adoption of ASU 2010-17 to have a significant impact on its
consolidated financial statements.





In April
2010, the FASB issued Accounting Standard Update 2010-17, “Revenue
Recognition—Milestone Method (Topic 605): Milestone Method of Revenue
Recognition” orASU 2010-17.This Update provides
guidance on the recognition of revenue under the milestone method, which allows
a vendor to adopt an accounting policy to recognize all of the arrangement
consideration that is contingent on the achievement of a substantive milestone
(milestone consideration) in the period the milestone is achieved. The
pronouncement is effective on a prospective basis for milestones achieved in
fiscal years and interim periods within those years, beginning on or after
June 15, 2010. We do not expect the adoption of ASU 2010-17 to have a
significant impact on its consolidated financial statements.





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 June 30, 2010 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
                                                          
                                                          $
                                                          177,404
                                                          
                                                          
                                                          $
                                                          177,404
                                                          
                                                          
                                                          $
                                                          -
                                                          
                                                          
                                                          $
                                                          -Other
      loans
                                                          
                                                          
                                                          97,902
                                                          
                                                          
                                                          
                                                          97,902
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          -Notes
      payable
                                                          
                                                          
                                                          388,080
                                                          
                                                          
                                                          
                                                          388,080
                                                          
                                                          
                                                          
                                                          -
                                                          
                                                          
                                                          
                                                          -Deposits
      due to sales representatives
                                                          
                                                          
                                                          67,884
                                                          
                                                          
                                                          
                                                          67,884
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          -Lease
      with Bao Gang Group
                                                          
                                                          
                                                          528
                                                          
                                                          
                                                          
                                                          264
                                                          
                                                          
                                                          
                                                          264
                                                          
                                                          
                                                          
                                                          -Longmen
      Joint Venture construction obligations
                                                          
                                                          
                                                          12,302
                                                          
                                                          
                                                          
                                                          12,302
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          -Convertible
      notes(1)
                                                          
                                                          
                                                          4,171
                                                          
                                                          
                                                          
                                                          4,171
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          -Total
                                                          
                                                          $
                                                          748,271
                                                          
                                                          
                                                          $
                                                          748,007
                                                          
                                                          
                                                          $
                                                          264




57





(1)
            On
      August 4, 2010, the investors in the remaining outstanding December
      2007 Notes elected to convert all the amounts due under the December 2007
      Notes into the Company’s common stock. These are the only remaining notes
      outstanding from the Company’s December 13, 2007 private placement. The
      Notes were converted in accordance with their terms resulting in the
      issuance of a total of 1,559,675 shares of common Stock in the aggregate
      to the Investors (the “Conversion”). As a result of this Conversion, the
      Company has no outstanding balance for the December 2007
      Notes.





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 a
2009 annual production capacity of 3.8 million metric tons, a $1 change in the
annual average price would change annual pre-tax profits by approximately $3.8
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, GS (China), Longmen Joint Venture, Baotou Steel Pipe Joint
Venture and Maoming, are all located in China. They produce and sell all
of their products domestically in the PRC. 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 $1.9
million decrease in net income.





ITEM
4. CONTROLS AND PROCEDURES.




The Company, with the participation of
our Chief Executive Officer and Chief Financial Officer, conducted an evaluation
of the design and operation of our disclosure controls and procedures, as
defined under Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of
1934, as amended (the Exchange Act), as of June 30, 2010.  Our
disclosure controls and procedures are designed (i) to ensure that information
required to be disclosed by it in the reports that it files or submits under the
Exchange Act are recorded, processed,  summarized and reported within
the time periods specified in the SEC’s rules and forms and (ii) to ensure that
information required to be disclosed in the reports we file or submit under the
Exchange Act is accumulated and communicated to our management, including our
Chief Executive Officer and Chief Financial Officer, to allow timely decisions
regarding required disclosure.  Based on their evaluation, our Chief
Executive Officer and Chief Financial Officer have concluded that our disclosure
controls and procedures were effective as of June 30, 2010 in alerting
management on a timely basis to information required to be included in our
submissions and filings under the Exchange Act.


58





There were no changes in the Company’s
internal control over financial reporting during its most recently completed
fiscal quarter that have materially affected or are reasonably likely to
materially affect its internal control over financial reporting, as defined in
Rule 13a-15(f) under the Exchange Act.





PART
II – OTHER INFORMATION





ITEM
1. LEGAL PROCEEDINGS.





From time
to time, we are subject to certain legal proceedings, claims and disputes that
arise in the ordinary course of our business. Although we cannot predict the
outcomes of these legal proceedings, we do not believe these actions; in the
aggregate will have a material adverse impact on our financial position, results
of operations or liquidity.





ITEM
6. EXHIBITS.





(a)  Exhibits





10.1
              Lease Agreement, dated March 31,
      2010, by and between General Steel (China) Co., Ltd. and Tianjin
      Daqiuzhuang Steel Plates Co., Ltd. (included as Exhibit 10.1 to the
      Form 8-K filed on April 6, 2010 and incorporated herein by
      reference).10.2
              Joint
      Venture Framework Agreement, dated May 13, 2010, by and between
      General Steel Holdings, Inc. and Shanxi Meijin Energy Group Co., Ltd.
      (included as Exhibit 10.1 to the Form 8-K filed on May 18, 2010 and
      incorporated herein by reference).10.3
              Debt
      Repayment Agreement, dated June 7, 2010, by and between General Steel
      Holdings, Inc., Maoming Hengda Steel Group Ltd., Guangzhou Hengda
      Industrial Group Ltd. and Ms. Ding Yumei (included as Exhibit 10.1 to the
      Form 8-K filed on June 9, 2010 and incorporated herein by
      reference).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.


59





SIGNATURES





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





General
      Steel Holdings, Inc.Date:
      August 9, 2010
                By:
      /s/ Zuosheng YuZuosheng
      YuChief
      Executive Officer and ChairmanDate:
      August 9, 2010
                By:
      /s/ John ChenJohn
      ChenChief
      Financial Officer
and Director


60