**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      D.C. 20549**




**FORM
      10-Q**




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





**For
      the quarterly period ended June 30, 2008**





**Commission
      File Number 333-105903**




**General
      Steel Holdings, Inc.**


(Exact
      name of registrant as specified in its charter)




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




**Room
      2315, Kun Tai International Mansion Building,**


**Yi
      No 12, Chao Yang Men Wai Ave.**


**Chao
      Yang District, Beijing, China 100020**


(Address
      of Principal Executive Office, Including Zip Code)




**+86(10)58797346**


(Registrant's
      Telephone Number, Including Area Code)




Indicate
      by check mark whether the registrant: (1) has filed all reports required to
      be filed by Section 13 or 15(d) of the Exchange Act during the past
      12 months (or for such shorter period that the registrant was required to
      file such reports), and (2) has been subject to such filing requirements
      for the past 90 days.    Yes ý No o




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




Large
                accelerated filero
            
            Accelerated
                filero
            
            Non-accelerated
                filerý
            
            Smaller
                reporting companyo





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




As
      of
      August 14, 2008, 35,686,033 shares
      of common stock, par value $ 0.001 per
      share, were issued and outstanding.














**Table
      of Contents**


**Page**Part I: FINANCIAL INFORMATION:
            
            F-1Item 1.     Financial Statements.
            
            F-1Consolidated
                Balance Sheets as of June 30, 2008 (Unaudited) and December 31,
                2007
            
            F-2Consolidated
                Statements of Operations and Other Comprehensive Income (Loss) (Unaudited)
                for the Three and Six Months Ended June 30, 2008 and 2007
            
            F-3Consolidated
                Statements of Shareholders’ Equity (Unaudited)
            
            F-4Consolidated
                Statements of Cash Flows (Unaudited) for the Six Months Ended June
                30,
                2008 and 2007
            
            F-5Notes
                to Consolidated Financial Statements (Unaudited)
            
            F-6Item 2.    Management’s Discussion and Analysis of FinancialCondition and Results of Operations.
            
            1Item 3.   Quantitative and Qualitative Disclosures About Market Risks.
            
            21Item 4.   Controls and Procedures
            
            22Part II. OTHER INFORMATIONItem 1.    Legal Proceedings.
            
            22Item 1A.  Risk Factors
            
            23Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds
            
            32Item 5.  Other Information
            
            33Item 6—Exhibits
            
            33Signatures
            
            34





**PART
      I – FINANCIAL INFORMATION**





**ITEM
      1. FINANCIAL STATEMENTS**


GENERAL
                  STEEL HOLDINGS INC. AND SUBSIDIARIESCONSOLIDATED
                  BALANCE SHEETSAS
                  OF JUNE 30, 2008 AND DECEMBER 31, 2007A
                  S
                  S E T S
  June
                  30,
              
              December
                  31,2008
              
              2007(Unaudited)CURRENT
                  ASSETS:Cash
              
              $
              26,910,158
              
              $
              43,713,346Restricted
                  cash
              
              
              101,352,891
              
              
              8,391,873Accounts
                  receivable, net of allowance for doubtful accounts of$276,101and
                  $148,224 as of June 30, 2008 and December 31, 2007,
                  respectively
              
              
              26,118,539
              
              
              11,225,678Accounts
                  receivable - related parties
              
              
              37,126,645
              
              
              565,631Notes
                  receivable
              
              
              18,895,361
              
              
              4,216,678Notes
                  receivable - restricted
              
              
              -
              
              
              12,514,659Short
                  term loan receivable - related parties
              
              
              -
              
              
              1,233,900Other
                  receivables
              
              
              3,776,407
              
              
              1,280,853Other
                  receivables - related parties
              
              
              520,264
              
              
              1,913,448Dividend
                  receivable
              
              
              627,042
              
              
              -Inventories
              
              
              137,440,721
              
              
              77,928,925Advances
                  on inventory purchases
              
              
              53,566,234
              
              
              58,170,474Advances
                  on inventory purchases - related parties
              
              
              19,343,195
              
              
              9,944,012Prepaid
                  expenses - current
              
              
              1,499,850
              
              
              1,059,866Prepaid
                  expenses related party - current
              
              
              52,524
              
              
              49,356Deferred
                  tax assets
              
              
              860,140
              
              
              399,751Deferred
                  notes issuance cost
              
              
              5,108,617
              
              
              3,564,546433,198,588
              
              
              236,172,996PLANT
                  AND EQUIPMENT, net
              
              
              400,720,970
              
              
              218,263,367OTHER
                  ASSETS:Advances
                  on equipment purchases
              
              
              95,834
              
              
              742,061Investment
                  in unconsolidated subsidiaries
              
              
              9,875,972
              
              
              822,600Prepaid
                  expenses - non current
              
              
              534,268
              
              
              506,880Prepaid
                  expenses related party - non current
              
              
              236,358
              
              
              142,467Intangible
                  assets, net of accumulated amortization
              
              
              24,883,346
              
              
              21,756,709Total
                  other assets
              
              
              35,625,778
              
              
              23,970,717Total
                  assets
              
              $
              869,545,336
              
              $
              478,407,080L
                  I A B I L I T I E S  A N D  S H A R E H O L D E R S'  E Q U
                  I T YCURRENT
                  LIABILITIES:Accounts
                  payable
              
              $
              159,824,445
              
              $
              102,241,708Accounts
                  payable - related parties
              
              
              8,237,683
              
              
              14,302,738Short
                  term loans - bank
              
              
              85,565,694
              
              
              93,019,608Short
                  term loans - others
              
              
              72,383,213
              
              
              19,156,070Short
                  term loans - related parties
              
              
              7,309,590
              
              
              7,317,027Short
                  term notes payable
              
              
              155,708,387
              
              
              15,163,260Other
                  payables
              
              
              9,050,597
              
              
              3,343,684Other
                  payable - related parties
              
              
              967,165
              
              
              2,126,383Accrued
                  liabilities
              
              
              10,728,642
              
              
              5,248,863Customer
                  deposits
              
              
              137,476,284
              
              
              37,872,698Customer
                  deposits - related parties
              
              
              5,690,541
              
              
              9,211,736Deposits
                  due to sales representatives
              
              
              2,181,205
              
              
              3,068,298Taxes
                  payable
              
              
              32,288,459
              
              
              27,576,240Investment
                  payable
              
              
              7,003,200
              
              
              6,580,800Distribution
                  payable to minority shareholder
              
              
              2,381,458
              
              
              2,820,803Total
                  current liabilities
              
              
              696,796,563
              
              
              349,049,916NOTES
                  PAYABLE, net of debt discount of $32,933,400
              
              
              7,066,600
              
              
              5,440,416DERIVATIVE
                  LIABILITIES
              
              
              53,599,177
              
              
              28,483,308Total
                  liabilities
              
              
              757,462,340
              
              
              382,973,640MINORITY
                  INTEREST
              
              
              67,349,806
              
              
              42,044,266SHAREHOLDERS'
                  EQUITY:Preferred
                  stock, $0.001 par value, 50,000,000 shares authorized, 3,092,899
                  sharesissued
                  and outstanding
              
              
              3,093
              
              
              3,093Common
                  Stock, $0.001 par value, 200,000,000 shares authorized, 34,948,765
                  and34,634,765
                  shares issued and outstandingas
                  of June 30, 2008 and December 31, 2007, respectively
              
              
              34,949
              
              
              34,635Paid-in-capital
              
              
              26,192,979
              
              
              23,429,153Retained
                  earnings
              
              
              (44,539
              )
              
              22,686,590Statutory
                  reserves
              
              
              4,280,688
              
              
              3,632,325Contribution
                  receivable
              
              
              (959,700
              )
              
              (959,700
              )Accumulated
                  other comprehensive income
              
              
              15,225,720
              
              
              4,563,078Total
                  shareholders' equity
              
              
              44,733,190
              
              
              53,389,174Total
                  liabilities and shareholders' equity
              
              $
              869,545,336
              
              $
              478,407,080






The
        accompanying notes are an integral part of these statements.




F-1
 
  GENERAL
                    STEEL HOLDINGS, INC. AND SUBSIDIARIESCONSOLIDATED
                    STATEMENTS OFOPERATIONSAND OTHER COMPREHENSIVE INCOME(LOSS)FOR
                    THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2008 AND
                    2007(UNAUDITED)
  Three
                    months ended
                
                Six
                    months endedJune
                    30,
                
                June
                    30,2008
                
                2007
                
                2008
                
                2007REVENUES
                
                $
                277,514,917
                
                $
                121,254,744
                
                $
                456,007,084
                
                $
                158,862,715REVENUES
                    - RELATED PARTIES
                
                
                109,514,019
                
                
                -
                
                
                222,587,851
                
                
                -TOTAL
                    REVENUES
                
                
                387,028,936
                
                
                121,254,744
                
                
                678,594,935
                
                
                158,862,715COST
                    OF SALES
                
                
                259,734,698
                
                
                113,141,376
                
                
                426,449,361
                
                
                149,016,342COST
                    OF SALES - RELATED PARTIES
                
                
                104,425,433
                
                
                -
                
                
                216,294,654
                
                
                -TOTAL
                    COST OF SALES
                
                
                364,160,131
                
                
                113,141,376
                
                
                642,744,015
                
                
                149,016,342GROSS
                    PROFIT
                
                
                22,868,805
                
                
                8,113,368
                
                
                35,850,920
                
                
                9,846,373SELLING,
                    GENERAL AND ADMINISTRATIVE EXPENSES
                
                
                9,503,221
                
                
                2,844,411
                
                
                16,036,042
                
                
                3,474,611INCOME
                    FROM OPERATIONS
                
                
                13,365,584
                
                
                5,268,957
                
                
                19,814,878
                
                
                6,371,762OTHER
                    EXPENSE (INCOME), NETInterest
                    income
                
                
                (877,099
                )
                
                (57,810
                )
                
                (1,457,417
                )
                
                (89,465
                )Interest/finance
                    expense
                
                
                6,289,868
                
                
                1,756,992
                
                
                12,276,375
                
                
                2,397,850Change
                    in fair value of derivative liabilities
                
                
                27,786,632
                
                
                -
                
                
                25,115,869
                
                
                -Other
                    nonoperating (income) expense, net
                
                
                (649,871
                )
                
                (458,040
                )
                
                (1,019,142
                )
                
                (846,567
                )Total
                    other expense, net
                
                
                32,549,530
                
                
                1,241,142
                
                
                34,915,685
                
                
                1,461,818INCOME(LOSS)BEFORE
                    PROVISION FOR INCOME TAXESAND
                    MINORITY INTEREST
                
                
                (19,183,946
                )
                
                4,027,815
                
                
                (15,100,807
                )
                
                4,909,944PROVISION
                    FOR INCOME TAXESCurrent
                
                
                1,292,890
                
                
                1,206,612
                
                
                1,959,246
                
                
                1,333,882Deferred
                
                
                (206,100
                )
                
                -
                
                
                (422,633
                )
                
                -Total
                    provision for income taxes
                
                
                1,086,790
                
                
                1,206,612
                
                
                1,536,613
                
                
                1,333,882NET
                    INCOME (LOSS)BEFORE
                    MINORITY INTEREST
                
                
                (20,270,736
                )
                
                2,821,203
                
                
                (16,637,420
                )
                
                3,576,062LESS
                    MINORITY INTEREST
                
                
                4,000,490
                
                
                927,902
                
                
                5,445,346
                
                
                1,207,896NET
                    INCOME(LOSS)
                
                
                (24,271,226
                )
                
                1,893,301
                
                
                (22,082,766
                )
                
                2,368,166OTHER
                    COMPREHENSIVE INCOME:Foreign
                    currency translation adjustments
                
                
                6,339,703
                
                
                374,568
                
                
                10,662,642
                
                
                598,119COMPREHENSIVE
                    INCOME(LOSS)
                
                $
                (17,931,523
                )
                $
                2,267,869
                
                $
                (11,420,124
                )
                $
                2,966,285WEIGHTED
                    AVERAGE NUMBER OF SHARESBasic
                
                
                34,928,576
                
                
                31,444,665
                
                
                34,883,740
                
                
                31,444,665Diluted
                
                
                34,928,576
                
                
                31,444,665
                
                
                34,883,740
                
                
                31,444,665EARNING
                    PER SHAREBasic
                
                $
                (0.695
                )
                $
                0.060
                
                $
                (0.633
                )
                $
                0.075Diluted
                
                $
                (0.695
                )
                $
                0.060
                
                $
                (0.633
                )
                $
                0.075
    The
          accompanying notes are an integral part of these statements.
  F-2
  GENERAL
          STEEL HOLDINGS, INC. AND SUBSIDIARIES
  CONSOLIDATED
          STATEMENTS OF SHAREHOLDERS' EQUITY
  Preferred
                    stock
                
                Common
                    stock
                
                
                
                Retained
                    earnings
                
                
                
                Accumulated
                        otherPar
                
                
                
                Par
                
                Paid-in
                
                Statutory
                
                
                
                Subscriptions
                
                comprehensiveShares
                
                value
                
                Shares
                
                value
                
                capital
                
                reserves
                
                Unrestricted
                
                receivable
                
                income
                
                TotalsBALANCE,
                    January 1, 2007
                
                
                -
                
                $
                -
                
                
                31,250,000
                
                $
                31,250
                
                $
                6,871,358
                
                $
                1,107,010
                
                $
                4,974,187
                
                $
                -
                
                $
                1,076,688
                
                $
                14,060,493Net
                    income
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                2,368,166
                
                
                
                
                
                
                
                
                2,368,166Preferred
                    stock issued for acquistion of minority interest ,net
                    of dividend distribution to Victory New
                
                
                3,092,899
                
                
                3,093
                
                
                
                
                
                
                
                
                8,370,907
                
                
                
                
                
                (2,188,203
                )
                
                
                
                
                
                
                
                6,185,797Common
                    stock issued for conversion ofredeemable
                    stock, $1.95/share
                
                
                
                
                
                
                
                
                176,665
                
                
                177
                
                
                344,328
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                344,505Common
                    stock issued for service, $1.32/share
                
                
                
                
                
                
                
                
                18,000
                
                
                18
                
                
                23,742
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                23,760Foreign
                    currency translation adjustments
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                598,119
                
                
                598,119BALANCE,
                    June 30, 2007, unaudited
                
                
                3,092,899
                
                $
                3,093
                
                
                31,444,665
                
                $
                31,445
                
                $
                15,610,335
                
                $
                1,107,010
                
                $
                5,154,150
                
                $
                -
                
                $
                1,674,807
                
                $
                23,580,840Net
                    income
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                20,057,755
                
                
                
                
                
                
                
                
                20,057,755Adjustment
                    to statutory reserve
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                2,525,315
                
                
                (2,525,315
                )
                
                
                
                
                
                
                
                -Registered
                    Capital to be received fromBaotou
                    Steel by 05/21/09
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (959,700
                )
                
                
                
                
                (959,700
                )Conversion
                    of redeemable stock, $1.95
                
                
                
                
                
                
                
                
                1,000,000
                
                
                1,000
                
                
                1,948,992
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                1,949,992Conversion
                    of warrants, $2.50
                
                
                
                
                
                
                
                
                2,120,000
                
                
                2,120
                
                
                5,297,880
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                5,300,000Common
                    stock issued for compensation, $8.16
                
                
                
                
                
                
                
                
                70,100
                
                
                70
                
                
                571,946
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                572,016Foreign
                    currency translation gain
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                2,888,271
                
                
                2,888,271BALANCE,
                    December 31, 2007
                
                
                3,092,899
                
                $
                3,093
                
                
                34,634,765
                
                $
                34,635
                
                $
                23,429,153
                
                $
                3,632,325
                
                $
                22,686,590
                
                $
                (959,700
                )
                $
                4,563,078
                
                $
                53,389,174Net
                    loss
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (22,082,766
                )
                
                
                
                
                
                
                
                (22,082,766
                )Adjustment
                    to statutory reserve
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                648,363
                
                
                (648,363
                )
                
                
                
                
                
                
                
                -Common
                    stock issued for compensation, $7.16
                
                
                
                
                
                
                
                
                76,600
                
                
                77
                
                
                548,379
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                548,456Common
                    stock issued for compensation, $10.43
                
                
                
                
                
                
                
                
                150,000
                
                
                150
                
                
                1,564,350
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                1,564,500Common
                    stock issued for compensation, $6.66
                
                
                
                
                
                
                
                
                87,400
                
                
                87
                
                
                581,997
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                582,084Common
                    stock transferred by CEO for compensation, $6.91
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                69,100
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                69,100Foreign
                    currency translation adjustments
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                10,662,642
                
                
                10,662,642BALANCE,
                    June 30, 2008, unaudited
                
                
                3,092,899
                
                $
                3,093
                
                
                34,948,765
                
                $
                34,949
                
                $
                26,192,979
                
                $
                4,280,688
                
                $
                (44,539
                )
                $
                (959,700
                )
                $
                15,225,720
                
                $
                44,733,190
    The
          accompanying notes are an integral part of these statements.
 F-3
  GENERAL
                    STEEL HOLDINGS, INC. AND SUBSIDIARIESCONSOLIDATED
                    STATEMENTS OF CASH FLOWSFOR
                    THE SIX MONTHS ENDED JUNE 30, 2008 AND 2007(UNAUDITED)
  2008
                
                2007CASH
                    FLOWS FROM OPERATING ACTIVITIES:Net
                    (loss) income
                
                $
                (22,082,766
                )
                $
                2,368,166Adjustments
                    to reconcile net income(loss)to
                    cashprovided
                    by (used in) operating activities:Minority
                    interest
                
                
                5,445,346
                
                
                1,207,896Depreciation
                
                
                8,868,941
                
                
                1,979,184Amortization
                
                
                444,670
                
                
                194,830Loss
                    on disposal of equipment
                
                
                -
                
                
                118,528Stock
                    issued for services and compensation
                
                
                1,199,640
                
                
                23,760Interest
                    expense accrued on mandatory redeemable stock
                
                
                -
                
                
                114,726Amortization
                    of deferred note issuance cost
                
                
                20,429
                
                
                -Amortization
                    of discount on convertible notes
                
                
                1,626,184
                
                
                -Change
                    in fair value of derivative instrument
                
                
                25,115,869
                
                
                -Deferred
                    tax assets
                
                
                (422,633
                )
                
                -Changes
                    in operating assets and liabilitiesAccounts
                    receivable
                
                
                (13,657,403
                )
                
                499,590Accounts
                    receivable - related parties
                
                
                (21,068,625
                )
                
                -Notes
                    receivable
                
                
                (13,961,704
                )
                
                (212,753
                )Other
                    receivables
                
                
                (1,219,840
                )
                
                (152,646
                )Other
                    receivables - related parties
                
                
                1,471,397
                
                
                (814,100
                )Loan
                    receivable
                
                
                1,276,560
                
                
                -Inventories
                
                
                (44,931,442
                )
                
                (843,369
                )Advances
                    on inventory purchases
                
                
                33,110,981
                
                
                248,632Advances
                    on inventory purchases - related parties
                
                
                (8,517,117
                )
                
                (25,403,755
                )Prepaid
                    expense - current
                
                
                (245,115
                )
                
                (111,573
                )Prepaid
                    expense - non current
                
                
                11,443
                
                
                -Prepaid
                    expense - non current - related parties
                
                
                (82,388
                )
                
                -Accounts
                    payable
                
                
                1,188,213
                
                
                14,049,429Accounts
                    payable - related parties
                
                
                1,440,412
                
                
                -Other
                    payables
                
                
                (2,250,089
                )
                
                808,677Other
                    payable - related parties
                
                
                (1,208,217
                )
                
                (13,990,128
                )Accrued
                    liabilities
                
                
                2,598,366
                
                
                7,981,708Dividends
                    payable
                
                
                (391,165
                )
                
                -Customer
                    deposits
                
                
                90,831,063
                
                
                771,354Customer
                    deposits - related parties
                
                
                (3,998,027
                )
                
                7,247,099Taxes
                    payable
                
                
                (4,147,173
                )
                
                14,610,931Net
                    cash provided by operating activities
                
                
                36,465,810
                
                
                10,696,186CASH
                    FLOWS FROM INVESTING ACTIVITIES:Cash
                    acquired from subsidiary
                
                
                1,256,385
                
                
                426,387Increase
                    in investment payable
                
                
                -
                
                
                6,226,080Deposits
                    due to sales representatives
                
                
                (1,053,872
                )
                
                (355,405
                )Proceeds
                    from short term investment
                
                
                2,340,360
                
                
                -Advance
                    on equipment purchases
                
                
                674,550
                
                
                (1,941,624
                )Equipment
                    purchases
                
                
                (93,010,997
                )
                
                (1,350,225
                )Cash
                    proceeds from sale of equipment
                
                
                -
                
                
                39,442Intangible
                    assets purchases
                
                
                (186,623
                )
                
                -Payment
                    to original shareholders
                
                
                (7,092,000
                )
                
                -Net
                    cash (used in) provided by investing activities
                
                
                (97,072,197
                )
                
                3,044,655CASH
                    FLOWS FINANCING ACTIVITIES:Restricted
                    cash
                
                
                (55,759,041
                )
                
                (5,188,741
                )Notes
                    receivable- restricted
                
                
                12,947,333
                
                
                -Borrowings
                    on short term loans - bank
                
                
                27,141,084
                
                
                25,727,979Payments
                    on short term loans - bank
                
                
                (41,610,454
                )
                
                (30,165,358
                )Borrowings
                    on short term loans - related parties
                
                
                7,106,184
                
                
                25,942,000Borrowings
                    on short term loan - others
                
                
                42,641,359
                
                
                -Payments
                    on short term loans - others
                
                
                (33,772,944
                )
                
                -Borrowings
                    on short term notes payable
                
                
                109,642,320
                
                
                13,437,956Payments
                    on short term notes payable
                
                
                (26,325,504
                )
                
                (8,249,556
                )Cash
                    contribution received from minority shareholders
                
                
                -
                
                
                778,260Net
                    cash provided by financing activities
                
                
                42,010,337
                
                
                22,282,540EFFECTS
                    OF EXCHANGE RATE CHANGE IN CASH
                
                
                1,792,862
                
                
                1,449,773INCREASE
                    (DECREASE) IN CASH
                
                
                (16,803,188
                )
                
                37,473,154CASH,
                    beginning ofperiod
                
                
                43,713,346
                
                
                6,831,549CASH,
                    end ofperiod
                
                $
                26,910,158
                
                $
                44,304,703
    The
          accompanying notes are an integral part of these statements.
 F-4
 
  GENERAL
            STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES
            TO
            CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
            30,
            2008
 (UNAUDITED)
 **Note
            1 - Background**
 
 General
            Steel Holdings, Inc. (the “Company”) was incorporated on August 5, 2002 in the
            state of Nevada. The Company through its 100% owned subsidiary, General
            Steel
            Investment operates a portfolio of Chinese steel companies serving various
            industries. The Company presently has four production subsidiaries: Daqiuzhuang
            Metal, Baotou Steel - General Steel Special Steel Pipe Joint Venture
            Co., Ltd.,
            (“Baotou Steel Pipe Joint Venture”), Shaanxi Longmen Iron and Steel Co., Ltd.
            (“Longmen Joint Venture”), and Maoming Hengda Steel Group Co., Ltd. The
            Company’s main products include rebar, hot-rolled carbon and silicon sheets and
            spiral-weld pipes.
 
 The
            following table reflects the Company’s current organization structure:
 
 
 
 On
            April
            27, 2007, Daqiuzhuang Metal and Baotou Iron and Steel Group Co., Ltd.
            ("Baotou
            Steel") entered into an Amended and Restated Joint Venture Agreement
            (the
            "Agreement"), amending the September 28, 2005 Joint Venture Agreement
            ("Original
            Joint Venture Agreement") which established Baotou Steel Pipe Joint Venture,
            a
            PRC limited liability company. The Agreement increased Daqiuzhuang Metal's
            ownership interest in the Joint Venture to 80%. Baotou Steel Pipe Joint
            Venture
            obtained its business license from the PRC on May 25, 2007 and started
            its
            normal operation in July 2007. See more discussion in Note 19 - Business
            combinations.
 
 F-5
 
  GENERAL
                STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES
                TO
                CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
                30,
                2008
 (UNAUDITED)
 Baotou
            Steel Pipe Joint Venture is located in Kundulun District, Baotou city,
            Inner
            Mongolia, China. It produces and sells spiral welded steel pipes and
            primarily
            serves customers in the oil, gas and petrochemical markets.
 
 On
            May
            18, 2007, General Steel entered into a Purchase Agreement with Victory
            New
            Holdings Limited (“Victory New”), a British Virgin Islands registered company
            under the control of the Company’s Chairman, CEO and majority shareholder,
            Zuosheng Yu (aka Henry Yu), to acquire Victory New’s 30% interest in Tianjin
            Daqiuzhuang Metal Sheet Co. Ltd. (“Daqiuzhuang Metal”). General Steel agreed to
            issue to Victory New an aggregate of 3,092,899 shares of Series A preferred
            stock with a fair value of $8,374,000, and voting power of 30% of the
            combined
            voting power of General Steel’s common and preferred stock while outstanding. As
            a result of the acquisition, Daqiuzhuang Metal is a wholly owned subsidiary
            of
            the Company. See details in Note 19 - Business combinations.
 
 On
            May
            18, 2007, Daqiuzhuang Metal established Yangpu Shengtong Investment Co.,
            Ltd.
            (“Yangpu Investment”) and injected registered capital totaling $13,030,000
            (RMB110,000,000), into the investment. The total registered capital of
            Yangpu
            Investment is $14,333,000 (RMB111,000,000), and Daqiuzhuang Metal has
            a 99.1%
            ownership interest in Yangpu Investment. The rest of Yangpu Investment
            is
            indirectly owned by Zuosheng Yu, our Chairman and CEO.
 
 Qiu
            Steel
            Investment Co., Ltd. (“Qiu Steel Investment”) was founded on June 1, 2006. In
            June 2007, Yangpu Investment agreed to invest RMB148,000,000, or approximately
            $19,284,400, through a capital injection and equity transfer with former
            shareholders. The total registered capital of Qiu Steel Investment is
            $19,545,000 (RMB150,000,000). As a result of the above mentioned equity
            transaction, Yangpu Investment acquired 98.7% equity of Qiu Steel Investment
            making Qiu Steel Investment a subsidiary of Yangpu Investment and Daqiuzhuang
            Metal. The rest of Qiu Steel Investment is indirectly owned by Zuosheng
            Yu, our
            Chairman and CEO.
 
 Yangpu
            Investment and Qiu Steel Investment are Chinese registered limited liability
            companies formed to acquire other businesses.
 
 On
            June
            15, 2007, General Steel and Shaanxi Longmen Iron and Steel (Group) Co.,
            Ltd., a
            PRC limited liability company (“Longmen Group”), formed Longmen Joint Venture
            effective June 1, 2007. General Steel contributed RMB300 million or
            approximately $39,450,000 through its subsidiaries, Daqiuzhuang Metal
            and Qiu
            Steel Investment, to the Longmen Joint Venture. General Steel and Longmen
            Group
            own a 60% and 40% ownership interest, respectively, in Longmen Joint
            Venture.
            The Longmen Joint Venture obtained its business license from the PRC
            on June 22,
            2007. See more discussion in Note 19 - Business combinations.
 
 Longmen
            Joint Venture is located in Hancheng city, Shaanxi province, China. Longmen
            Joint Venture is the largest integrated steel producer in Shaanxi province
            that
            uses iron ore and coke as primary raw materials for steel production.
            Longmen
            Joint Venture produces pig iron, crude steel, reinforced bars and high-speed
            wire. Longmen Joint Venture is also engaged in several other business
            activities, most of which are related to steel manufacturing. These include
            the
            production of coke and the production of iron ore pellets from taconite,
            transportation services and real estate and hotel operations. These operations
            are all located in Hancheng city and primarily serve regional customers
            in the
            construction industry.
 
 F-6
 
  GENERAL
                STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES
                TO
                CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
                30,
                2008
 (UNAUDITED)
 On
            September 24, 2007, Longmen Joint Venture acquired 74.92% ownership interest
            in
            Environmental Protection Industry Development Co., Ltd., a PRC limited
            liability
            company (“EPID”) engaging in recycling steel production waste, for $2,380,000
            (RMB18,080,930), and a 36% equity interest in Hualong Fire Retardant
            Materials
            Co., Ltd., a PRC limited liability company (“Hualong”) engaging in producing
            fire retardant material for steel production, for $430,000 (RMB3,287,980).
            The
            parties agreed to make the effective date of the transaction July 1,
            2007.
 
 On
            January 14, 2008, the Company through Longmen Joint Venture, completed
            its
            acquisition of a controlling interest in Hancheng Tongxing Metallurgy
            Co., Ltd.
            (“Tongxing”). The joint venture contributed its land use right of 217,487 square
            meters (approximately 53 acres) with appraised value of approximately
            $4.1
            million (RMB30,227,333). Pursuant to the agreement, the land will be
            converted
            into shares valued at approximately $3.1 million (RMB22,744,419), providing
            the
            Joint Venture stake of 22.76% ownership in Tongxing and making it Tongxing’s
            largest and controlling shareholder. The parties agreed to make the effective
            date of the transaction January 1, 2008. The acquisition is accounted
            for as
            acquisition under common control.  See
            more
            detail in Note 19 - Business combinations.
 
 On
            June
            25, 2008, the Company and Tianjin Qiu Steel Investment (“Qiu Steel Investment”)
            entered into an equity purchase agreement (the “Purchase Agreement”) with
            Maoming Hengda Steel Group Limited (the “Henggang”), in which the Company
            contributed $7.1 million (RMB 50 million) through its subsidiary, Qiu
            Steel, to
            Henggang original shareholders in exchange for 99% of the equity of Henggang.
            The acquisition was completed and became effective June 30, 2008. See
            Note 19 -
            Business combinations. Henggang is a steel products processor located
            in Maoming
            city, Guangdong province, in China’s southern coastal region. Production
            capacity at the facility is 1.8 million tons annually, with the majority
            of
            production focused on high-speed wire, an industrial steel product used
            in
            construction. The facility has been operating at approximately 10% of
            production
            capacity due to a redirection of corporate focus by the previous
            owners.
 
 **Note
            2 - Summary of significant accounting policies**
 
 Basis
            of presentation
 
 The
            consolidated financial statements of the Company reflect the activities
            of the
            following directly and indirectly owned subsidiaries:
 
 PercentageSubsidiary
                  
                  Of
                      OwnershipGeneral
                      Steel Investment Co., Ltd.
                  
                  British
                      Virgin Islands
                  
                  100.0%Tianjin
                      Daqiuzhuang Metal Sheet Co., Ltd
                  
                  P.R.C.
                  
                  100.0%Baotou
                      Steel - General Steel Special Steel Pipe Joint Venture Co.,
                      Ltd.
                  
                  P.R.C.
                  
                  80.0%Yangpu
                      Shengtong Investment Co., Ltd.
                  
                  P.R.C.
                  
                  99.1%Qiu
                      Steel Investment Co., Ltd.
                  
                  P.R.C.
                  
                  98.7%Shaanxi
                      Longmen Iron and Steel Co. Ltd.
                  
                  P.R.C.
                  
                  60.0%Maoming
                      Hengda Steel Group Co., Ltd.
                  
                  P.R.C.
                  
                  99.0%
 
 The
            accompanying financial statements have been prepared in accordance with
            accounting principles generally accepted in the United States of America.
            The
            accompanying consolidated financial statements include the accounts of
            all
            directly and indirectly owned subsidiaries listed above. All material
            intercompany transactions and balances have been eliminated in the
            consolidation.
 
 F-7
 
  GENERAL
                STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES
                TO
                CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
                30,
                2008
 (UNAUDITED)
 Management
            has included all 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 2007 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 of America requires management
            to
            make estimates and assumptions that affect the amounts reported in the
            financial
            statements and accompanying notes. Significant accounting estimates reflected
            in
            the Company’s financial statements include the useful lives of and impairment
            for property, plant and equipment, potential losses on uncollectible
            receivables
            and the fair value of the conversion feature and warrants associated
            with the
            note payable. Actual results could differ from these estimates.
 
 Concentration
            of risks
 
 The
            Company's operations are carried out in the PRC. Accordingly, the Company's
            business, financial condition and results of operations may be influenced
            by the
            political, economic and legal environment in the PRC, and by the general
            state
            of the PRC's economy. The Company's operations in the PRC are subject
            to
            specific considerations and significant risks not typically associated
            with
            companies in North America and Western Europe. The Company's results
            may be
            adversely affected by changes in governmental policies with respect to
            laws and
            regulations, anti-inflationary measures, currency conversion and remittance
            abroad, and rates and methods of taxation, among other things.
 
 Cash
            includes cash on hand and demand deposits in accounts maintained with
            state
            owned banks within the People’s Republic of China and Hong Kong. Total cash
            (including restricted cash balances) in these banks on June 30, 2008
            and
            December 31, 2007 amounted to $127,766,130 and $53,817,485, respectively,
            of
            which no deposits are covered by insurance. The Company has not experienced
            any
            losses in such accounts and believes it is not exposed to any risks on
            its cash
            in bank accounts.
  The
            Company had five major customers, which represented approximately 33.7%,
            and
            40.4% of the Company’s total sales for the three months ended June 30, 2008 and
            2007, respectively, and approximately 42.1%, and 37% of the Company’s total
            sales for the six months ended June 30, 2008 and 2007, respectively.
            Five
            customers accounted for 58.7% and 0% of total accounts receivable as
            of June 30,
            2008, and December 31, 2007, respectively.
 
 The
            purchase of raw materials from five major suppliers represent approximately
            29%
            and 69.6% of Company’s total purchase for the three months ended June 30, 2008
            and 2007, respectively, and 44% and 76% of the Company’s total purchase for the
            six months ended June 30, 2008 and 2007. Five vendors accounted for 1.35%
            and
            11% of total accounts payable as of June 30, 2008 and December 31, 2007,
            respectively.
 
 F-8
 
  GENERAL
                STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES
                TO
                CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
                30,
                2008
 (UNAUDITED)
 Revenue
            recognition
 
 The
            Company's revenue recognition policies are in compliance with Staff Accounting
            Bulletin (“SAB”) 104. Sales revenue is recognized at the date of shipment to
            customers when a formal arrangement exists, the price is fixed or determinable,
            the delivery is completed, no other significant obligations of the Company
            exist
            and collectability is reasonably assured. Payments received before all
            of the
            relevant criteria for revenue recognition are recorded as customer deposits.
            Sales revenue represents the invoiced value of goods, net of value-added
            tax
            (VAT). All of the Company’s products sold in the PRC are subject to a Chinese
            value-added tax at a rate of 13% to 17% of the gross sales price. This
            VAT may
            be offset by VAT paid by the Company on raw materials and other materials
            included in the cost of producing the finished product.
 
 Foreign
            currency translation and other comprehensive income
 
 The
            reporting currency of the Company is the US dollar. The Company uses
            the local
            currency, Renminbi (RMB), as its functional currency. Assets and liabilities
            are
            translated at the unified exchange rate as quoted by the People’s Bank of China
            at the end of the period. Translation adjustments resulting from this
            process
            are included in accumulated other comprehensive income in the statement
            of
            shareholders’ equity. Transaction gains and losses that arise from exchange rate
            fluctuations on transactions denominated in a currency other than the
            functional
            currency are included in the results of operations as incurred.
 
 Translation
            adjustments resulting from this process are included in accumulated other
            comprehensive income and amounted to $6,339,703 and $374,568 for the
            three
            months ended June 30, 2008 and 2007, respectively and $10,662,642 and
            $598,119
            for the six months ended June 30, 2008 and December 31, 2007, respectively.
            The
            balance sheet amounts, with the exception of equity at June 30, 2008
            and
            December 31, 2007 were translated at 6.85 RMB and 7.29 RMB to $1.00 USD,
            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, 2008 and 2007 were 7.05 RMB, and 7.71 RMB, respectively.
            Cash flows are also translated at average translation rates for the period,
            therefore, amounts reported on the statement of cash flows will not necessarily
            agree with changes in the corresponding balances on the balance
            sheet.
 
 Financial
            instruments
 
 SFAS
            107,
“Disclosures about Fair Value of Financial Instruments” requires disclosure of
            the fair value of financial instruments held by the Company. SFAS 107
            defines
            the fair value of financial instruments as the amount at which the instrument
            could be exchanged in a current transaction between willing parties.
 
 The
            Company considers the carrying amount of cash, accounts receivable, other
            receivables, accounts payable, accrued liabilities, and long term debts
            to
            approximate their fair values because of the short period of time between
            the
            origination of such instruments and their expected realization and their
            current
            market rate of interest.
 
 The
            Company also analyzes all financial instruments with features of both
            liabilities and equity under SFAS 150, “Accounting for Certain Financial
            Instruments with Characteristics of Both Liabilities and Equity,” SFAS No 133,
“Accounting for Derivative Instruments and Hedging Activities” and EITF 00-19,
“Accounting for Derivative Financial Instruments Indexed to, and Potentially
            Settled in, a Company’s Own Stock.” The convertible preferred shares issued in
            2005 and the convertible note issued in 2007 did not require bifurcation
            or
            result in liability accounting. Additionally, the Company analyzes registration
            rights agreements associated with any equity instruments issued to determine
            if
            penalties triggered for late filing should be accrued under FSP EITF
            00-19-2,
“Accounting for Registration Payment Arrangements.”
 
 F-9
 
  GENERAL
                STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES
                TO
                CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
                30,
                2008
 (UNAUDITED)
 Derivative
            Instrument
 
 In
            December 2007, the Company issued convertible notes totaling $40,000,000
            (“Notes”) and 1,154,958 warrants. Both the warrants and the conversion option
            embedded in the Notes meet the definition of a derivative instrument
            in SFAS
            133, “Accounting for Derivative Instruments and Hedging Activities.” Therefore
            these instruments are accounted for as derivative liabilities and
            marked-to-market each reporting period. The change in the value of the
            derivative liabilities is charged against or credited to income.
 
 Fair
            value measurements
 
 The
            Company adopted SFAS 157, “Fair Value Measurements” on January 1, 2008. SFAS 157
            defines fair value, establishes a three-level valuation hierarchy for
            disclosures of fair value measurement and enhances disclosures requirements
            for
            fair value measures. The three levels are defined as follow:
 
 Level
            1
            inputs to the valuation methodology are quoted prices (unadjusted) for
            identical
            assets or liabilities in active markets.
 
 Level
            2
            inputs to the valuation methodology include quoted prices for similar
            assets and
            liabilities in active markets, and inputs that are observable for the
            assets or
            liability, either directly or indirectly, for substantially the full
            term of the
            financial instruments.
 
 Level
            3
            inputs to the valuation methodology are unobservable and significant
            to the fair
            value.
 
 The
            Company’s investment in unconsolidated subsidiaries amounted to $9,875,972 as
            of
            June 30, 2008. Since there is no quoted or observable market price for
            the fair
            value of similar long term investment, the Company then used the level
            3 inputs
            for its valuation methodology. The determination of the fair value was
            based on
            the capital investment that the Company contributed. The carrying value
            of the
            long term investments approximated the fair value as of June 30, 2008.
 
 In
            2007,
            the Company issued convertible notes in the aggregate principal amount
            of
            $40,000,000 and warrants to purchase 1,154,958 shares of common stock
            of the
            Company. Pursuant to SFAS 133 and EITF 00-19, the Company determined
            that both
            the warrants and the conversion option embedded in the Notes meet the
            definition
            of a derivative instrument and must be carried as a liability and marked
            to
            market for each reporting period. As of June 30, 2008, the Company reevaluated
            the derivative liabilities using Cox Rubenstein Binomial Model, defined
            in SFAS
            157 as level 3 inputs, and recorded the changes in earnings. As a result,
            the
            derivative liability is carried on the balance sheet at its fair value.
  F-10
 GENERAL
              STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES
              TO
              CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
              30,
              2008
 (UNAUDITED)
 As
            of
            June 30, 2008, the carrying value of the convertible notes amounted to
            $7,066,600. The Company determined the fair value of the convertible
            notes using
            the level three inputs to the Binomial Model and determined that the
            fair value
            amounted to approximately $54 million due to the increase in the Company’s
            common stock price.
 
 Carrying
                      Value
                    as
                      of
                    June
                      30, 2008
                  
                  Fair
                      Value Measurements at June 30, 2008
                    Using
                      Fair Value HierarchyAssets
                  
                  
                  
                  
                  
                  Level
                      1
                  
                  
                  Level
                      2
                  
                  
                  Level
                      3Long
                      term investments
                  
                  $
                  9,875,972
                  
                  
                  
                  
                  
                  
                  
                  $
                  9,875,972LiabilitiesDerivative
                      liabilities
                  
                  $
                  53,599,177
                  
                  
                  
                  
                  
                  
                  
                  $
                  53,599,177Convertible
                      notes payable
                  
                  $
                  7,066,600
                  
                  
                  
                  
                  
                  
                  
                  $
                  7,066,600
  Except
            for the derivative liabilities, the Company did not identify any other
            assets or
            liabilities that are required to be presented on the balance sheet at
            fair value
            in accordance with SFAS 157.
 
 Cash
            and cash equivalents
 
 Cash
            and
            cash equivalents include cash on hand and demand deposits in banks with
            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.
 
 Accounts
            receivable and allowance for doubtful accounts
  The
            Company conducts its business operations in the People’s Republic of China.
            Accounts receivable include trade accounts due from the customers. An
            allowance
            for doubtful account is established and recorded based on managements’
assessment of the credit history and relationship with the customers.
            Management
            reviews its accounts receivable on a regular basis to determine if the
            bad debt
            allowance is adequate, and adjusts the allowance when necessary.
 
 Notes
            receivable
 
 Notes
            receivable represents trade accounts receivable due from various customers
            where
            the customers’ banks have guaranteed the payment of the receivables. This amount
            is non-interest bearing and is 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 $18,895,361 and $4,216,678 of notes receivable
            outstanding as of June 30, 2008 and December 31, 2007,
            respectively.
 
 F-11
 
  GENERAL
                STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES
                TO
                CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
                30,
                2008
 (UNAUDITED)
 Restricted
            notes receivable represents notes pledged as collateral for short term
            loans
            from banks. As of June 30, 2008 and December 31, 2007, restricted notes
            receivable amounted to $0 and $12,514,659, respectively.
 
 Inventories
 
 Inventories
            are stated at the lower of cost or market using weighted average
            method.
 
 Shipping
            and handling
 
 Shipping
            and handling for raw materials purchased are included in cost of goods
            sold.
            Shipping and handling cost incurred for shipping of finished products
            to
            customers are included in selling expenses. Shipping and handling expenses
            related to purchases of material and sales of finished goods for the
            three
            months ended June 30, 2008 and 2007 amounted to $919,220 and $352,753,
            respectively. Shipping and handling for the six months ended June 30,
            2008 and
            2007 amounted to $1,622,292 and $372,578, respectively.
 
 Intangible
            assets
 
 All
            land
            in the People’s Republic of China is owned by the government and. However, the
            government grants “land use right” to use the land.
 
 Daqiuzhuang
            Metal acquired land use rights during the years ended 2000 and 2003 for
            a total
            of $3,167,483. These land use rights are for 50 years and expire in 2050
            and
            2053. However, Daqiuzhuang Metal's initial business license had a ten-year
            term.
            Therefore, management elected to amortize the land use rights over the
            ten-year
            business term. Daqiuzhuang Metal became a Sino-Foreign Joint Venture
            in 2004,
            and obtained a new business license for twenty years; however, the Company
            decided to continue amortizing the land use rights over the original
            ten-year
            business term.
 Longmen
            Group contributed land use rights for a total amount of $19,823,885 to
            the
            Longmen Joint Venture. The land use rights are for 50 years and expire
            in 2048
            to 2052. Heng Gang has land use rights of $2,037,560 for 50 years and
            expire in
            2054.
 
 Plant
            and equipment, net
 
 Plant
            and
            equipment are stated at cost less accumulated depreciation. Depreciation
            is
            computed using the straight-line method over the estimated useful lives
            of the
            assets with 3%-5% residual value.
 
 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.
 
 F-12
 
  GENERAL
                STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES
                TO
                CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
                30,
                2008
 (UNAUDITED)
 Long
            lived assets
 
 Long
            lived assets, including plant, equipment and intangible assets are reviewed
            annually or more often if necessary, to determine whether their carrying
            value
            has become impaired. The Company considers assets to be impaired if the
            carrying
            value exceeds the future projected cash flows from related operations.
            The
            Company also re-evaluates the periods of depreciation and amortization
            to
            determine whether subsequent events and circumstances warrant revised
            estimates
            of useful lives. As of June 30, 2008, the Company expects these assets
            to be
            fully recoverable.
 
 Investments
            in unconsolidated subsidiaries
 
 Investee
            companies over which the Company has the ability to exercise significant
            influence, but does not have a controlling interest is accounted for
            using the
            equity method. Significant influence is generally considered to exist
            when the
            Company has an ownership interest in the voting stock of the investee
            of between
            20% and 50%, and other factors, such as representation on the investee's
            Board
            of Directors, voting rights and the impact of commercial arrangements,
            are
            considered in determining whether the equity method of accounting is
            appropriate. In December 2007, the Company acquired 27% of ownership
            interest in
            Xian Delong Powder Engineering Materials Co., Ltd., through its 74.92%
            owned
            subsidiary, Environmental Protection Industry Development Co., Ltd.,
            for
            $875,400. This investment is accounted for by the equity method.
 
 The
            Company’s newly acquired subsidiary, Hancheng Tongxing Metallurgy Co., Ltd.
            invested in several companies from 2004 to 2007; investments in these
            unconsolidated subsidiaries totaled $9,000,572 as of June 30, 2008. Since
            Tongxing does not have the ability to exercise control or significant
            influence
            over the investee companies, the investments have been recorded under
            the cost
            method.
 
 Investees
                  
                  Years
                      invested
                  
                  Amount
                      invested
                  
                  %
                      ownedShanxi
                      Daxigou Mining Co.,Ltd
                  
                  
                  2004
                  
                  $
                  729,500
                  
                  
                  11Shanxi
                      Xinglong Thermoelectric Co.,Ltd
                  
                  
                  2004-2007
                  
                  
                  4,832,208
                  
                  
                  37.6Shanxi
                      Longgang Group Baoji roll-forming steel Co.,Ltd
                  
                  
                  2005
                  
                  
                  612,780
                  
                  
                  23.81Shanxi
                      Longgang Group Xian steel Co.,Ltd
                  
                  
                  2005
                  
                  
                  145,900
                  
                  
                  10Shanxi
                      Longgang Group Co.,Ltd
                  
                  
                  2003-2004
                  
                  
                  1,889,405
                  
                  
                  3.8Huashan
                      Metallurgical Equipment Co. Ltd.
                  
                  
                  2003
                  
                  
                  72,950
                  
                  
                  25Hejin
                      Liyuan Washing Coal Co.Ltd.
                  
                  
                  2006
                  
                  
                  218,850
                  
                  
                  38Hancheng
                      Jinma Coking Co.Ltd.
                  
                  
                  2006
                  
                  
                  498,979
                  
                  
                  40Total
                  $
                  9,000,572
 
 Total
            investment in unconsolidated subsidiaries amounted to $9,875,972 and
            $822,600 as
            of June 30, 2008 and December 31, 2007, respectively.
 
 Short-term
            notes payable
 
 Short-term
            notes payable are lines of credit extended by banks. When purchasing
            raw
            materials, the Company often issues a short-term note payable to the
            vendor.
            This short-term note payable is guaranteed by the bank for its complete
            face
            value. 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. The total outstanding amounts of short-term notes payable
            were
            $155,708,387 and $15,163,260 as of June 30, 2008 and December 31, 2007,
            respectively.
  F-13
 
  GENERAL
                STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES
                TO
                CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
                30,
                2008
 (UNAUDITED)
 Earnings
            per share
 
 The
            Company reports earnings per share in accordance with the provisions
            of SFAS
            128, "Earnings Per Share." SFAS 128 requires presentation of basic and
            diluted
            earnings per share in conjunction with the disclosure of the methodology
            used in
            computing such earnings per share.
 
 Basic
            earnings per share are computed by dividing income available to common
            stockholders by the weighted average common shares outstanding during
            the
            period. Diluted earnings per share takes into account the potential dilution
            that could occur if securities or other contracts to issue common stock
            were
            exercised and converted into common stock.
 
 Income
            taxes
 
 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.
 
 The
            Company reports income taxes pursuant to SFAS 109, “Accounting for Income
            Taxes”. SFAS 109 requires the recognition of deferred income tax liabilities
            and
            assets for the expected future tax consequences of temporary differences
            between
            income tax basis and financial reporting basis of assets and liabilities.
            Provision for income taxes consists of taxes currently due plus deferred
            taxes.
            The Company adopted FASB Interpretation 48, “Accounting for Uncertainty in
            Income Taxes” (“FIN 48”), as of January 1, 2007. A tax position is recognized as
            a benefit only if it is “more likely than not” that the tax position would be
            sustained in a tax examination, with a tax examination being presumed
            to occur.
            The amount recognized is the largest amount of tax benefit that is greater
            than
            50% likely of being realized on examination. For tax positions not meeting
            the
“more likely than not” test, no tax benefit is recorded. The adoption had no
            effect on the Company’s financial statements.
 
 The
            charge for taxation is based on the results for the year as adjusted
            for items,
            which are non-assessable or disallowed. It is calculated using tax rates
            that
            have been enacted or substantively enacted by the balance sheet
            date.
 
 Deferred
            tax is accounted for using the balance sheet liability method in respect
            of
            temporary differences arising from differences between the carrying amount
            of
            assets and liabilities in the financial statements and the corresponding
            tax
            basis used in the computation of assessable tax profit. In principle,
            deferred
            tax liabilities are recognized for all taxable temporary differences.
            Deferred
            tax assets are recognized to the extent that it is probable that taxable
            profit
            will be available against which deductible temporary differences can
            be
            utilized. Deferred tax is calculated using tax rates that are expected
            to apply
            to the period when the asset is realized or the liability is settled.
            Deferred
            tax is charged or credited in the income statement, except when it is
            related to
            items credited or charged directly to equity, in which case the deferred
            tax is
            also dealt with in equity. Deferred tax assets and liabilities are offset
            when
            they relate to income taxes levied by the same taxation authority and
            the
            Company intends to settle its current tax assets and liabilities on a
            net
            basis.
 
 F-14
 
  GENERAL
                STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES
                TO
                CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
                30,
                2008
 (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 SFAS 123R,
            “Accounting for Stock-Based Compensation,” and the conclusions reached by EITF
            96-18, “Accounting for Equity Instruments That Are Issued to Other Than
            Employees for Acquiring or in Conjunction with Selling Goods or Services.” Costs
            are measured at the estimated fair market value of the consideration
            received or
            the estimated fair value of the equity instruments issued, whichever
            is more
            reliably determinable. The value of equity instruments issued for consideration
            other than employee services is determined on the earlier of a performance
            commitment or completion of performance by the provider of goods or services
            as
            defined by EITF 96-18.
 
 Minority
            interest
 
 Minority
            interest consists of the interest of minority shareholders in the subsidiaries
            of the Company. As of June 30, 2008 and December 31, 2007, minority interest
            amounted to $67,349,806 and $42,044,266, respectively.
 
 Reclassifications
 
 Certain
            prior period amounts have been reclassified to conform to the current
            period
            presentation. These reclassifications have no effect on net income or
            cash
            flows.
 
 Recently
            issued accounting pronouncements
 
 In
            February 2007, the FASB issued SFAS 159, The Fair Value Option for Financial
            Assets and Financial Liabilities—including an amendment of FASB Statement No.
            115 (“FAS 159”). SFAS 159 permits companies to choose to measure many financial
            instruments and certain other items at fair value that  are
            not
            currently required to be measured at fair value. The objective of SFAS
            159 is to
            provide opportunities to mitigate volatility in reported earnings caused
            by  measuring
            related assets and liabilities differently without having to apply hedge
            accounting provisions. SFAS 159 also establishes presentation and
            disclosure  requirements
            designed to facilitate comparisons between companies that choose different
            measurement attributes for similar types of assets and liabilities.
            SFAS  159
            will
            be effective in the first quarter of fiscal 2009. The Company chose not
            to elect
            the option to measure the fair value of eligible financial assets and
            liabilities
 
 In
            December 2007, the FASB issued SFAS 160, “Noncontrolling Interests in
            Consolidated Financial Statements - an amendment of Accounting Research
            Bulletin
            No. 51”, which establishes accounting and reporting standards for ownership
            interests in subsidiaries held by parties other than the parent, the
            amount of
            consolidated net income attributable to the parent and to the noncontrolling
            interest, changes in a parent’s ownership interest and the valuation of retained
            non-controlling equity investments when a subsidiary is deconsolidated.
            The
            Statement also establishes reporting requirements that provide sufficient
            disclosures that clearly identify and distinguish between the interests
            of the
            parent and the interests of the non-controlling owners. SFAS 160 is effective
            for fiscal years beginning after December 15, 2008. The Company has not
            determined the effect that the application of SFAS 160 will have on its
            consolidated financial statements.
 
 F-15
 
  GENERAL
                STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES
                TO
                CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
                30,
                2008
 (UNAUDITED)
 In
            December 2007, Statement of Financial Accounting Standards 141(R), *Business
            Combinations* ,
            was
            issued. SFAS 141R replaces SFAS 141, *Business
            Combinations.* SFAS
            141R
            retains the fundamental requirements in SFAS 141 that the acquisition
            method of
            accounting (which SFAS 141 called the *purchase
            method* )
            be used
            for all business combinations and for an acquirer to be identified for
            each
            business combination. SFAS 141R requires an acquirer to recognize the
            assets
            acquired, the liabilities assumed, and any noncontrolling interest in
            the
            acquiree at the acquisition date, measured at their fair values as of
            that date,
            with limited exceptions. This replaces SFAS 141’s cost-allocation process, which
            required the cost of an acquisition to be allocated to the individual
            assets
            acquired and liabilities assumed based on their estimated fair values.
            SFAS 141R
            also requires the acquirer in a business combination achieved in stages
            (sometimes referred to as a step acquisition) to recognize the identifiable
            assets and liabilities, as well as the noncontrolling interest in the
            acquiree,
            at the full amounts of their fair values (or other amounts determined
            in
            accordance with SFAS 141R). SFAS 141R applies prospectively to business
            combinations for which the acquisition date is on or after the beginning
            of the
            first annual reporting period beginning on or after December 15, 2008.
            An entity
            may not apply it before that date. The Company is currently evaluating
            the
            impact that adopting SFAS No. 141R will have on its financial
            statements.
 
 In
            March
            2008, the
            FASB
            issued SFAS 161, “Disclosures about Derivative Instruments and Hedging
            Activities - an amendment of FASB Statement No. 133”, which changes the
            disclosure requirements for derivative instruments and hedging activities.
            Entities are required to provide enhanced disclosures about (a) how and
            why an
            entity uses derivative instruments, (b) how derivative instruments and
            related
            hedged items are accounted for under Statement 133 and its related
            interpretations, and (c) how derivative instruments and related hedged
            items
            affect an entity’s financial position, financial performance and cash flows.
            SFAS 161 is effective for financial statements issued for fiscal years
            and
            interim periods beginning after November 15, 2008. The
            Company is currently evaluating the impact that adopting SFAS No. 161
            will have
            on its financial statements.
 
 In
            April
            2008, the FASB issued 142-3 “Determination of the useful life of Intangible
            Assets”, which amends the factors a company should consider when developing
            renewal assumptions used to determine the useful life of an intangible
            asset
            under SFAS142. This Issue is effective for financial statements issued
            for
            fiscal years beginning after December 15, 2008, and interim periods within
            those
            fiscal years. SFAS 142 requires companies to consider whether renewal
            can be
            completed without substantial cost or material modification of the existing
            terms and conditions associated with the asset. FSP 142-3 replaces the
            previous
            useful life criteria with a new requirement—that an entity consider its own
            historical experience in renewing similar arrangements. If historical
            experience
            does not exist then the Company would consider market participant assumptions
            regarding renewal including 1) highest and best use of the asset by a
            market
            participant, and 2) adjustments for other entity-specific factors included
            in
            SFAS 142. The Company is currently evaluating the impact that adopting
            SFAS
            No.142-3 will have on its financial statements
 
 In
            May
            2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
            Accounting Principles.” This Statement identifies the sources of accounting
            principles and the framework for selecting the principles to be used
            in the
            preparation of financial statements of nongovernmental entities that
            are
            presented in conformity with generally accepted accounting principles
            (GAAP) in
            the United States (the GAAP hierarchy). The Company is currently evaluating
            the
            impact that adopting SFAS No. 162 will have on its financial
            statements.
 
 F-16
 In
            May
            2008, the FASB issued SFAS No. 163, “Accounting for Financial Guarantee
            Insurance Contracts, an interpretation of FASB Statement No. 60.” The scope of
            this Statement is limited to financial guarantee insurance (and reinsurance)
            contracts, as described in this Statement, issued by enterprises included
            within
            the scope of Statement 60. Accordingly, this Statement does not apply
            to
            financial guarantee contracts issued by enterprises excluded from the
            scope of
            Statement 60 or to some insurance contracts that seem similar to financial
            guarantee insurance contracts issued by insurance enterprises (such as
            mortgage
            guaranty insurance or credit insurance on trade receivables). This Statement
            also does not apply to financial guarantee insurance contracts that are
            derivative instruments included within the scope of FASB Statement No.
            133,
“Accounting for Derivative Instruments and Hedging Activities.” This Statement
            will not have and impact on the Company’s financial statements.
 
 In
            June
            2008, the FASB issued Emerging Issues Task Force Issue 07-5 “Determining whether
            an Instrument (or Embedded Feature) is indexed to an Entity’s Own Stock” (“EITF
            No. 07-5”). This Issue is effective for financial statements issued for fiscal
            years beginning after December 15, 2008, and interim periods within those
            fiscal
            years. Early application is not permitted. Paragraph 11(a) of Statement
            of
            Financial Accounting Standard No 133 “Accounting for Derivatives and Hedging
            Activities” (“SFAS 133”) specifies that a contract that would otherwise meet the
            definition of a derivative but is both (a) indexed to the Company’s own
            stock and (b) classified in stockholders’ equity in the statement of
            financial position would not be considered a derivative financial instrument.
            EITF No.07-5 provides a new two-step model to be applied in determining
            whether
            a financial instrument or an embedded feature is indexed to an issuer’s own
            stock and thus able to qualify for the SFAS 133 paragraph 11(a) scope
            exception.
            This standard will triggered liability accounting on all options and
            warrants
            exercisable at strike prices denominated in any currency other than the
            functional currency of the operating entity in China (Renminbi).. The
            Company is
            currently evaluating the impact that adopting EITF 07-5 will have on
            its
            financial statements.
 
 In
            June
            2008, FASB issued EITF Issue No. 08-4, “Transition Guidance for Conforming
            Changes to Issue No. 98-5 (“EITF No. 08-4”)”. The objective of EITF No.08-4
            is to provide transition guidance for conforming changes made to EITF
            No. 98-5,
“Accounting for Convertible Securities with Beneficial Conversion Features
            or
            Contingently Adjustable Conversion Ratios”, that result from EITF No. 00-27
“Application of Issue No. 98-5 to Certain Convertible Instruments”, and SFAS No.
            150, “Accounting for Certain Financial Instruments with Characteristics of
            both
            Liabilities and Equity”. This Issue is effective for financial statements issued
            for fiscal years ending after December 15, 2008. Early application is
            permitted. The Company is currently evaluating the impact that adopting
            EITF 08-4 will have on its financial statements.
 
 **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, 2008
                    (Unaudited)
                  
                  December
                      31, 2007Accounts
                      receivable
                  
                  $
                  63,521,285
                  
                  $
                  11,939,533Less:
                      allowance for doubtful accounts
                  
                  
                  276,101
                  
                  
                  148,224Net
                      accounts receivable
                  
                  $
                  63,245,184
                  
                  $
                  11,791,309
 
 F-17
 
  GENERAL
                STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES
                TO
                CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
                30,
                2008
 (UNAUDITED)
 Movement
            of allowance for doubtful accounts is as follows:
 
 June
                      30, 2008
                    (Unaudited)
                  
                  December
                      31, 2007Beginning
                      balance
                  
                  $
                  148,224
                  
                  $
                  137,132Charge
                      to expense
                  
                  
                  -
                  
                  
                  751Written-off
                  
                  
                  -
                  
                  
                  -Addition
                      from acquistion
                  
                  
                  118,373Exchange
                      rate effect
                  
                  
                  9,504
                  
                  
                  10,341Ending
                      balance
                  
                  $
                  276,101
                  
                  $
                  148,224
 
 **Note
            4 - Inventory**
 
 Inventory
            consists of the following:
 
 June
                      30, 2008
                    (Unaudited)
                  
                  December
                      31, 2007Supplies
                  $
                  2,004,737
                  $
                  1,829,551Raw
                      materials
                  
                  49,494,808
                  
                  42,919,783Work
                      in process
                  
                  -
                  
                  82,439Finished
                      goods
                  
                  85,941,176
                  
                  33,097,152Total
                  $
                  137,440,721
                  $
                  77,928,925
  Raw
            materials consist primarily of iron ore and coke at Long Men Joint Venture,
            steel strip at Daqiuzhuang Metal and billet at Henggang. Work in
            process primarily consists of pig iron and other semi-finished products.
            The
            cost of finished goods includes direct costs of raw materials as well
            as direct
            labor used in production. Indirect production costs such as utilities
            and
            indirect labor related to production such as assembling, shipping and
            handling
            costs are also included in the cost of inventory. The Company reviews
            its
            inventory periodically for possible obsolete goods and to determine if
            any
            reserves are necessary for potential obsolescence. As of June 30, 2008
            and
            December 31, 2007, the Company believes no reserves are necessary.
 
 **Note
            5 - Advances on inventory purchases**
 
 Advances
            on inventory purchases are monies deposited or advanced to outside vendors
            or
            related parties on future inventory purchases. Due to the high shortage
            of steel
            in China, most of the Company’s vendors require a certain amount of money to be
            deposited with them as a guarantee that the Company will receive 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 $72,909,429 and $68,114,486
            as of
            June 30, 2008 and December 31, 2007, respectively.
 
 F-18
 
  GENERAL
                STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES
                TO
                CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
                30,
                2008
 (UNAUDITED)
 **Note
            6 - Plant and equipment, net**
 
 Plant
            and
            equipment consist of the following:
 
 June
                      30, 2008
                  
                  December
                      31, 2007(Unaudited)Buildings
                      and improvements
                  
                  $
                  101,977,092
                  
                  $
                  71,265,004Machinery
                  
                  
                  215,867,977
                  
                  
                  134,716,437Transportation
                      equipment
                  
                  
                  6,705,210
                  
                  
                  4,232,556Other
                      equipment
                  
                  
                  8,554,685
                  
                  
                  1,310,489Construction
                      in process
                  
                  
                  118,175,370
                  
                  
                  24,574,027Totals
                  
                  
                  451,280,334
                  
                  
                  236,098,513Less
                      accumulated depreciation
                  
                  
                  (50,559,364
                  )
                  
                  (17,835,146
                  )Totals
                  
                  $
                  400,720,970
                  
                  $
                  218,263,367
 
 Long
            Men
            JV is in the process of constructing two blast furnaces and a sintering
            system.
            All the costs related to the construction have been capitalized as construction
            in progress amounted to $116,520,168 as of June 30, 2008. The remaining
            balance
            in construction in progress is from Henggang.
 
 Depreciation,
            including amounts in cost of sales, for the three months ended June 30,
            2008 and
            2007 amount to $4,369,068 and $1,417,475, respectively, and for the six
            months
            ended June 30, 2008 and 2007, amounted to $8,868,941 and $1,979,184,
            respectively.
 
 **Note
            7 - Intangible assets**
 
 The
            Company’s intangible assets are as follows:
 
 June
                      30, 2008
                  
                  December
                      31, 2007(Unaudited)Land
                      use right
                  
                  $
                  27,091,190
                  
                  $
                  23,629,059Software
                  
                  
                  293,818
                  
                  
                  71,978Accumulated
                      Amortization
                  
                  
                  (2,501,662
                  )
                  
                  (1,944,328
                  )Total
                  
                  $
                  24,883,346
                  
                  $
                  21,756,709
 
 Total
            amortization expense for the three months ended June 30, 2008 and 2007
            amounted
            to $239,524 and $118,306, respectively, and for six months ended June
            30, 2008
            and 2007, amounted to
            $444,670 and $194,830, respectively.
 
 F-19
 
  GENERAL
                STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES
                TO
                CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
                30,
                2008
 (UNAUDITED)
 **Note
            8 - Debt**
 
 Short
            term loans
 
 Short
            term loans represent amounts due to various banks, other companies and
            individuals, and related parties normally due within one year. The loans
            due to
            banks can be renewed with the banks. The Company had short term loans
            from
            related parties totaling $7,317,027 as of December 31, 2007, and $7,309,590
            as
            of June 30, 2008.
 
 The
            loans
            due to banks consisted of the following:
 
 DAQIUZHUANG
                      METALJune
                      30, 2008
                    (Unaudited)
                  
                  December
                      31, 2007Loan
                      from China Bank, JingHai Branch, dueSeptember
                      2008. Quarterly interest only payment at7.29%
                      per annum, secured by equipment
                  
                  $
                  1,021,300
                  
                  $
                  959,700Loans
                      from Agriculture Bank, DaQiuZhuang Branch, duevarious
                      dates from September 2008 to April 2009.Quarterly
                      interest only payments ranging from8.424%
                      to 8.964% per annum, guaranteed by anunrelated
                      third party and secured by equipment
                  
                  
                  10,954,172
                  
                  
                  10,293,468Loan
                      from Construction Bank of China, JinHai Branch, dueAugust
                      2008. Monthly interest only payment at 8.55%per
                      annum, guaranteed by an unrelated third party and
                    secured
                      by equipment
                  
                  
                  1,604,900
                  
                  
                  1,508,100Loans
                      from ShangHai PuFa Bank, due various dates fromJuly
                      2008 to March 2009. Quarterly interest only paymentsranging
                      from 7.22% to 8.964% per annum, guaranteedby
                      an unrelated third party
                  
                  
                  4,377,000
                  
                  
                  4,113,000Loan
                      from China Merchants Bank, dueNovember
                      2008. Quarterly interest only paymentsat
                      floating interest rate,105% of People's Bank base rateof
                      7.29% to 7.85%, guaranteed by an unrelated third party.
                  
                  
                  8,754,000
                  
                  
                  8,226,000Loan
                      from ShenZhen Development Bank, dueJanuary
                      2009. Monthly interest only paymentat
                      7.47% per annum, secured byinventory
                      and guaranteed by CEO of the Company.
                  
                  
                  7,295,000
                  
                  
                  6,855,000Total
                      Daqiuzhuang Metal
                  
                  $
                  34,006,372
                  
                  $
                  31,955,268
  F-20
  GENERAL
              STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES
              TO
              CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
              30,
              2008
 (UNAUDITED)
 LONG
                          MEN JOINT VENTUREJune
                          30, 2008
                        (Unaudited)
                      
                      
                      December
                          31, 2007Loans
                          from Construction Bank, due various
                        dates
                          from September to October 2008. Monthly
                        interest
                          only payments at 8.02% per annum,
                        guaranteed
                          by equipment.
                      
                      $
                      4,684,849
                      
                      $
                      20,633,550Loans
                          from Construction Bank, due various datesfrom
                          Septemberto
                          June 2009. Monthly interestonly
                          payments at 8.20% per annum,guaranteed
                          by equipment .
                      
                      
                      4,960,600
                      
                      
                      -Loans
                          from Agriculture Bank, due various datesin
                          May 2008. Monthly interest only payments at 7.12%guaranteed
                          by Bankers’ Acceptance Bill.
                      
                      
                      -
                      
                      
                      3,989,610Loans
                          from Bank of China, HanCheng Branch, dueJuly
                          2008. Quarterly interest payments 6.90% per
                        annum,
                          guaranteed by a related third party.
                      
                      
                      5,836,000
                      
                      
                      9,597,000Loans
                          from Credit Cooperatives, due various datesfrom
                          July 2008 to February 2009. Monthly interestpayments
                          by 11.02% per annum, guaranteedby
                          a subsidiary.
                      
                      
                      2,918,000
                      
                      
                      2,742,000Loans
                          from HuaXia Bank, due in November 2008.Monthly
                          interest payment at 8.74% per annum,guaranteed
                          by equipment.
                      
                      
                      5,836,000
                      
                      
                      13,819,680Loan
                          from Communication Bank, due October 2008, Quarterlyinterest
                          only payments, annual interest rate of 8.02%,guaranteed
                          by equipment.
                      
                      
                      3,647,500
                      
                      
                      3,427,500Loan
                          from China Merchants Bank, due September 2008,Monthly
                          interest payments, annual interest rate of 9.13%,guaranteed
                          by a related third party and secured by land
                        use
                          rights and buildings.
                      
                      
                      7,295,000
                      
                      
                      6,855,000Loan
                          from China Minsheng Bank, due February 2009,
                        Quarterly
                          interest payments, annual interest rate of
                        7.47%,
                          guaranteed by a related third party and secured
                        by
                          equipment.
                      
                      
                      14,590,000
                      
                      
                      -Total
                          Longmen Joint Venture
                      
                      $
                      49,767,949
                      
                      $
                      61,064,340
 F-21
 GENERAL
              STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES
              TO
              CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
              30,
              2008
 (UNAUDITED)
 BAOTOU
                        STEEL PIPE JOINT VENTUREJune
                        30, 2008
                      (Unaudited)
                    
                    
                    December
                        31, 2007Loan
                        from China Merchants Bank Co., Ltd., due April 2009,
                      Monthly
                        interest payments, annual interest rate of 12%,
                      Guaranteed
                        by a related party and secured by
                      Equipments.
                    
                    
                    332,373
                    
                    
                    -Total
                        Baotou Steel Pipe Joint Venture
                    
                    $
                    332,373
                    
                    $
                    -
  MAOMING
                        HENGDA STEEL GROUP CO., LTD.June
                        30, 2008
                      (Unaudited)
                    
                    December
                        31, 2007Maoming
                        Hengda Steel Group Co., Ltd.Loan
                        from China Merchants Bank, due September, 2009.
                      Months
                        interest payments, annual interest rate of 7.47%,
                      guaranteed
                        by related parties.
                    
                    1,459,000
                    
                    -Total
                        Maoming Hengda Steel Group Co., Ltd.
                    
                    
                    1,459,000
                    
                    
                    -Grand
                        totals
                    
                    $
                    85,565,694
                    
                    $
                    93,019,608
  The
            Company had various loans from unrelated companies and individuals. The
            balances
            amounted to $72,383,213 and $19,156,070 as of June 30, 2008 and December
            31,
            2007, respectively. Out of the $72,383,213 current period balance, $32,135,464
            carries no interest, and the remaining $40,247,749 carries annual interest
            rates
            ranging from 8% to 12%. All prior year balances of $19,156,070 are subject
            to
            interest rates ranging from 8% to 12%. All short term loans from unrelated
            companies and individuals are unsecured loans.
 
 The
            Company borrowed short term loan from two of its related parties, Tianjin
            Da
            Zhan and Tianjin Heng yin amounting $3,924,710 and $3,384,880 to fund
            the Heng
            Gang acquisition. The loan carries 10% annual interest, and the interest
            starts
            accrual on July 1, 2008.
 
 Short
            term notes payable
 
 Short
            term notes payable are lines of credit extended by the banks. When purchasing
            raw materials, the Company often issues a short term note payable to
            the vendor
            funded with draws on the lines of credit. This short term note payable
            is
            guaranteed by the bank for its complete face value. The banks usually
            do not
            charge interest on these notes but require the Company to deposit a certain
            amount of cash at the bank as a guarantee deposit which is classified
            on the
            balance sheet as restricted cash.
 
 F-22
 
  GENERAL
                STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES
                TO
                CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
                30,
                2008
 (UNAUDITED)
 The
            Company had the following short term notes payable:
  DAQIUZHUANG
                        METALJune
                        30, 2008
                    
                    December
                        31,(Unaudited)
                    
                    
                    2007China
                        Bank, Jing Hai Branch, due March 2008,restricted
                        cash required of 50% of loan amount,guaranteed
                        by the Company
                    
                    $
                    -
                    
                    $
                    1,588,040Agricultural
                        Bank of China, various amounts, due April
                      2009,
                        restricted cash required of 60% of loan amount,guaranteed
                        by Buildings and improvements.
                    
                    
                    1,750,800
                    
                    
                    1,232,100ShangHai
                        PuFa Bank, various amounts,due
                        October 2008,restricted
                        cash required of 50% of loan balance,guaranteed
                        by an unrelated third party
                    
                    
                    5,836,000
                    
                    
                    5,488,120Total
                        Daqiuzhuang Metal
                    
                    $
                    7,586,800
                    
                    $
                    8,308,260
  LONGMEN
                        JOINT VENTUREAgricultural
                        Bank of China, various amounts, due dates
                      ranging
                        between August to December 2008, restricted
                      cash
                        required of 100% of loan amount.
                    
                    
                    12,401,500
                    
                    
                    -China
                        Bank, various amounts, due dates ranging between
                      July
                        to October,2008, restricted cash required of 100% of
                      loan
                        amount.
                    
                    
                    2,188,500
                    
                    
                    -Credit
                        Cooperatives, due August 2008,
                      restricted
                        cash required of 100% of loan amount.
                    
                    
                    1,459,000
                    
                    
                    -ShangHai
                        Pudong Development Bank, various amounts,due
                        dates ranging between September to October 2008,restricted
                        cash required of 60% of loan amount,guaranteed
                        by a related third party and equipment.
                    
                    
                    29,180,000
                    
                    
                    6,855,000China
                        Minsheng Bank, various amounts, due in September
                      2008,
                        restricted cash required of 50% of loan amount,
                      guaranteed
                        by equipment and related third parties.
                    
                    
                    29,180,000
                    
                    
                    -China
                        Minsheng Bank, due dates in August 2008, cash
                      restricted
                        required of 100% of loan amount.
                    
                    
                    7,295,000
                    
                    
                    -Industrial
                        Bank, due dates in October 2008, restricted cash
                      required
                        of 100% of loan amount.
                    
                    
                    2,918,000
                    
                    
                    -Bank
                        of communication, due dates in July 2008,restricted
                        cash required of 40% of loan amount.guaranteed
                        by equipment
                    
                    
                    5,690,100
                    
                    
                    -China
                        Zheshang Bank Co., Ltd, due dates in December 2008,restricted
                        cash required of 100% of loan amount.
                    
                    
                    8,316,300
                    
                    
                    -Huaxia
                        Bank, due dates in April 2008,restricted
                        cash required of 50% of loan amount.guaranteed
                        by equipment.
                    
                    
                    2,918,000
                    
                    
                    -Total
                        Longmen Joint Venture
                    
                    
                    101,546,400
                    
                    
                    6,855,000
  Maoming
                        Hengda Steel Group Co., Ltd.China
                        Merchants Bank, due dates in July 2008,
                      restricted
                        cash required of 100% of loan amount.
                    
                    
                    5,398,300
                    
                    
                    -China
                        Merchants Bank, due dates in July 2008,
                      restricted
                        cash required of 100% of loan amount.
                      guaranteed
                        by Buildings and improvements.
                    
                    
                    20,148,790
                    
                    
                    -ShangHai
                        Pudong Development Bank, due dates in
                      July
                        2008,restricted cash required of 100% of loan
                      amount.
                    
                    
                    10,459,101
                    
                    
                    -ShangHai
                        Pudong Development Bank,due dates
                      ranging
                        between August to September 2008,
                      restricted
                        cash required of 30% of loan amount.
                      guaranteed
                        by Buildings and improvements.
                    
                    
                    10,568,996
                    
                    
                    -Total
                        Maoming Hengda Steel Group Co., Ltd.
                    
                    
                    46,575,187
                    
                    
                    -Grand
                        totals
                    
                    $
                    155,708,387
                    
                    $
                    15,163,260
  Total
            interest expense for the three months ended June 30, 2008 and 2007 for
            the debt
            listed above amounted to $5,710,308 and $1,716,984, respectively; and
            for the
            six months ended June 30, 2008 and 2007, interest expense amounted to
            $8,583,173
            and $2,340,139, respectively.
 
 Capitalized
            interest amounted to $2,775,391 and $0 for the six months ended June
            30, 2008
            and 2007, respectively, and $1,963,886 and $0 for the three months ended
            June
            30, 2008 and 2007, respectively.
 
 **Note
            9 - Customer deposits**
 
 Customer
            deposits represent amounts advanced by customers on product orders. The
            product
            normally is shipped within six months after receipt of the advance payment,
            and
            the related sale is recognized in accordance with the Company’s revenue
            recognition policy. As of June 30, 2008 and December 31, 2007, customer
            deposits
            amounted to $143,166,825 and $47,084,434, including related parties deposits
            $5,690,541, and $9,211,736, respectively.
 
 F-23
 
  GENERAL
                STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES
                TO
                CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
                30,
                2008
 (UNAUDITED)
 **Note
            10 - Deposits due to sales representatives**
 
 Daqiuzhuang
            Metal and one of Longmen Joint Venture’s subsidiaries, Yuxin Trading, entered
            into agreements with various entities to act as the Company’s exclusive sales
            agent in a specified area. These exclusive sales agents must meet certain
            criteria and are required to deposit a certain amount of money with the
            Company.
            In return the sales agents receive exclusive sales rights to a specified
            area
            and discounted prices on products they order. These deposits bear no
            interest
            and are required to be returned to the sales agent once the agreement
            has been
            terminated. The Company had $ 2,181,205 and $3,068,298 in deposits due
            to sales
            representatives outstanding as of June 30, 2008 and December 31, 2007,
            respectively.
 
 **Note
            11 - Investment payable**
 
 In
            June
            2007, Yangpu Investment and the former shareholders of Qiu Steel Investment
            entered into an agreement. Pursuant to this agreement, Yangpu Investment
            received 98.7% of the total equity of Qiu Steel Investment for $19,284,400
            (RMB148,000,000). As of June 30, 2008, Yangpu Investment had payables
            of
            $7,003,200 (RMB48,000,000).
 
 **Note
            12 - Distribution payable to minority shareholder**
 
 Distribution
            payable represents dividends owed to the minority owners of EPID and
            Hualong for
            retained earnings prior to the acquisition date. As of June 30, 2008
            and
            December 31, 2007, Distribution payable amounted to $2,381,458 and $2,820,803,
            respectively.
  **Note
            13 - Convertible notes**
 
 On
            December 13, 2007, the Company entered into a Securities Purchase Agreement
            (the
“Agreement”) with certain institutional investors (the “Buyers”) issuing
            $40,000,000 (“Notes”) and 1,154,958 warrants (the “Warrants”). The warrants can
            be converted to common stock for 5 years through May 13, 2013 for $13.51
            per
            share.
  The
            Notes
            bear initial interest at 3% per annum, which will be increased each year
            as
            specified in the Notes, payable semi-annually in cash or shares of the
            Company’s
            common stock. The Notes have a five year term through December 12, 2012.
            They
            are convertible into shares of the common stock, subject to customary
            anti-dilution adjustments. The initial conversion price is $12.47. The
            Company
            may redeem the Notes at 100% of the principal amount, plus any accrued
            and
            unpaid interest, beginning December 13, 2008, provided the market price
            of the
            common stock is at least 150% of the then applicable conversion price
            for 30
            consecutive trading days prior to the redemption.
 
 The
            Notes
            are secured by a first priority, perfected security interest in certain
            shares
            of common stock of Zuo Sheng Yu, as evidenced by the pledge agreement.
            The Notes
            are subject to events of default customary for convertible securities
            and for a
            secured financing.
 
 In
            connection with this transaction, the Company and the Buyers entered
            into a
            registration rights agreement (the “Registration Rights Agreement”). Pursuant to
            the terms and conditions of the Registration Rights Agreement, the Company
            agreed to register within 60 calendar days common stock issuable to the
            Buyers
            for resale on a registration statement to be effective by 90 calendar
            days or
            120 days if the registration statement is subject to a full review by
            the U.S.
            Securities and Exchange Commission. The Company is required to register
            at least
            120% of the sum of shares issuable upon conversion of the Notes, the
            exercise of
            the Warrants and the payment of interest accrued on the Notes. The registration
            rights granted under the Registration Rights Agreement are subject to
            customary
            exceptions and qualifications and compliance with certain registration
            procedures.
  F-24
 
  GENERAL
                STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES
                TO
                CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
                30,
                2008
 (UNAUDITED)
 In
            addition, certain management members of the Company also entered into
            a lock-up
            agreement with the Company pursuant to which each person agreed not to
            sell any
            personally owned shares one year after the initial effective date of
            the resale
            registration statement described above.
 
 Pursuant
            to the Registration Rights Agreement, the Company was required to file
            the
            registration statement on February 11, 2008. The Company filed the registration
            statement on February 13, 2008, which was two days after the required
            filing
            date. As of the date of this report, the Company reached an agreement
            with all
            note holders to waive the related penalty of $427,000.
 
 Pursuant
            to APB 14, Accounting for Convertible Debt and Debt Issued with Stock
            Purchase
            Warrants, the Company discounted the Notes equal to the fair value of
            the
            warrants. The Notes were further discounted for the fair value of the
            conversion
            option. The combined discount is being amortized to interest expense
            over the
            life of the Notes using the effective interest method.
 
 The
            fair
            value of conversion option and the warrants were calculated using the
            Cox
            Rubenstein Binomial model based on the following variables:
 
 ·
                Expected
                    volatility of 105% ·
                Expected
                    dividend yield of 0% ·
                Risk-free
                    interest rate of 2.46% ·
                Expected
                    lives of five years ·
                Market
                    price at issuance date of $10.43 ·
                Strike
                    price of $12.47 and $13.51, for the conversion option and the
                    warrants,
                    respectively 
 Pursuant
            to SFAS 133 and EITF 00-19, the Company determined that both the warrants
            and
            the conversion option embedded in the Notes meet the definition of a
            derivative
            instrument and must be carried as a liability and marked to market each
            reporting period.
 
 On
            December 13, 2007, the Company recorded $34,719,062 as derivative liability,
            including $9,298,044 for the fair value of the warrants and $25,421,018
            for fair
            value of the conversion option. The initial carrying value of the Notes
            was
            $5,280,938. The financing cost of $3,594,500 was recorded as deferred
            note
            issuance cost and is being amortized to interest expense over the term
            of the
            Notes using the effective interest method.
 
 On
            June
            30, 2008, in accordance with SFAS 133, the fair value of derivative liabilities
            was recalculated and increased by $25,115,869 during the period, including
            $6,696,275 for the increase in fair value of the warrants and $18,419,594
            for
            the increase in fair value of the conversion option. The increase was
            recorded
            as a loss and included in other expense.
 
 As
            of
            June 30, 2008, the balance of derivative liabilities was $53,599,177,
            which
            consisted of $14,334,736 for the warrants and $39,264,441 for the conversion
            option, and the carrying value of the notes was $7,066,600. The effective
            interest charges on notes totaled $928,556 for the three months ended
            June 30,
            2008, $1,732,851 for the six months ended June 30, 2008. As of June 30,
            2008,
            the unamortized financing cost was $5,108,617, including $1,564,500 for
            additional issuance of 150,000 shares of the common stock to the placement
            agent
            in January 2008. Deferred issuance cost was amortized to interest expense
            using
            the effective interest method at $11,535 and $20,429 for the three months
            and
            six months ended June 30, 2008, respectively.
 
 F-25
 
  GENERAL
                STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES
                TO
                CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
                30,
                2008
 (UNAUDITED)
 **Note
            14 - Private offering of redeemable stock**
 
 On
            September 18, 2005, the Company entered into a subscription agreement
            with
            certain investors to sell a total of 1,176,665 shares of common stock
            at $1.50
            per share for gross proceeds of $1,765,000, commissions totaled $158,849,
            leaving net proceeds of $1,606,151. In addition, two warrants are attached
            to
            each share of common stock giving the warrant holders the right to purchase
            2,353,330 shares of common stock. The warrants can be exercised on the
            second
            anniversary of the subscription date at $2.50 per share and through the
            third
            anniversary date at $5.00 per share. At the option of the holder, the
            Company
            may be required to repurchase the 1,176,665 shares of common stock 18
            months
            after the closing date at a per share price of $1.95.
 
 In
            accordance with SFAS 150, The Company recorded the stock as a liability
            due to
            the mandatory redemption provision. The shares were recorded at fair
            value on
            the date of issuance, which was the net cash proceeds, plus any accrued
            interest
            up to March 31, 2007. The difference between the net proceeds, $1,606,151,
            and
            the redemption amount, $2,294,497, totaling $688,346, was accrued and
            amortized
            as interest expense.
 
 As
            of
            December 31, 2007, the put option on all the redeemable shares had expired
            and
            all the shares were reclassified into equity.
 
 **Note
            15 - Supplemental disclosure of cash flow information**
 
 Interest
            paid amounted to $8,687,340 and $2,026,318 for the six months ended June
            30,
            2008 and 2007, respectively, and $5,648,992 and $1,503,011 for the three
            months
            ended June 30, 2008 and 2007, respectively.
 
 Income
            tax payments amounted to $ 5,713,515 and $0 for  the
            six
            months ended June 30, 2008 and 2007, respectively, and $4,608,462 and
            $0 for the
            three months ended June 30, 2008 and 2007, respectively.
 
 On
            March
            1, 2007, 176,665 shares of redeemable stock were converted at $1.95 resulting
            in
            a reclassification of the shares from liabilities to equity.
 
 On
            January 14, 2008 the Company issued 150,000 shares of common stock at
            $10.43 per
            share as additional note issuance cost totaled $1,564,500.
 
 On
            February 5, 2008, the Company issued senior management and directors
            76,600
            shares of common stock at $7.16 per share, as compensation. The shares
            were
            valued at the market price on the grant date. The Company recorded compensation
            expense of $548,456 for the six months ended June 30, 2008.
 
 F-26
 
  GENERAL
                STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES
                TO
                CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
                30,
                2008
 (UNAUDITED)
 On
            April
            14, 2008, the Company, Mr. Zuo Sheng Yu (CEO of the Company) and Mr.
            Zhang Dan
            Li (CEO of Long Men Joint Venture) entered into a compensation agreement
            in
            which Mr. Zuo Sheng Yu agreed to transfer his own 600,000 shares to Mr.
            Zhang
            Dan Li in exchange for 15 years of service in the Company. Pursuant to
            SFAS 123R
            (Share-Based Payment) share-based payments awarded to an employee of
            the
            reporting entity by a related party or other holder of an economic interest
            in
            the entity is treated as compensation as if the shareholder has made
            a capital
            contribution. The shares are valued at $6.91 on grant date for a total
            of
            $4,146,000 and will be amortized over the life agreement. A total of
            $69,100 of
            compensation expense and additional paid in capital has been recorded
            for the
            three and six months ended June 30, 2008.
 
 On
            April
            15, 2008, the Company granted senior management and directors 87,400
            shares of
            common stock at $6.66 per share, as compensation. The shares were valued
            at the
            market price on the date granted. The Company recorded compensation expense
            of
            $582,084 for the six months ended June 30, 2008.
 
 **Note
            16 -** **Taxes**
 
 **Income
            tax**
 
 Beginning
            January 1, 2008, the new Enterprise Income Tax (“EIT”) law has replaced the
            existing laws for Domestic Enterprises (“DES”) and Foreign Invested Enterprises
            (“FIEs”). The new standard EIT rate of 25% has replaced the 33% rate currently
            applicable to both DES and FIEs. The two-year tax exemption and three-year
            50%
            tax reduction tax holiday for production-oriented FIEs will not be eliminated
            for certain entities incorporated on or after March 16, 2007.
 
 Significant
            components of the provision for income taxes on earnings from operation
            for
            three months ended June 30, 2008 and 2007 are as follows:
  June
                      30, 2008
                    (Unaudited)
                  
                  June
                      30, 2007
                    (Unaudited)Current
                  
                  $
                  1,292,890
                  
                  $
                  1,206,612Deferred
                  
                  
                  (206,100
                  )
                  
                  -Total
                      provision for income taxes
                  
                  $
                  1,086,790
                  
                  $
                  1,206,612
 
 Significant
            components of the provision for income taxes on earnings from operation
            for six
            months ended June 30, 2008 and 2007 are as follows:
 
 June
                      30, 2008
                    (Unaudited)
                  
                  June
                      30, 2007
                    (Unaudited)Current
                  
                  $
                  1,959,246
                  
                  $
                  1,333,882Deferred
                  
                  
                  (422,633
                  )
                  
                  -Total
                      provision for income taxes
                  
                  $
                  1,536,613
                  
                  $
                  1,333,882
 
 F-27
 
  GENERAL
                STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES
                TO
                CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
                30,
                2008
 (UNAUDITED)
 The
            principal component of the deferred income tax assets is as
            follows:
 
 June
                      30, 2008
                    (Unaudited)
                  
                  December
                      31, 2007Net
                      operating loss carry-forward
                  
                  $3,440,560
                  
                  $1,599,004Effective
                      tax rate
                  
                  
                  25.00
                  %
                  
                  25.00
                  %Deferred
                      tax asset
                  
                  $
                  860,140
                  
                  $
                  399,751
 
 The
            entire deferred tax asset is from net operating loss generated by one
            of the
            Company’s operating entity, Xi’an Rolling Mill. 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
            following table reconciles the U.S. statutory rates to the Company’s effective
            tax rate:
 
 June
                      30, 2008
                    (Unaudited)
                  
                  June
                      30, 2007
                    (Unaudited)U.S.
                      Statutory rates
                  
                  
                  34.00
                  %
                  
                  34.00
                  %Foreign
                      income not recognized
                    in
                      USA
                  
                  
                  (34.00
                  %)
                  
                  (34.00
                  %)China
                      income taxes
                  
                  
                  25.00
                  %
                  
                  33.00
                  %Tax
                      effect of income not taxable
                    for
                      tax purpose
                  
                  
                  (4.03
                  %)
                  
                  (6.00
                  %)Effect
                      of different tax rate of
                    subsidiaries
                      operating in other
                    jurisdictions
                  
                  
                  (10.32
                  %)
                  
                  -Total
                      provision for income taxes
                  
                  
                  10.65
                  %
                  
                  27.00
                  %
 
 Under
            the
            Income Tax Laws of PRC, the Company’s subsidiary, Daqiuzhuang Metal, is
            generally subject to an income tax at an effective rate of 33% (30% state
            income
            taxes plus 3% local income taxes) 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. The
            Company ’s
            subsidiary, Daqiuzhuang Metal, became a Chinese Sino-foreign joint venture
            at
            the time of the merger on October 14, 2004 and it became eligible for
            the tax
            benefit. Daqiuzhuang Metal is
            located in Tianjin
            Costal Economic Development Zone and under
            the
            Income Tax Laws of Tianjin City of PRC, it i s
            eligible for an income tax rate of 24%. Therefore, Daqiuzhuang
            Metal is
            exempt from income taxes for the years ended December 31, 2005 and 2006
            and is
            entitled to 50% income tax reduction of the special income tax rate of
            24%,
            which is a rate of 12% for the years ended December 31, 2007, 2008 and
            2009.
 
 F-28
 
  GENERAL
                STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES
                TO
                CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
                30,
                2008
 (UNAUDITED)
 The
            Company’s subsidiary, Longmen Joint Venture, is located in the mid-west region
            of China. It qualifies for the “Go-West” tax rebate of 15% tax rate promulgated
            by the government; therefore, income tax is accrued at 15%.
 
 Baotou
            Steel Pipe Joint Venture is located in Inner Mongolia, is subject
            to an income tax at an effective rate of 25%.
 
 Maoming
            Heng Gang Joint Venture is located in Guangdong province, is subject
            to an
            income tax at an effective rate of 25%.
 
 **Value
            added Tax**
 
 Enterprises
            or individuals who sell commodities, engage in repair and maintenance
            or import
            and export goods in the PRC are subject to a value added tax in accordance
            with
            Chinese laws. The value added tax standard rate is 17% of the gross sales
            price.
            A credit is available whereby VAT paid on the purchases of semi-finished
            products or raw materials used in the production of the Company’s finished
            products can be used to offset the VAT due on sales of the finished product.
 
 VAT
            on
            sales and VAT on purchases amounted to $ 173,244,315 and
            $ 135,853,629 for
            the
            six months ended June 30, 2008, $31,034,128 and $17,890,459 for the six
            months
            ended June 30, 2007, respectively. Sales and purchases are recorded net
            of VAT
            collected and paid as the Company acts as an agent for the government.
            VAT taxes
            are not impacted by the income tax holiday.
 
 VAT
            on
            sales and VAT on purchases amounted to $ 102,270,716 and
            $ 69,994,430 for the
            three months ended June 30, 2008, $25,203,377 and $12,315,972 for the
            three
            months ended June 30, 2007, respectively. Sales and purchases are recorded
            net
            of VAT collected and paid as the Company acts as an agent for the government.
            VAT taxes are not impacted by the income tax holiday.
 
 Taxes
            payable consisted of the following:
 
 June
                      30, 2008
                    (Unaudited)
                  
                  December
                      31, 2007VAT
                      taxes payable
                  
                  $
                  26,177,131
                  
                  $
                  20,320,241Income
                      taxes payable
                  
                  
                  3,716,398
                  
                  
                  5,112,876Misc
                      taxes
                  
                  
                  2,394,930
                  
                  
                  2,143,123Totals
                  
                  $
                  32,288,459
                  
                  $
                  27,576,240
  **Note
            17 -** **Earnings per share**
 
 The
            calculation of earnings per share is as follows:
 Three
                      months ended June 30
                  
                  Six
                      months ended June 30,2008
                  
                  2007
                  
                  2008
                  
                  2007Income
                      (Loss) attributable
                    to
                      holders of common
                    shares
                  
                  $
                  (24,271,226
                  )
                  $
                  1,893,301
                  
                  $
                  (22,082,766
                  )
                  $
                  2,368,166Basic
                      weighted average
                    number
                      of common
                    shares
                      outstanding
                  
                  
                  34,928,576
                  
                  
                  31,444,665
                  
                  
                  34,883,740
                  
                  
                  31,444,665Diluted
                      weighted average
                    number
                      of common
                    shares
                      outstanding
                  
                  
                  34,928,576
                  
                  
                  31,444,665
                  
                  
                  34,883,740
                  
                  
                  31,444,665Net
                      income (Loss)per
                    shareBasic
                  
                  $
                  (0.70
                  )
                  $
                  0.06
                  
                  $
                  (0.63
                  )
                  $
                  0.08Diluted
                  
                  $
                  (0.70
                  )
                  $
                  0.06
                  
                  $
                  (0.63
                  )
                  $
                  0.08
 
 F-29
 
  GENERAL
                STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES
                TO
                CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
                30,
                2008
 (UNAUDITED)
 As
            described in Note 1, the Company issued Victory
            New an aggregate of 3,092,899 shares of the Company’s Series A Preferred
            Stock to
            purchase 30% minority ownership of Daqiuzhuang Metal. The preferred stock
            can
            not be converted to common stock. Thus, the 3,092,899 shares of Series
            A
            Preferred Stock have been excluded from the earnings per share calculation.
 
 For
            the
            three and six months ended June 30 ,
            2008,
            warrants and convertible notes were excluded from the diluted loss per
            share due
            to anti-diluted effect.
 
 For
            the
            three and six months ended June 30, 2007, the Company has 1,176,665 shares
            of
            mandatory redeemable shares which are excluded from the calculation of
            basic and
            diluted EPS pursuant to SFAS,128. All outstanding warrants issued in
            connection
            with the redeemable shares were excluded from the diluted earnings per
            share
            calculation as they are anti-dilutive
 
 **Note
            18 -** **Related party balances and transactions**
 
 The
            Company subleased a portion of its land use rights to Tianjin Jing Qiu
            Steel
            Market Company, a related party under common control. The Company’s Chairman,
            CEO and majority shareholder, Yu Zuo Sheng (aka Henry Yu), is the chairman
            and
            the largest shareholder of Jing Qiu Steel Market Company.
 Total
            rental income for the six months ended June 30, 2008 and 2007 was $851,040
            and
            $778,260.
 
 The
            Company’s short term loan of $7,295,000 from Shenzhen Development Bank is
            personally guaranteed by the Company’s Chairman, CEO, and majority shareholder
            Yu Zuo Sheng (aka Henry Yu).
 
 Tianjin
            Dazhan Industry Co., Ltd. (“Dazhan”) and Tianjin Hengying Trading Co., Ltd.
            (“Hengying”) are steel trading companies controlled by the Company’s Chairman,
            CEO and majority shareholder, Yu Zuo Sheng (aka Henry Yu). Dazhan and
            Hengying
            acted as trading agents of the Company to make purchases and sales for
            the
            Company.
 
 For
            the
            six months ended June 30, 2008 and 2007, through Dazhan and Hengying,
            the
            Company purchased total of $54,350,613 and $41,633,447 of material from
            these
            entities, and sold $15,733,297 and $2,184,797 of finished products to
            these
            entities, respectively.
 
 F-30
 
  GENERAL
                STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES
                TO
                CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
                30,
                2008
 (UNAUDITED)
 The
            Longmen Joint Venture did not obtain the VAT invoices from the local
            tax bureau
            until late July 2007. Before obtaining VAT invoices, all the sales and
            purchases
            made by the joint venture were carried out through the Company’s joint venture
            partner, Long Men Group. In addition to the VAT status issue, the Longmen
            Joint
            Venture also made sales through Long Men Group for outstanding sales
            contracts
            signed before June 2007. Also some sales through Long Men Group were
            made due to
            the established market share and its long term relationship with the
            customers.
            All the sales proceeds and purchase payments were recorded as receivables
            from
            or payables to Long Men Group. Total related party sales amounted to
            $222,587,851 for the six months ended June 30, 2008. Total related party
            purchase of goods amounted to $180,617,636 for the six months ended June
            30,
            2008.
 
 All
            transactions with related parties are for normal business activities
            and are
            short term in nature. Settlements for the balances are usually in cash.
            The
            following charts summarize the related party transactions as of the six
            months
            ended June 30, 2008 and the year ended December 31, 2007:
 
 a.
                Accounts
                    receivable -related parties   Name
                      of related parties
                  
                  June
                      30, 2008
                    (Unaudited)
                  
                  December
                      31, 2007Long
                      Men Group
                  
                  
                  37,110,341
                  
                  
                  -Baogang
                      Jian An
                  
                  
                  16,304
                  
                  
                  -Tianjin
                      Jin Qiu Steel Market
                  
                  
                  -
                  
                  
                  565,631Total
                  
                  $
                  37,126,645
                  
                  $
                  565,631
 
 b.
                Other
                    receivables - related parties 
 Name
                      of related parties
                  
                  
                  June
                      30, 2008
                    (Unaudited)
                  
                  
                  December
                      31, 2007Beijing
                      Wendlar
                  
                  $
                  332,506
                  
                  $
                  1,033,713Yang
                      Pu Capital Automobile
                  
                  
                  -
                  
                  
                  616,950De
                      Long Fen Ti
                  
                  
                  41,858
                  
                  
                  137,100Tianjin
                      Jin Qiu Steel Market
                  
                  
                  145,900
                  
                  
                  48,830Yang
                      Pu Sheng Xin
                  
                  
                  -
                  
                  
                  74,113Yang
                      Pu Sheng Hua
                  
                  
                  -
                  
                  
                  2,742$
                  520,264
                  
                  $
                  1,913,448
 
 c.
                Advances
                    on inventory purchases - related parties 
 Name
                      of related parties
                  
                  June
                      30, 2008
                    (Unaudited)
                  
                  December
                      31, 2007Hengying
                  
                  $
                  -
                  
                  $
                  8,014,211Dazhan
                  
                  
                  11,124,977
                  
                  
                  1,929,801Liyuan
                      Ximei
                  
                  
                  1,660,926
                  
                  
                  -Long
                      Men Group
                  
                  
                  6,557,292
                  
                  
                  -$
                  19,343,195
                  
                  $
                  9,944,012
  F-31
 
  GENERAL
                  STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES
                  TO
                  CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
                  30,
                  2008
 (UNAUDITED)
 d.
                Prepaid
                    expenses - related parties 
 The
            Company prepaid rental fee for employee dormitory to a related party,
            Beijing
            Wendlar, a company controlled by Mr. Yu Zuo Sheng (aka Henry Yu). As
            of June 30,
            2008, the Company had a balance of the prepayment of $288,882, in which
            $52,524
            was current and $236,358 was classified as non current.
 
 e.
                Accounts
                    payable due to related parties 
 Name
                      of related parties
                  
                  June
                      30, 2008
                    (Unaudited)
                  
                  December
                      31,
                    2007Long
                      Men Group
                  
                  $
                  -
                  
                  $
                  7,954,189Dazhan
                  
                  
                  21,909
                  
                  
                  4,249,395Tianjin
                      Jin Qiu Steel Market
                  
                  
                  30,993Henan
                      Xinmi Kanghua
                  
                  
                  1,295,291
                  
                  
                  356,567Zhengzhou
                      Shenglong
                  
                  
                  265,357
                  
                  
                  269,917Baotou
                      Shengda Steel Pipe
                  
                  
                  -
                  
                  
                  1,472,670ShanXi
                      Fangxin
                  
                  
                  2,350,401
                  
                  
                  -Baotou
                      Shengda Steel Pipe
                  
                  
                  1,583,215
                  
                  
                  -Jin
                      Ma Coking Company
                  
                  
                  2,690,517
                  
                  
                  -$
                  8,237,683
                  
                  $
                  14,302,738
 
 f.
                Short
                    term loan due to related parties 
 Name
                      of related parties
                  
                  June
                      30, 2008
                    (Unaudited)
                  
                  December
                      31,
                    2007HanCheng
                      TongXing
                  
                  $
                  -
                  
                  $
                  7,317,027Dazhan
                  
                  
                  3,924,710
                  
                  
                  -Hengying
                  
                  
                  3,384,880
                  
                  
                  -7,309,590
                  
                  
                  7,317,027
 
 g.
                Other
                    payables due to related parties 
 Name
                      of related parties
                  
                  
                  June
                      30, 2008
                    (Unaudited)
                  
                  
                  December
                      31, 2007Beijing
                      Wandler
                  
                  $
                  -
                  
                  $
                  34,275Tianjin
                      Jin Qiu Steel Market
                  
                  
                  -
                  
                  
                  1,487,600Hengying
                  
                  
                  913,691
                  
                  
                  563,816Baotou
                      Shengda Steel Pipe
                  
                  
                  34,507
                  
                  
                  31,095Baogang
                      Jian An
                  
                  
                  18,967
                  
                  
                  9,597$
                  967,165
                  
                  $
                  2,126,383
 
 h.
                Customer
                    deposits - related parties  Name
                      of related parties
                  
                  June
                      30, 2008
                    (Unaudited)
                  
                  December
                      31,
                    2007Hengying
                  
                  $
                  5,690,541
                  
                  $
                  6,855,000Haiyan
                  
                  
                  -
                  
                  
                  2,356,736$
                  5,690,541
                  
                  $
                  9,211,736
 
 F-32
  GENERAL
              STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES
              TO
              CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
              30,
              2008
 (UNAUDITED)
 **Note
            19 -** **Business
            combinations**
 
 **a.
            Acquisition of 30% minority interest of Daqiuzhuang Metal**
 
 On
            May
            18, 2007, General Steel entered into a Purchase Agreement with Victory
            New
            Holdings to acquire the remaining 30% interest in Daqiuzhuang Metal.
            General
            Steel agreed to issue Victory New 3,092,899 shares of Series A Preferred
            Stock
            which have a voting power of 30% of the combined voting power of the
            Company’s
            common and preferred stock for the life of the Company. As a result of
            the
            acquisition, the Company increased its equity interest in Daqiuzhuang
            Metal from
            70% to 100%. On May 23, 2007, the Company transferred its 30% interest
            in
            Daqiuzhuang Metal to General Steel Investment (BVI). As a result of this
            transfer, General Steel Investment (BVI) holds 100% of equity interest
            of
            Daqiuzhuang Metal.
 
 Victory
            New Holdings Ltd. was a newly formed entity under the control of the
            Company’s
            Chairman, CEO and majority shareholder Zuosheng Yu (aka Henry Yu). Victory
            New
            was legally owned by Mrs. Yang Baoyin, Mr. Yu’s mother. Therefore, General Steel
            and Victory New were under common control. According to SFAS
            141,
            "Business Combinations", a cquisition
            of minority interests from entities under common control should be accounted
            for
            using the purchase method. The
            Company engaged a third party to determine the fair value of
            transaction ,
            which
            was $8,374,000. The premium over book value of $2,188,203 was accounted
            for as
            dividend distribution to the shareholder of Victory New.
 
 **b.
            Joint venture agreement with Baotou Steel**
 
 On
            April
            27, 2007, Daqiuzhuang Metal, a wholly owned subsidiary of the Company,
            and
            Baotou Iron and Steel Group Co., Ltd. (“Baotou Steel”) entered into an Amended
            and Restated Joint Venture Agreement (the “Amended agreement”), amending the
            Joint Venture Agreement entered into on September 28, 2005 (“Original Joint
            Venture Agreement”). The Amended agreement increased Daqiuzhuang Metal's
            ownership interest in the Joint Venture from 20% to 80%.
 
 The
            Amended agreement states that the initial capital of the joint venture
            company
            will be approximately $6,400,000, equal to the registered capital. Baotou
            Steel
            will contribute RMB10,000,000, or approximately $1,270,000, and Daqiuzhuang
            Metal will contribute RMB40,000,000, or approximately $5,130,000. Daqiuzhuang
            Metal and Baotou Steel each contributed 30% of their portion of the registered
            capital to commence the business. This joint venture obtained its business
            license on  May
            25,
            2007. Operations began in the third quarter of 2007.
 
 The
            joint
            venture’s name is Baotou Steel - General Steel Special Steel Pipe Joint Venture
            Company Limited, a limited liability company formed under the laws of
            the PRC.
            Baotou Steel Pipe Joint Venture is located at Kundulun District, Baotou
            city,
            Inner Mongolia, China. It produces and sells spiral-weld steel
            pipes.
 
 F-33
 
  GENERAL
                STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES
                TO
                CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
                30,
                2008
 (UNAUDITED)
 The
            ownership is as follows:
 %
                      OwnershipBaotou
                      Iron and Steel (Group) Co., Ltd.
                  20%Daqiuzhuang
                      Metal Sheet Co., Ltd
                  
                  80%
 
 **c.
            Shaanxi Longmen Iron and Steel Co., Ltd** **Joint Venture**
 
 On
            June
            15, 2007, General Steel Holdings Inc. and Shaanxi Longmen Iron and Steel
            (Group)
            Co., Ltd. (”Longmen Group”) signed an agreement to form Shaanxi Longmen Iron and
            Steel Co., Ltd. (“Longmen Joint Venture”). Longmen Group contributed the
            operating facility and corresponding debt with an appraised net asset
            value of
            RMB200 million. General Steel Holdings, Inc. contributed RMB300 million
            to the
            Longmen Joint Venture through its subsidiaries Daqiuzhuang Metal and
            Qiu Steel
            Investment. Daqiuzhuang Metal and Qiu Steel Investment contributed
            RMB160,000,000 and RMB140,000,000 in cash, respectively, and hold 32%
            and 28%
            ownership, respectively, or 60% collectively. Longmen Group owns 40%
            of the
            Longmen Joint Venture. The Longmen Joint Venture obtained the business
            license
            on June 22, 2007.
 
 Assets
            acquired and debts assumed in the transaction are listed as below:
 
 Item
                  
                  Fair
                      Value
                  
                  Assumed
                      by
                    Longmen
                      Joint VentureCurrent
                      assets
                  
                  $
                  317,744,960
                  
                  $
                  98,530,222Property,
                      plant, and equipment
                  
                  
                  186,915,879
                  
                  
                  164,811,374Intangible
                      assets
                  
                  
                  20,128,972
                  
                  
                  19,543,875Other
                      assets
                  
                  
                  99,604,841
                  
                  
                  -Total
                      assets
                  
                  
                  624,394,652
                  
                  
                  282,885,471Current
                      liability
                  
                  
                  473,168,746
                  
                  
                  223,776,221Long
                      term liability
                  
                  
                  38,246,111
                  
                  
                  32,809,250Total
                      liabilities
                  
                  
                  511,414,857
                  
                  
                  256,585,471Net
                      assets
                  
                  $
                  112,979,795
                  
                  $
                  26,300,000
 
 On
            September 24, 2007, Longmen Joint Venture acquired 74.92% ownership interest
            in
            Environmental Protection Industry Development Co., Ltd. (“EPID)” for RMB18.0
            million or $2.4 million and a 36% equity interest in Hualong Fire Retardant
            Materials Co., Ltd., (“Hualong”) for RMB3.3 million or $0.4 million. The parties
            agreed to make the effective date of the transaction July 1, 2007. Due
            to EPID,
            Hualong, and Longmen Joint Venture being under common management control,
            this
            transaction was recorded at the book value as of the effective date.
 
 Assets
            acquired and debts assumed in the transaction are listed as below:
 
 EPID
                  
                  
                  Fair
                      Value
                  
                  
                  Assumed
                      by
                    Longmen
                      Joint
                    Venture
                      (74.92%)Current
                      assets
                  
                  $
                  2,609,601
                  
                  $
                  1,955,113Property,
                      plant, and equipment
                  
                  
                  5,619,646
                  
                  
                  4,210,239Total
                      assets
                  
                  
                  8,229,247
                  
                  
                  6,165,352Total
                      liabilities
                  
                  
                  5,055,550
                  
                  
                  3,787,618Net
                      assets
                  
                  $
                  3,173,697
                  
                  $
                  2,377,734
  F-34
 GENERAL
              STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES
              TO
              CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
              30,
              2008
 (UNAUDITED)
 Hualong
                  
                  Fair
                      Value
                  
                  Assumed
                      by
                    Longmen
                      Joint
                    Venture
                      (36%)Current
                      assets
                  
                  $
                  3,905,068
                  
                  $
                  1,405,824Property,
                      plant, and equipment
                  
                  
                  1,653,693
                  
                  
                  595,330Total
                      assets
                  
                  
                  5,558,761
                  
                  
                  2,001,154Total
                      liabilities
                  
                  
                  4,357,736
                  
                  
                  1,568,785Net
                      assets
                  
                  $
                  1,201,025
                  
                  $
                  432,369
  On
            January 14, 2008, the Company through Longmen Joint Venture, completed
            its
            acquisition of a controlling interest in Hancheng Tongxing Metallurgy
            Co., Ltd.
            (“Tongxing”). Tongxing contributed its land use right of 217,487 square meters
            (approximately 53 acres) with an the appraised value of approximately
            $4.1
            million (RMB30,227,333). Pursuant to the agreement, the land will be
            converted
            into shares valued at approximately $3.1 million (RMB22,744,419), providing
            the
            Joint Venture stake of 22.76% ownership in Tongxing and making it Tongxing’s
            largest and controlling shareholder. The parties agreed to make the effective
            date of the transaction January 1, 2008. The acquisition is accounted
            for as
            acquisition under common control.
 
 Tongxing
                  
                  Fair
                      Value
                  
                  Assumed
                        byLongmen Joint Venture (22.76%)Current
                      assets
                  
                  $
                  55,504,572
                  
                  $
                  12,632,840Non
                      current assets
                  
                  
                  8,088,884
                  
                  
                  1,841,030Total
                      assets
                  
                  
                  63,593,456
                  
                  
                  14,473,870Total
                      liabilities
                  
                  
                  50,782,229
                  
                  
                  11,558,035Net
                      assets
                  
                  $
                  12,811,227
                  
                  $
                  2,915,835
 
 **d.
            Pro Forma**
 
 The
            following unaudited pro forma condensed income statements for the years
            ended
            June 30, 2007 was prepared under generally accepted accounting principles
            as if
            the Longmen Joint Venture transactions had occurred on January 1, 2007.
            The pro
            forma information may not be indicative of the results that would have
            occurred
            if the acquisition had been in effect from and on the dates indicated
            or which
            may be obtained in the future.
 
 F-35
 
  GENERAL
                STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES
                TO
                CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
                30,
                2008
 (UNAUDITED)
 Pro
            Forma
            Condensed Income Statements:
 
 
 For
                          the six monthsendedJune 30, 2007(In
                      Million $)Sales
                  
                  $
                  482.49Cost
                      of sales
                  
                  
                  430.34Gross
                      Profit
                  
                  
                  52.15SG&A
                      expenses
                  
                  
                  18.59Other
                      expense
                  
                  
                  13.23Income
                      before income tax and minority interest
                  
                  
                  20.33Income
                      tax
                  
                  
                  3.30Net
                      income before minority interest
                  
                  
                  17.03Minority
                      interest
                  
                  
                  0.99Net
                      income
                  
                  $
                  16.04
 
 **e,
            Acquisition of Hengda Steel Group**
 
 On
            June
            25, 2008, The Company through Qiu Steel Investment entered into equity
            purchase
            agreement with the shareholders of Henggang to
            acquire 99% equity of Henggang. The total purchase price for the acquisition
            is
            $7.3 million (RMB 50 million). The fair value of Henggang was
            $10.1 million (RMB 69 million) as of June 30, 2008. Pursuant to SFAS
            141,
            Business Combinations, the excess of total fair value acquired over purchase
            price should be allocated as a pro rata reduction of non-current assets.
            Subsequently, the Company recorded the difference as a reduction of fixed
            assets
            acquired.
 
 The
            joint
            venture’s name is Maoming Heng Da Steel Group Co. Ltd., a company formed under
            the laws of the PRC. It is located in Maoming city, Guangdong province
            in China.
            It produces and sells high speed wire.
 
 Henggang
                  
                  Fair
                      Value
                  
                  Assumed
                        byThe CompanyCurrent
                      assets
                  
                  $
                  45,314,444
                  
                  $
                  44,861,300Non
                      current assets
                  
                  
                  81,780,107
                  
                  
                  78,290,811Total
                      assets
                  
                  
                  127,094,551
                  
                  
                  123,152,111Total
                      liabilities
                  
                  
                  117,027,385
                  
                  
                  115,857,111Net
                      assets
                  
                  $
                  10,067,166
                  
                  $
                  7,295,000
 
 F-36
 
  GENERAL
                STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES
                TO
                CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
                30,
                2008
 (UNAUDITED)
 The
            financial data of Hanggang as of June 30, 2008 is included in the Company’s
            consolidated financial statements.
 
 **Note
            20 - Shareholder’s equity**
 
 On
            February 12, 2007, the Company issued to Aurelius Consulting Group, Inc.
            (also
            known as RedChip Companies, Inc.) 18,000 shares of common stock in the
            amount of
            $23,742 as a portion of its compensation for investor relations services
            rendered. Those shares were valued at the market price at the date of
            the
            agreement.
 
 In
            2007,
            as discussed in Note 13, 1,176,665 shares of redeemable stock were converted
            at
            $1.95 resulting reclassification from liabilities to equity.
 
 2,120,000
            warrants were converted to common stock at $2.50 per share in September,
            2007
            for $5,300,000 in cash.
  On
            October 1, 2007, the Company issued senior management and directors 70,100
            shares of common stock at $8.16 per share, as compensation. The shares
            were
            valued at the market price on the date granted. The Company recorded
            compensation expense of $572,016 for the year ended December 31,
            2007.
 
 On
            January 14, 2008 the Company issued 150,000 shares of common stock at
            $10.43 per
            share as additional note issuance cost totaled $1,564,500. The shares
            price is
            determined as the market price on the date granted.
 
 On
            February 5, 2008, the Company issued senior management and directors
            76,600
            shares of common stock at $7.16 per share, as compensation. The shares
            were
            valued at the market price on the date granted. The Company recorded
            compensation expense of $548,456 for the six months ended June 30,
            2008.
 
 On
            April
            14, 2008, the Company, Mr. Zuo Sheng Yu (CEO of the Company) and Mr.
            Zhang Dan
            Li (CEO of Long Men Joint Venture) entered into a compensation agreement
            in
            which Mr. Zuo Sheng Yu agreed to transfer his own 600,000 shares to Mr.
            Zhang
            Dan Li in exchange for 15 years of service in the Company. Pursuant to
            SFAS 123R
            (Share-Based Payment) share-based payments awarded to an employee of
            the
            reporting entity by a related party or other holder of an economic interest
            in
            the entity is treated as compensation as if the shareholder has made
            a capital
            contribution. The shares are valued at $6.91 on grant date for a total
            of
            $4,146,000 and will be amortized over the life agreement. A total of
            $69,100 of
            compensation expense and additional paid in capital has been recorded
            for the
            three and six months ended June 30, 2008.
 
 On
            April
            15, 2008, the Company granted senior management and directors 87,400
            shares of
            common stock at $6.66 per share, as compensation. The shares were valued
            at the
            market price on the date granted. The Company recorded compensation expense
            of
            $582,084 for the six months ended June 30, 2008.
 
 F-37
 
  GENERAL
                STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES
                TO
                CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
                30,
                2008
 (UNAUDITED)
 Warrants:
 As
            discussed in Note 13 and 14, the Company has the following warrants
            outstanding:
 
 Outstanding
                      as of January 1, 2007
                  
                  
                  2,353,334Granted
                  
                  
                  -Forfeited
                  
                  
                  -Exercised
                  
                  
                  -Outstanding
                      as of June 30, 2007
                  
                  
                  2,353,334Granted
                  
                  
                  1,154,958Forfeited
                  
                  
                  -Exercised
                  
                  
                  (2,120,000
                  )Outstanding
                      as of December 31, 2007
                  
                  
                  1,388,292Granted
                  
                  
                  -Forfeited
                  
                  
                  -ExercisedOutstanding
                      as of June 30, 2008
                  
                  
                  1,388,292
 
 Outstanding
                      Warrants
                  
                  Exercisable
                      WarrantsExercise
                      Price
                  
                  Number
                  
                  Average
                      Remaining Contractual Life
                  
                  Average
                      Exercise Price
                  
                  Number
                  
                  Average
                      Remaining Contractual Life$5.00
                  
                  
                  233,334
                  
                  
                  0.17
                  
                  $
                  5.00
                  
                  
                  233,334
                  
                  
                  0.17$13.51
                  
                  
                  1,154,958
                  
                  
                  4.87
                  
                  $
                  13.51
                  
                  
                  1,154,958
                  
                  
                  4.87Total
                  
                  
                  1,388,292
                  
                  
                  4.08
                  
                  
                  
                  
                  
                  1,388,292
                  
                  
                  4.08
 
 **Note
            21 - Retirement plan**
 
 Regulations
            in the People’s Republic of China require the Company to contribute to a defined
            contribution retirement plan for all employees. All Joint Venture employees
            are
            entitled to a retirement pension amount calculated based upon their salary
            at
            their date of retirement and their length of service in accordance with
            a
            government managed pension plan. The PRC government is responsible for
            the
            pension liability to the retired staff. It was the first year the Company
            was
            required to make contributions to the state retirement plan. The Company
            is
            required to contribute 20% of the employees’ monthly salary. Employees are
            required to contribute 7% of their salary to the plan. Total pension
            expense
            incurred by the Company amounted to $1,331,057 and $ 266,509 for the
            six months
            ended June 30, 2008 and 2007.
 
 F-38
 
  GENERAL
                STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES
                TO
                CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
                30,
                2008
 (UNAUDITED)
 **Note
            22 - 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 t hese
            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. For
            the
            six months ended June 30, 2008 and
            2007,
            the Company transferred $648,363 and $0 to this reserve. 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
            23 - Commitment and contingencies**
 
 The
            Company is obligated to contribute $5,130,000 (RMB40,000,000), as registered
            capital to Baotou Steel Pipe Joint Venture. The Company contributed
            approximately $1,734,200 through December 31, 2007, and the balance will
            be
            contributed in 2008, from the operating cash flow of Daqiuzhuang
            Metal.
 
 Daqiuzhuang
            Metal provides dormitory facilities for its employees under a 10 year
            rental
            contract. The agreement began January 2006 and required full prepayment
            for the
            10 year period totaling $466,200.
 Total
            rental expense for the six months ended June 30, 2008 and 2007 amounted
            to
            25,531 and $22,348.
 
 Daqiuzhuang
            Metal rented land for 50 years starting September 2005. The agreement
            called for
            Daqiuzhuang Metal to pay the first three years’ rent payments upon signing the
            agreement. The balance due for the remaining 47 years payment is due
            in
            September 2008, after the lessor has assisted Daqiuzhuang Metal in obtaining
            the
            appropriate land use rights. Total amount of the rent over the 50 years
            period
            is approximately $1,044,728 (or RMB8,067,400).
 
 As
            of
            June 30, 2008, total future minimum lease payments for the unpaid portion
            under
            an operating lease were as follows:
 
 Year
                      ended December 31,
                  
                  Amount2008
                  
                  
                  424,909Thereafter
                  
                  $
                  -
 
 Total
            rental expense of the land use right for the six months ended June 30,
            2008 and
            2007, amounted to $11,443 and $10,464, respectively, and total rental
            expense
            amounted to $5,805 and $5,260 for the three months ended June 30, 2008
            and 2007,
            respectively.
  F-39
 **ITEM
            2. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
            OF
            OPERATIONS**




**Forward-Looking
      Statements:**





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





**Company
      Overview**





General
      Steel Holdings, Inc. (“General Steel”), headquartered in Beijing China, operates
      a diverse portfolio of Chinese steel companies. Our companies serve various
      industries and produce a variety of steel products including: reinforced bars
      (rebar), hot-rolled carbon and silicon sheets , spiral-weld
      pipes and high-speed wire. Our aggregate production capacity of steel products
      is 4.8 million 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 are an overall
      driver for all our products.





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





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





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





We
      presently have controlling interest in four steel subsidiary
      companies:





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


1


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


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


•
Maoming
      Hengda Steel Group Limited (Maoming)





**Steel
      Operating Companies**





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





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





Daqiuzhuang
      Metal has ten steel sheet production lines capable of processing approximately
      400,000 tons of 0.75-2.0 mm hot-rolled carbon steel sheets per year. Products
      are sold through a nation-wide network of 35 distributors and 3 regional sales
      offices.





Daqiuzhuang
      Metal uses a traditional rolling mill production sequence, such as heating,
      rolling, cutting, annealing, and flattening to process and cut coil segments
      into steel sheets. The sheet sizes are approximately 2,000 mm (length) x 1,000
      mm (width) x 0.75 to 2.0 mm (thickness). Limited size adjustments can be made
      to
      meet order requirements. Products sell under the registered “Qiu Steel” brand
      name.





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





On
      April
      27, 2007, Daqiuzhuang Metal and Baotou Iron and Steel Group Co., Ltd. ("Baotou
      Steel") entered into an Amended and Restated Joint Venture Agreement (the
      "Agreement"), amending the Joint Venture Agreement entered into on September
      28,
      2005 ("Original Joint Venture Agreement"). The Amended and Restated Joint
      Venture Agreement increased Daqiuzhuang Metal's ownership interest in the Joint
      Venture to 80%. The joint venture company’s name is Baotou Steel - General Steel
      Special Steel Pipe Joint Venture Company Limited (“Baotou Steel Pipe Joint
      Venture”). Baotou Steel is required to contribute RMB 10,000,000, or
      approximately $1,270,000 taking a 20% ownership interest in the Baotou Steel
      Pipe Joint Venture. Daqiuzhuang Metal is required to contribute RMB 40,000,000,
      or approximately $5,130,000 taking an 80% ownership interest in the Baotou
      Steel
      Pipe Joint Venture.





We
      have
      invested $1.56 million cash into this joint venture with the rest of the
      required registered capital to be invested within two years. The remainder
      of
      the investment will come from the operating cash flow from Daqiuzhuang
      Metal.





Baotou
      Steel Pipe Joint Venture received its business license approval on May 25,
      2007.
      It has four production lines capable of producing 100,000 tons of double
      spiral-weld pipes. These pipes are used in the energy sector to transport
      natural gas, oil and steam. Pipes produced at the mill have a diameter ranging
      from 219-1240 mm; a wall thickness ranging from 6-13 mm; and a length ranging
      from 6-12 m. Final production capacity at the mill will reach 600,000 tons
      in
      2009. Additional products may also be added. Presently, Baotou Steel Pipe Joint
      Venture sells its products using an internal sales force to customers in the
      Inner Mongolia Autonomous Region and the northwest region of China.





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





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


2





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





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





Long
      Steel Group operates as a fully-integrated steel production facility, which
      means it is capable of taking iron-ore and other raw materials, processing
      them
      into crude steel and then processing the crude steel into finished steel
      products. Less than 10% of steel companies in China have fully-integrated steel
      production capacity.





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


•
Shaanxi
      Longmen Iron and Steel Group Co., Ltd., (“Base Steel Operations”): Includes 8
      blast furnaces (total volume of 1749 cubic meters), 4 converters (total load
      of
      150 tons) and 1 continuous casting mill;


•
Shaanxi
      Longmen Iron and Steel Group Co., Ltd., Xi’an Rolling Mill: Annual capacity is
      700,000 tons of rebar - includes 1 semi-continuous mill line;


•
Shaanxi
      Longmen Iron and Steel Group Co., Ltd., Mulonggou Mining Co.: An iron-ore mine
      with 150,000 tons annual capacity;


•
Shaanxi
      Longmen Iron and Steel Group Co., Ltd., Changlong Transportation Co: A
      comprehensive transportation company combining railroad transportation, loading
      and discharging, maintenance as well as finished oil products and components
      -
      daily throughput capacity exceeds 5000 tons;


•
Shaanxi
      Longmen Iron and Steel Group Co., Ltd., Hancheng Yulong Hotel: A 125 room hotel
      and recreation complex catering to the regional construction and steel support
      industries;


•
Shaanxi
      Yuxin Commercial Trading Co., Ltd.; and


•
Shaanxi
      Yuteng Commercial Trading Co., Ltd.





Longmen
      Joint Venture employs approximately 6,000 full-time and 2,000 part-time
      workers.





The
      annual capacity at Longmen Joint Venture is 2.5 million tons of crude steel.
      It
      is the largest steel producer in Shaanxi province. Approximately 94% of its
      total production is devoted to reinforced bar steel (rebar - a commodity grade
      steel product used to reinforce the concrete), with the remainder being
      roundbar, wire rod and related products. These products are primarily used
      in
      building and infrastructure construction.





We
      are
      currently building 2 new blast furnaces and supporting facilities. The new
      blast
      furnaces each will have a volume of 1,280 cubic meters. Upon completion the
      blast furnaces will double our pig iron producing capacity from 2 million tons
      to 4 million tons annually. This will allow our crude steel production to
      increase from 2.5 million tons to 4 million tons annually. We anticipate the
      new
      furnaces will be online in the fourth quarter of this year.





In
      addition to increased output, the new blast furnaces will create greater
      production efficiencies through reduced input costs and energy
      savings





Longmen
      Joint Venture’s products are categorized within the steel industry as “longs”
(referencing their shape). Rebar is generally considered a regional product
      because its size, weight and dimension make it ill-suited for cost-effective
      long-haul ground transportation. By our estimates, the provincial market demand
      for rebar is 6 - 8 million tons. Slightly more than half of the province demand
      radiates from Xi’an, the province capital, located 180 km from the Longmen Joint
      Venture main site. We estimate in Xi’an we have a 72% market
      share.


3





An
      established regional network of 24 agents and 2 sales offices sell the Longemn
      Joint Venture’s products. All products sell under the registered brand name of
“Yulong” which enjoys strong regional recognition and awareness. Rebar and
      billet products carry ISO 9001 and 9002 certification and many other products
      have won national quality awards. Products produced at the facility have been
      used in the construction of the Yangtze River Three Gorges Dam, Xi’an
      International Airport, the Xi Han, Xi Tong and Xi Da provincial expressways,
      and
      are currently being used in the construction of the Xi’an city subway
      system.





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





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





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





On
      January 11, 2008, Longmen Joint Venture completed its acquisition of a
      controlling interest in Hancheng Tongxing Metallurgy Co., Ltd. (“Tongxing”).
      Tongxing contributed its land use right of 217,487 square meters (approximately
      53 acres) with an appraised value of approximately $4.1 million (RMB
      30,227,333). Pursuant to the agreement, the land will be converted into shares
      valued at approximately $3.1 million (RMB 22,744,419), providing the Joint
      Venture a stake of 22.76% ownership in Tongxing and making it Tongxing’s largest
      and controlling shareholder. Tongxing has two core operating areas: coking
      coal
      production and rebar processing. Its coking coal operations have an annual
      production capacity of 250,000 tons. Its rebar processing facility has an
      annualized rolling capacity of 300,000 tons.





***•
      Maoming Hengda Steel Group Limited (Maoming)***





On
      June
      25, 2008, through our subsidiary Qiu Steel Investment, we acquired 99% of
      Maoming Hengda Steel Group, Limited (“Maoming”) for RMB 50 million
      (approximately USD 7.3 million). Maoming’s core business is the production of
      high-speed wire and rebar, products used in the construction industry. Located
      on 140 hectares (approximately 346 acres) in Maoming city, Guangdong province,
      the facility has two production lines capable of producing 1.8 million tons
      of
      5.5mm to 16mm diameter high-speed wire and 12mm to 38mm diameter rebar each
      year. The products are sold through 9 distributors targeting customers in
      Guangxi province and the western region of Guangdong province.





We
      paid
      $7.3 million (RMB 50 million) for the facility. The facility had been operating
      at approximately 10% of capacity due to, we believe, a redirected corporate
      focus of the previous owners.


4


**Operating
      Information Summary by Subsidiaries**





Daqiuzhuang Metal
            
            Baotou Steel Pipe
              Joint Venture
            
            Longmen Joint
              Venture
            
            MaomingAnnual
                Production Capacity (ton)
            
            400,000
            
            100,000
            
            2.5
                million
            
            1.8
                millionMain
                Products
            
            Carbon/Silicon
                Sheet
            
            Spiral-weld
                pipe
            
            Rebar
            
            High-speed
                wireMain
                Application
            
            Light
                Agricultural Vehicles
            
            Energy
                transport
            
            Infrastructure
                and Construction
            
            Infrastructure
                and Construction





**Stock
      listing**





We
      obtained listing approval from American Stock Exchange (the “AMEX”) on September
      28, 2007. The stock officially started to trade on AMEX on October 3, 2007
      under
      the ticker symbol “GSI”. On March 6, 2008, we migrated from the AMEX to the NYSE
      Arca and officially started to trade under the same ticker symbol
“GSI”.





On
      July
      25, 2008 we received authorization to list our common stock on the NYSE. On
      August 8, 2008, we officially migrated from the NYSE Arca to the NYSE and
      officially started to trade under the same ticker symbol “GSI”.





**Factors
      affecting our operating results**




Demand
      for our products





Overall,
      domestic economic growth is an important demand driver for our products.
      According to estimates by various international sources, China’s economy will
      grow by approximately 10% in 2008. Industry demand drivers for our products
      include construction and infrastructure growth, rural income growth and energy
      demand.





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





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


5


At
      Baotou
      Steel Pipe Joint Venture, the need to transport oil and steam drives demand
      for
      spiral-weld steel pipe. The West-East pipeline that will bring oil and natural
      gas from the Xinjiang Uyghur Autonomous Region to large eastern coastal cities
      will be the largest single demand driver for our pipes. This pipeline starts
      in
      China’s far western Xinjiang Uyghur Autonomous Region and stretches 4000 km
      through ten regions, provinces and municipalities before it ends in Zhejiang
      province. Construction on the pipeline commenced in the first quarter of 2008.
      Lesser demand is fueled by smaller pipeline projects and municipal energy
      infrastructure projects.





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





Supply
      of
      raw materials





Iron-ore


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





Longmen
      Joint Venture produces 2.5 million tons of our aggregate 4.8 million ton annual
      production. At Longmen Joint Venture, approximately 90% of the production costs
      are attributable to the purchase of raw materials, with iron-ore being the
      largest component of the purchase.





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





We
      currently source approximately 15% of our iron-ore from the Mulonggou and
      Daxigou mines, 70%-75% from domestic mines and only 10-15% of our iron-ore
      from
      imports. The iron-ore from the Mulonggou and Daxigou mines is below the market
      price as a part of the Longmen Joint Venture agreement. In 2008, we aim to
      increase the percentage of iron-ore sourced from Mulonggou and Daxigou mines
      from approximately 15% to 30%. We anticipate this will increase our gross
      margin. We believe gaining greater direct control over our key raw material
      supply is important for margin and secured source protection.





International
      iron-ore contract price went up 65% in the middle of the first quarter of this
      year. This international contract rate is available only to large-scale
      purchasers, of which we are not yet one. Our Longmen facility pays spot price
      for iron ore which went up by approximately 10% in the second quarter of this
      year. The increase also put some pressure on our gross margin. While we are
      the
      largest integrated producer of steel in the region and have a greater ability
      than non-integrated producers to pass higher production cost on to our
      customers, there exists a lag time between the time when the production cost
      goes up and the time when the selling price can be raised to cover the cost.
      This is the reason we were unable to immediately pass the costs on. The selling
      price has already caught up in the second quarter.


6


Coke


After
      iron-ore, coke is our second most largely consumed raw material. It takes
      approximately 550 kg to 600 kg of coke to make 1 ton of pig-iron. Throughout
      China, the price of coke has risen sharply since the beginning of the year,
      due
      largely to increasing energy demands and the government’s closure of many small
      coal mines. The chart below shows the development of our coke prices in the
      first half of 2008.











Our
      Longmen facility has the benefit of being located in the center of China’s coal
      belt. All coke used at Longmen Joint Venture is sourced locally from the town
      of
      Hancheng, the town where Longmen Joint Venture is located. This strategic
      location in the center of China’s coal belt ensures dependable supply and
      minimum transportation costs for this key raw material.





Industry
      consolidation





In
      2007,
      the government held firm on its resolve to consolidate the highly fragmented
      domestic steel industry through coerced mergers and heightened operating
      requirements. In November 2007, the National Development and Reform Commission
      (NDRC), the nation’s top economic planner, reported that to date 29.4 million
      tons of outdated iron smelting capacity and 15.21 million tons of outdated
      steel
      smelting capacity had been eliminated. It also announced later
      obligation letter with 18 provinces, autonomous regions and municipalities
      to eliminate 49.31 million tons of outdated iron smelting capacity and 36.1
      million tons of outdated steel smelting capacity. The obligation letters
      involved 573 enterprises. It is the government’s goal to consolidate 50% of
      domestic production among the top 10 steel companies by 2010 and 70% by
      2020.





We
      believe that the government will continue to strengthen its industry
      consolidation effort. As excess capacity from weaker market players is removed,
      the eliminated capacity will be reassigned to steel companies which have gained
      government approval for expansion.





Environmental
      controls for the Olympic Games





This
      summer, Beijing is hosting the Olympic and Paralympic Games. In an effort to
      improve the air quality in and around Beijing, Interfax China reported that
      Hebei Development and Reform Commission planned to suspend production at 42
      polluting enterprises in the province, including small scale steel mills. The
      closure period would be between July 17 and September 20, 2008. The enterprises
      are scattered through seven cities surrounding Beijing: Shijiazhuang, Chengde,
      Zhangjiakou, Qinhuangdao, Tangshan, Langfang and Baoding. Our facilities are
      not
      included in this list. Based on currently available information, we have not
      experienced any disruption in production capabilities at any of our facilities.


7


Sichuan
      Earthquake





On
      May
      12, 2008, a 7.8 magnitude earthquake hit Sichuan province causing large scale
      destruction and personal injury. Fortunately, none of our operating facilities
      were physically damaged by this earthquake. We have not experienced any
      significant impact on our sales and procurement plans caused by this event.
      As
      recovery in Sichuan province continues and moves into phases of rebuilding
      and
      reconstruction, we will monitor closely the market conditions to be alert to
      emerging opportunities for sales.





**Operating
      Results**





We
      purchased Maoming on June 25, 2008, with only four business days remaining
      in
      the second quarter. There is no impact from Maoming on our Income Statement
      for
      this period.





***Sales
      Revenue***





***Three
      months ended June 30, 2008 compared with three months ended June 30,
      2007***





Overall,
      net sales for the three months ended June 30, 2008 were approximately $387
      million compared to $121.3 million in the same period of 2007, an increase
      of
      219%. The increase in net sales is mostly attributed to our Longmen Joint
      Venture which started its operations on June 1, 2007. The second quarter of
      2008
      reflects a full three months of operations whereas the second quarter results
      for 2007 reflect only one month of Longmen Joint Venture
      operations.





At
      Daqiuzhuang Metal, shipments for the three months ended June 30, 2008 decreased
      32% to 66,148 tons from 97,381 tons in the same period of 2007, due to the
      change in product mix. In the three months of 2008, we shifted our product
      mix
      to include more silicon sheets and thinner hot rolled carbon sheets which have
      a
      longer processing time than other carbon sheets. The average selling price
      per
      ton was $731 for the second quarter of 2008 as compared to $447 for the second
      quarter of 2007. We increased selling price to pass on higher input costs to
      our
      customers. Changes in product mix toward silicon sheets and thinner carbon
      sheets also have a higher selling price than other carbon sheets.





At
      Longmen Joint Venture, shipments for the three months ended June 30, 2008 were
      517,200. Shipments for the one month recorded in the three month period ended
      June 30, 2007 were 207,573 tons. Average selling price per ton for the three
      months ended June 30, 2008 increase to $649 from $375 in the same period of
      2007. Longmen Joint Venture accounted for $335.8million for the three months
      ended June 30, 2008 and accounted for $77.7 million in sales during the month
      of
      June 2007.





The
      following table displays sales and steel shipment data for our operating units
      for the three months ended 2008 and 2007.





2nd Quarter 2008
            
            2nd Quarter 2007Operating Unit
            
            Shipment
              Volume
            
            Sales Amount
            
            Shipment
              Volume
            
            Sales Amount(in Tons)
            
            
            
            (in Tons)Daqiuzhuang
                Metal
            
            
            66,148
            
            $
            48,348,198
            
            
            97,381
            
            $
            43,516,921Baotou
                Steel Pipe Joint Venture
            
            
            4,507
            
            
            2,899,529Longmen
                Joint Venture
            
            
            517,200
            
            
            335,781,209
            
            
            207,573
            
            
            77,737,823Totals
            
            
            587,855
            
            $
            387,028,936
            
            
            304,954
            
            $
            121,254,744




8


***Six
      months ended June 30, 2008 compared with six months ended June 30,
      2007***





Overall,
      net sales for the six months ended June 30, 2008 were approximately
      $678.6million compared to $158.9 million in the same period of 2007, an increase
      of 327%.





The
      increase in net sales was mostly attributed to our Longmen Joint Venture which
      started its operations on June 1, 2007. The
      first
      half of 2008 reflects a full six months of operations whereas the first half
      of
      2007 only includes one month of Longmen Joint Venture operations.





At
      Daqiuzhuang Metal, shipments for the six months ended June 30, 2008 decreased
      35% to 119,887 tons from 185,167 tons in the same period of 2007, due to the
      change in product mix. In the six months of 2008, we shifted our product mix
      to
      include more silicon sheets and thinner carbon sheets which have a longer
      processing time than other carbon sheets. Average selling price per ton
      including sale of scrap for the six months ended June 30, 2008 increased to
      $687
      from $438 in the same period of 2007. We increased selling price to pass on
      higher input costs to our customers. Changes in product mix toward silicon
      sheets and thinner carbon sheets also have a higher selling price than other
      carbon sheets.





At
      Longmen Joint Venture, shipments for the six months ended June 30, 2008 were
      986,800 and shipments for the one month recorded in the six months ended June
      30, 2007 were 207,573 tons. Average selling price per ton for the six months
      ended June 30, 2008 increase to $600 from $375 for the one month recorded in
      the
      six months ended June 30, 2007. Longmen Joint Venture accounted for $592 million
      for the six months ended June 30, 2008 and accounted for $77.7 million during
      the month of June 2007.





The
      following table displays sales and steel shipment data for our operating units
      for the six months ended 2008 and 2007.




1st half, 2008
            
            1st half, 2007Operating Unit
            
            Shipment
              Volume
            
            Sales Amount
            
            Shipment
              Volume
            
            Sales Amount(in Tons)
            
            
            
            (in Tons)Daqiuzhuang
                Metal
            
            
            119,887
            
            $
            82,365,588
            
            
            185,167
            
            $
            81,124,892Baotou
                Steel Pipe Joint Venture
            
            
            6,339
            
            
            3,996,326
            
            
            -
            
            
            -Longmen
                Joint Venture
            
            
            986,800
            
            
            592,233,021
            
            
            207,573
            
            
            77,737,823Totals
            
            
            1,113,026
            
            $
            678,594,935
            
            
            392,740
            
            $
            158,862,715





***Gross
      Profit***





***Three
      months ended June 30, 2008 compared with three months ended June 30,
      2007***





Gross
      profit for the three months ended June 30, 2008 was approximately $22.87
      million, an increase of 182% or $14.77 million from $8.1 million for the same
      period last year. Gross profit margin for the three months ended June 30, 2008
      decreased to 5.91% from 6.69% for the three months ended June 30,
      2007.




9




The
      following table displays gross profit and gross margin data for our operating
      units for the three months ended 2008 and 2007.


2ndQuarter 2008
            
            2ndQuarter 2007Operating Unit
            
            Gross Profit
            
            Gross
              Margin
            
            Gross Profit
            
            Gross
              MarginDaqiuzhuang
                Metal
            
            $
            1,701,567
            
            
            3.52
            %
            $
            984,263
            
            
            2.26
            %Baotou
                Steel Pipe Joint Venture
            
            
            2,969
            
            
            0.10
            %
            
            -
            
            
            -Longmen
                Joint Venture
            
            
            21,164,269
            
            
            6.30
            %
            
            7,129,105
            
            
            9.17
            %Totals
            
            $
            22,868,805
            
            
            5.91
            %
            $
            8,113,368
            
            
            6.69
            %





We
      have
      been able to increase our selling prices to pass on the increases in our raw
      materials prices. This has kept our margin positive although there is some
      compression of our margin.





Our
      second quarter 2008 aggregate gross margin increased by 1.45% compared to the
      first quarter 2008 as shown in the following chart.





2nd Quarter 2008
            
            1st Quarter 2008Operating Unit
            
            Gross Profit
            
            Gross
              Margin
            
            Gross Profit
            
            Gross
              MarginDaqiuzhuang
                Metal
            
            $
            1,701,567
            
            
            3.52
            %
            $
            1,924,305
            
            
            5.66
            %Baotou
                Steel Pipe Joint Venture
            
            
            2,969
            
            
            0.10
            %
            
            33,657
            
            
            3.07
            %Longmen
                Joint Venture
            
            
            21,164,269
            
            
            6.30
            %
            
            11,024,153
            
            
            4.30
            %Totals
            
            $
            22,868,805
            
            
            5.91
            %
            $
            12,982,115
            
            
            4.46
            %




Our
      overall gross profit margin improved by 1.45% increasing to 5.91% in the second
      quarter of 2008 compared with 4.46% for the first quarter of 2008.





The
      improved gross margin is due to the increase in selling price catching up to
      the
      increases in raw material costs, thus allowing us to pass the cost of higher
      inputs on to our customers. Additionally, by comparison, the first quarter
      of
      the year is traditionally the weakest quarter for the construction steel market
      in China owing to the Chinese New Year Holiday and winter weather.





***Six
      months ended June 30, 2008 compared with six months ended June 30,
      2007***





Gross
      profit for the six months ended June 30, 2008 was approximately $35.85 million,
      an increase of 262% or $25.95million from $9.9 million for the same period
      last
      year. Gross profit margin for the six months ended June 30, 2008 decreased
      to
      5.28% from 6.20% for the six months ended June 30, 2007.





The
      increase in gross profit is mostly attributed to our Longmen Joint Venture
      which
      started its operations on June 1, 2007. The first half 2008 reflects a full
      six
      months of operations whereas the first half 2007 only includes one month of
      Longmen Joint Venture operations.





The
      first
      half of 2008 experienced sharp increases in the prices of iron ore and coke.
      Taking into account slight time lag in pricing, we have largely been able to
      pass on a portion of these price increases to our customers, but rising prices
      have put pressure on our margins.





10




The
      following table displays gross profit and gross margin data for our operating
      units for the six months ended 2008 and 2007.




1st half, 2008
            
            1st half, 2007Operating Unit
            
            Gross Profit
            
            Gross
              Margin
            
            Gross Profit
            
            Gross
              MarginDaqiuzhuang
                Metal
            
            $
            3,625,872
            
            
            4.40
            %
            $
            2,717,268
            
            
            3.35
            %Baotou
                Steel Pipe Joint Venture
            
            
            36,626
            
            
            0.92
            
            
            -
            
            
            -Longmen
                Joint Venture
            
            
            32,188,422
            
            
            5.44
            %
            
            7,129,105
            
            
            9.17
            %Totals
            
            $
            35,850,920
            
            
            5.28
            %
            $
            9,846,373
            
            
            6.20
            %





***Cost
      of Sales***





***Three
      months ended June 30, 2008 compared with three months ended June 30,
      2007***





Cost
      of
      sales principally consists of the cost of raw materials, labor, utilities,
      manufacturing costs, manufacturing related depreciation and other fixed costs.
      Overall, cost of sales increased to $364.16 million for the three months ended
      June 30, 2008 from $113.14 million for the same period of 2007.





The
      increase in cost of sales is mostly attributed to our Longmen Joint Venture
      which started its operations on June 1, 2007. Second quarter 2008 reflects
      a
      full three months of operations whereas second quarter 2007 only includes one
      month of Longmen Joint Venture operations.





At
      Daqiuzhuang Metal, average cost per ton was $705 and $437, respectively for
      the
      three months ended June 30, 2008 and 2007. Cost of sales went up mainly due
      to
      the price increase in iron ore which is a raw material in the steel strip coil
      we buy for processing.





At
      Longmen Joint Venture, average cost per ton was $608 and $340, respectively
      for
      the three months ended June 30, 2008 and 2007. Cost of sales went up mainly
      due
      to the price increase in iron ore and coke which accounts for approximately
      80%
      of the cost.





The
      following table displays cost of sales and steel shipment data for our operating
      units for the three months ended 2008 and 2007.




2nd Quarter 2008
            
            2nd Quarter 2007Operating Unit
            
            Shipment
              Volume
            
            Cost of Sales
            
            Shipment
              Volume
            
            Cost of Sales(in Tons)
            
            
            
            (in Tons)Daqiuzhuang
                Metal
            
            
            66,148
            
            $
            46,646,631
            
            
            97,381
            
            $
            42,532,658Baotou
                Steel Pipe Joint Venture
            
            
            4,507
            
            
            2,896,559
            
            
            -
            
            
            -Longmen
                Joint Venture
            
            
            517,200
            
            
            314,616,941
            
            
            207,573
            
            
            70,608,718Totals
            
            
            587,855
            
            $
            364,160,131
            
            
            304,954
            
            $
            113,141,376





***Six
      months ended June 30, 2008 compared with six months ended June 30,
      2007***





Overall
      cost of sales increased to $642.7 million for the six months ended June 30,
      2007
      from $149 million for the same period of 2007. The increase in cost of sales
      is
      mostly attributed to our Longmen Joint Venture which started its operations
      on
      June 1, 2007. The first half of 2008 reflects a full six months of operations
      whereas the first half of 2007 only includes one month of Longmen JV operations.


11





At
      Daqiuzhuang Metal, average cost per ton was $657 and $423, respectively for
      the
      six months ended June 30, 2008 and 2007. Cost of sales went up mainly due to
      the
      price increase in raw materials.





At
      Longmen Joint Venture, average cost per ton was $567 and $340, respectively
      for
      the six months ended June 30, 2008 and 2007. Cost of sales went up mainly due
      to
      the price increases in iron ore and coke.





The
      following table displays cost of sales and steel shipment data for our operating
      units for the six months ended 2008 and 2007.




1st half, 2008
            
            1st half, 2007Operating Unit
            
            Shipment
              Volume
            
            Cost of Sales
            
            Shipment
              Volume
            
            Cost of Sales(in Tons)
            
            
            
            (in Tons)Daqiuzhuang
                Metal
            
            
            119,887
            
            $
            78,739,716
            
            
            185,167
            
            $
            78,407,624Baotou
                Steel Pipe Joint Venture
            
            
            6,339
            
            
            3,959,699
            
            
            -
            
            
            -Longmen
                Joint Venture
            
            
            986,800
            
            
            560,044,600
            
            
            207,573
            
            
            70,608,718Totals
            
            
            1,113,026
            
            $
            642,744,015
            
            
            392,740
            
            $
            149,016,342




***Selling,
      General and Administrative Expenses***





***Three
      months ended June 30, 2008 compared with three months ended June 30,
      2007***





Selling,
      general and administrative expenses, such as executive compensation, office
      expenses, legal and accounting charges, travel charges, and various taxes were
      $9.50 million for the three months ended June 30, 2008, compared to $2.84
      million for the same period of 2007. This increase is largely attributable
      to
      the operations of the Longmen Joint Venture, which began June 1, 2007, and
      alone
      accounted for approximately increase $5.36 million in selling, general and
      administrative expenses for the three months ended June 30, 2008. We also issued
      87,400 shares of incentive stock awards to our key employees in the second
      quarter of 2008 which accounted for approximately $0.58 million in the SG&A
      expenses.





***Six
      months ended June 30, 2008 compared with Six months ended June 30,
      2007***





Selling,
      general and administrative expenses were $16.04 million for the six months
      ended
      June 30, 2008, compared to $3.47 million for the same period of 2007. This
      increase is largely attributable to the operations of the Longmen Joint Venture,
      which began June 1, 2007, and alone accounted for approximately increase $8.73
      million in selling, general and administrative expenses for the six months
      ended
      June 30, 2008.  Stock
      issued for services and compensation increased $1.20 million for the six months
      ended June 30, 2008, there was no stock issued for services and compensation
      for
      the same period of 2007.


12


**Other
      income (expense)**





***Three
      months ended June 30, 2008 compared with three months ended June 30,
      2007***





Interest
      expense including amortization of debt issuance cost was $6.29 million for
      the
      three months ended June 30, 2008, compared to $1.76 million for the same period
      in 2007. This increase is largely attributable to the operations of the Longmen
      Joint Venture, which began June 1, 2007. Loss from derivative instrument was
      $28.73 million for the three months ended June 30, 2008 including $27.79 million
      increase in the value of derivative liabilities and $0.94 million increase
      in
      effective interest charge and amortization of debt issuance cost. There was
      no
      derivative instrument for the same period of 2007.




Pursuant
      to SFAS 133 and EITF 00-19, the Company determined that both the warrants and
      the conversion option embedded in the Notes meet the definition of a derivative
      instrument and must be carried as a liability and marked to market each
      reporting period.





On
      December 13, 2007, the Company recorded $34,719,062 as derivative liability,
      including $9,298,044 for the fair value of the warrants and $25,421,018 for
      fair
      value of the conversion option. On June 30, 2008, in accordance with SFAS 133,
      the fair value of derivative liabilities was recalculated and increased by
      $27,786,632 for the three months ended June 30, 2008, including $7,415,855
      for
      the increase in fair value of the warrants and $20,370,777 for the increase
      in
      fair value of the conversion option. The increase was recorded as a loss and
      included in other expense.





***Six
      months ended June 30, 2008 compared with Six months ended June 30,
      2007***





Interest
      expense was $12.28 million for the six months ended June 30, 2008, compared
      to
      $2.4 million for the same period in 2007. This increase is largely attributable
      to the operations of the Longmen Joint Venture, which began June 1, 2007. Loss
      from derivative instrument was $26.87 million for the six months ended June
      30,
      2008 including $25.12 million increase in the value of derivative liabilities
      and $1.75 million increase in effective interest charge and amortization of
      debt
      issuance cost. There was no derivative instrument for the same period of 2007.





Pursuant
      to SFAS 133 and EITF 00-19, the Company determined that both the warrants and
      the conversion option embedded in the Notes meet the definition of a derivative
      instrument and must be carried as a liability and marked to market each
      reporting period.





On
      December 13, 2007, the Company recorded $34,719,062 as derivative liability,
      including $9,298,044 for the fair value of the warrants and $25,421,018 for
      fair
      value of the conversion option. On June 30, 2008, in accordance with SFAS 133,
      the fair value of derivative liabilities was recalculated and increased by
      $25,115,869 for the six months ended June 30, 2008, including $6,696,275 for
      the
      increase in fair value of the warrants and $18,419,594 for the increase in
      fair
      value of the conversion option. The increase was recorded as a loss and included
      in other expense.





***Net
      income***





***Three
      months ended June 30, 2008 compared with three months ended June 30,
      2007***





Net
      loss
      for the three months ended June 30, 2008 is $24.27 million, decreasing $26.17
      million from net income of $1.9 million for the same period of 2007. This
      decrease is largely attributable to loss from derivative instrument which was
      $28.73 million for the three months ended June 30, 2008. There was no derivative
      instrument for the same period of 2007. Without influence from derivative
      instrument, our net income from operations is $4.45 million for the three months
      ended June 30, 2008 compared to $1.9 million for the same period of 2007, an
      improvement of 134%.





The
      derivative instrument loss is a non-operating, non-cash expense related to
      the
      convertible bond and related warrants issued December 2007. Due to accounting
      rules, the derivative instrument value and associated gain or loss is linked
      to
      the stock price of General Steel Holdings, Inc. The gain or loss of this
      instrument is not related to operating performance and has no impact on cash
      (no
      cash was paid out or received in).


13





The
      increase in Operating Net Income is mostly attributed to our Longmen Joint
      Venture which started its operations on June 1, 2007. Second quarter 2008
      reflects a full three months of operations whereas second quarter 2007 only
      includes one month of Longmen Joint Venture operations.





***Six
      months ended June 30, 2008 compared with Six months ended June 30,
      2007***





Net
      loss
      for the six months ended June 30, 2008 is $22.08 million, decreasing $24.45
      million from net income of $2.37 million for the same period of 2007. This
      decrease is largely due to loss from derivative instrument $26.87 million for
      the six months ended June 30, 2008, there was no derivative instrument for
      the
      same period of 2007. Without influence from derivative instrument, net income
      would have reached $4.79 million for the six months ended June 30, 2008 compared
      to $2.37 million for the same period of 2007, about 100% increase.





The
      derivative instrument loss is a non-operating, non-cash expense related to
      the
      convertible bond and related warrants issued December 2007. According to
      accounting rules, the conversion feature on the debt and the warrants issued
      with the debt must be treated as a derivative, reported at fair value and marked
      to market each reporting period. The derivative instrument value and associated
      gain or loss is linked to the stock price of General Steel Holdings, Inc. The
      gain or loss of this instrument is not related to operating performance and
      has
      no impact on cash (no cash was paid or received).





***Earnings
      per share***





Earnings
      per share was $-0.695 for the three months ended June 30, 2008 and was $-0.633
      for the six months ended June 30, 2008. Earnings per share are calculated as
      follows:





Three months ended June 30
            
            Six months ended June 30,2008
            
            2007
            
            2008
            
            2007Income
                (Loss) attributable to holders of common shares
            
            $
            (24,271,226
            )
            $
            1,893,301
            
            $
            (22,082,766
            )
            $
            2,368,166Basic
                weighted average number of common shares outstanding
            
            
            34,928,576
            
            
            31,444,665
            
            
            34,883,740
            
            
            31,444,665Diluted
                weighted average number of common shares outstanding
            
            
            34,928,576
            
            
            31,444,665
            
            
            34,883,740
            
            
            31,444,665Net
                income (Loss)per shareBasic
            
            $
            (0.70
            )
            $
            0.06
            
            $
            (0.63
            )
            $
            0.08Diluted
            
            $
            (0.70
            )
            $
            0.06
            
            $
            (0.63
            )
            $
            0.08





The
      second quarter 2008 earnings per share were negatively impacted by the loss
      on
      derivative instrument which is a non-operating, non cash expense. The chart
      below excludes the derivative instrument reflecting operating earnings per
      share
      which better reflects operating business results.





Three months ended June 30
            
            Six months ended June 30,2008
            
            2007
            
            2008
            
            2007Income
                (Loss) attributable to holders of common shares
            
            $
            4,455,497
            
            $
            1,893,301
            
            $
            4,786,382
            
            $
            2,368,166Basic
                weighted average number of common shares outstanding
            
            
            34,928,576
            
            
            31,444,665
            
            
            34,883,740
            
            
            31,444,665Diluted
                weighted average number of common shares outstanding
            
            
            35,044,603
            
            
            31,444,665
            
            
            34,986,608
            
            
            31,444,665Net
                income (Loss)per shareBasic
            
            $
            0.13
            
            $
            0.06
            
            $
            0.14
            
            $
            0.08Diluted
            
            $
            0.13
            
            $
            0.06
            
            $
            0.14
            
            $
            0.08




14


***Income
      taxes***





The
      Company did not carry on any business and did not maintain any branch office
      in
      the United States during the six months ended June 30, 2008 and 2007. Therefore,
      no provision for withholding or U.S. federal income taxes or tax benefits on
      the
      undistributed earnings and/or losses of the Company has been made.





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





The
      effective income tax rate at our Baotou Steel Pipe Joint Venture is 25%. The
      new
      Enterprise Income Tax Law became effective January 1, 2008, reducing the income
      tax rate for Baotou Steel Pipe Joint Venture from 33% to 25%.





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





For
      the
      three months ended June 30, 2008, we had a tax expense of $1.1 million. For
      the
      six months ended June 30, 2008, we had a tax expense of $1.5
      million.





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





**Minority
      interest**





Minority
      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.





***Accounts
      Receivable***





Accounts
      receivable and accounts receivable-related party were $63.2 million as of June
      30, 2008 compared to $11.8 million on December 31, 2007.





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, 2008, we reserved $0.28
      million for bad debt allowance based on our reasonable estimate.




15











***Liquidity
      and capital resources***




Due
      to
      the strong market demand for our products and our new Longmen Joint Venture,
      we
      plan to maintain a higher-than-average debt to equity ratio to better position
      ourselves in this fast growing market. Our bank loans are considered short
      term
      for the purpose of the preparation of the financial statements though they
      are
      renewable with the banks every year. Cash balance including restricted cash
      amounted to $128.26 million and $52.1 million as of June 30, 2008 and December
      31, 2007, respectively.





***Operating
      activities***





Net
      cash
      provided by operating activities for the six months ended June 30, 2008 was
      $36.47 million compared to $10.7 million in the same period of 2007. This change
      was mainly due to the combination of the following factors:





Cash
      inflow after the adjustments of some non cash items to the net loss, such as
      depreciation and amortization, stock issued for services and compensation,
      minority interest and loss on derivative instrument, totaling of $42.30 million
      compared to $3.64 as of June 30, 2007.





Cash
      inflow due to the increase in accounts payable, other payables, accrued
      liabilities, customer deposits and tax payable totaling of $84.06 million for
      the six months ended June 30, 2008 compared to $31.48 as of June 30, 2007.
      We
      are currently building two blast furnaces at Longmen Joint Venture and we have
      been financing this construction using vending financing and working capital
      provided by our suppliers and customers.





Cash
      outflow resulting from increase in accounts receivable and accounts
      receivable-related party which was $34.73 million in the half year of 2008
      compared to cash inflow of $0.5 million as of June 30, 2007.





Cash
      outflow due to increase in inventory and advances on inventory purchases of
      $20.34 million compared to $26.0 million as of June 30, 2007.





***Investing
      activities***





Net
      cash
      used in investing activities was $97.07 million for the first half year of
      2008
      compared to $3.04 million provided in the same period of 2007. This increase
      in
      cash used in investing activities mainly resulted from a $93 million cash
      outflow which was spent on building the new blast furnaces. The Company
      contributed $7.09 million to Maoming’s original shareholders in exchange of 99%
      of the equity of Maoming.





***Financing
      activities***





Net
      cash
      provided by financing activities was $42.01 million for the first half year
      of
      2008 compared to $22.28 million in the same period of 2007. This was mainly
      attributable to a net cash inflow of $83.31 million on short term notes payable
      and outflow of $55.75 million on restricted cash.




***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.




16




***Compliance
      with environmental laws and regulations***





**Longmen
      Joint Venture:**





Since
      2002, our joint venture partner, Long Steel Group, has invested $76 million
      (RMB
      580 million) in a series of comprehensive projects to reduce its waste emissions
      of coal gas, water, and solid waste. In 2005 it received ISO 14001 certification
      for its overall environmental management system. Long Steel Group has received
      several awards from the Shaanxi provincial government for its increasing effort
      in environmental protection.





Long
      Steel Group has spent more than $4.3 million (RMB 33 million) on a comprehensive
      waste water recycling and water treatment system. The 2,000m3/h treatment
      capacity system was implemented at the end of 2005. In the first quarter of
      2008, new water consumption per ton of steel produced was 1.1 ton.





Long
      Steel Group has built one 10,000m3 coke-oven gas tank and one 50,000m3 blast
      furnace coal gas tank to collect the residual coal gas produced from its own
      facility and that of surrounding enterprises. Long Steel Group also built a
      thermal power plant with two 25 KW dynamos that uses the residual coal gas
      from
      the blast furnaces and converters as fuel to generate power.





Long
      Steel Group also has built 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 tons of solid waste
      and
      generate revenue of more than $2.6 million (RMB20 million) each
      year.





**Daqiuzhuang
      Metal:**





Based
      on
      the equipment, technologies and measures adopted, Daqiuzhuang Metal is not
      considered a high-pollution factory in China. The production process does not
      need much water and produces only a minimal amount of chemical waste.
      Daqiuzhuang Metal uses gas-fired reheat furnaces recommended by the State
      Environmental Protection Agency to heat raw materials and semi-finished
      products.





In
      2005,
      Daqiuzhuang County ordered an environmental clean-up campaign and required
      harmful waste water discharge to be reduced. In order to meet these
      requirements, we invested $94,190 to remodel our industrial water recycling
      system to reduce new water consumption and industrial water
      discharge.





This
      wastewater recycling system is able to process 350 tons of wastewater daily.
      We
      can realize approximately $10,000 savings per year using this
      system.





We
      believe that future costs relating to environmental compliance will not have
      a
      materially adverse effect on the Company’s financial position. There is always
      the possibility, however, that unforeseen changes, such as new laws or
      enforcement policies, could result in materially adverse costs.





***Off-balance
      sheet arrangements***




There
      ware no off-balance sheet arrangements in the second quarter of
      2008.




17




***Critical
      Accounting Policies***





Management’s
      discussion and analysis of its financial condition and results of operations
      are
      based upon our consolidated financial statements, which have been prepared
      in
      accordance with accounting principles generally accepted in the United States.
      Our financial statements reflect the selection and application of accounting
      policies which require management to make significant estimates and judgments.
      See Note 2 to our consolidated financial statements, “Summary of Significant
      Accounting Policies.” Management bases its estimates on historical experience
      and on various other assumptions that are believed to be reasonable under the
      circumstances. Actual results may differ from these estimates under different
      assumptions or conditions.




We
      believe that the following reflect the more critical accounting policies that
      currently affect our financial condition and results of operations.





Revenue
      recognition





The
      Company's revenue recognition policies are in compliance with Staff Accounting
      Bulletin (“SAB”) 104. Sales revenue is recognized at the date of shipment to
      customers when a formal arrangement exists, the price is fixed or determinable,
      the delivery is completed, no other significant obligations of the Company
      exist
      and collectability is reasonably assured. Payments received before all of the
      relevant criteria for revenue recognition are recorded as customer deposits.
      Sales revenue represents the invoiced value of goods, net of value-added tax
      (VAT). All of the Company’s products sold in the PRC are subject to a Chinese
      value-added tax at a rate of 13% to 17% of the gross sales price. This VAT
      may
      be offset by VAT paid by the Company on raw materials and other materials
      included in the cost of producing the finished product.





Use
      of
      estimates





The
      preparation of financial statements in conformity with generally accepted
      accounting principles of the United States of America requires management to
      make estimates and assumptions that affect the amounts reported in the financial
      statements and accompanying notes. Significant accounting estimates reflected
      in
      the Company’s financial statements include the useful lives of and impairment
      for property, plant and equipment, potential losses on uncollectible receivables
      and convertible notes. Actual results could differ from these
      estimates.





Derivative
      Instrument





The
      Company entered into a Securities Purchase Agreement (the “Agreement”) with
      certain institutional investors (the “Buyers”). Pursuant to the Agreement, the
      Company agreed to sell to the Buyers (i) senior convertible notes in the
      aggregate principal amount of $40,000,000 (“Notes”) and (ii) warrants to
      purchase an additional aggregate amount of 1,154,958 shares of Common Stock
      of
      the Company (the “Warrants”). Both the Warrants and the conversion option
      embedded in the Notes meet the definition of a derivative instrument in SFAS
      133, Accounting for Derivative Instruments and Hedging Activities. Therefore
      these instruments are accounted for as derivative liabilities and periodically
      marked-to-market. The change in the value of the derivative liabilities is
      charged against or credited to income.





Financial
      instruments





Statement
      of Financial Accounting Standards No. 107 (SFAS 107), “Disclosures about Fair
      Value of Financial Instruments” requires disclosure of the fair value of
      financial instruments held by the Company. SFAS 107 defines the fair value
      of
      financial instruments as the amount at which the instrument could be exchanged
      in a current transaction between willing parties.





The
      Company considers the carrying amount of cash, accounts receivable, other
      receivables, accounts payable, accrued liabilities, and long term debts to
      approximate their fair values because of the short period of time between the
      origination of such instruments and their expected realization and their current
      market rate of interest.




18




The
      Company also analyzes all financial instruments with features of both
      liabilities and equity under SFAS 150, “Accounting for Certain Financial
      Instruments with Characteristics of Both Liabilities and Equity,” SFAS No 133,
“Accounting for Derivative Instruments and Hedging Activities” and EITF 00-19,
“Accounting for Derivative Financial Instruments Indexed to, and Potentially
      Settled in, a Company’s Own Stock.” The convertible preferred shares issued in
      2005 and the convertible note issued in 2007 did not require bifurcation or
      result in liability accounting. Additionally, the Company analyzes registration
      rights agreements associated with any equity instruments issued to determine
      if
      penalties triggered for late filing should be accrued under FSP EITF 00-19-2,
      “Accounting for Registration Payment Arrangements.”





Fair
      value measurements





The
      Company adopted SFAS 157, “Fair Value Measurements” on January 1, 2008. SFAS 157
      defines fair value, establishes a three-level valuation hierarchy for
      disclosures of fair value measurement and enhances disclosures requirements
      for
      fair value measures. The three levels are defined as follow:





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





Level
      2
      inputs to the valuation methodology include quoted prices for similar assets
      and
      liabilities in active markets, and inputs that are observable for the assets
      or
      liability, either directly or indirectly, for substantially the full term of
      the
      financial instruments.





Level
      3
      inputs to the valuation methodology are unobservable and significant to the
      fair
      value.





***New
      Accounting Pronouncements***




In
      February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
      Assets and Financial Liabilities—including an amendment of FASB Statement No.
      115 (“FAS 159”). FAS 159 permits companies to choose to measure many financial
      instruments and certain other items at fair value that are not currently
      required to be measured at fair value. The objective of FAS 159 is to provide
      opportunities to mitigate volatility in reported earnings caused by measuring
      related assets and liabilities differently without having to apply hedge
      accounting provisions. FAS 159 also establishes presentation and disclosure
      requirements designed to facilitate comparisons between companies that choose
      different measurement attributes for similar types of assets and liabilities.
      The Company chose not to elect the option to measure the fair value of eligible
      financial assets and liabilities.





In
      December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
      Consolidated Financial Statements - an amendment of Accounting Research Bulletin
      No. 51” (“SFAS 160”), which establishes accounting and reporting standards for
      ownership interests in subsidiaries held by parties other than the parent,
      the
      amount of consolidated net income attributable to the parent and to the
      noncontrolling interest, changes in a parent’s ownership interest and the
      valuation of retained non-controlling equity investments when a subsidiary
      is
      deconsolidated. The Statement also establishes reporting requirements that
      provide sufficient disclosures that clearly identify and distinguish between
      the
      interests of the parent and the interests of the non-controlling owners. SFAS
      160 is effective for fiscal years beginning after December 15, 2008. The Company
      has not determined the effect that the application of SFAS 160 will have on
      its
      consolidated financial statements.





In
      December 2007, Statement of Financial Accounting Standards No. 141(R), Business
      Combinations, was issued. SFAS No. 141R replaces SFAS No. 141, Business
      Combinations. SFAS 141R retains the fundamental requirements in SFAS 141 that
      the acquisition method of accounting (which SFAS 141 called the purchase method)
      be used for all business combinations and for an acquirer to be identified
      for
      each business combination. SFAS 141R requires an acquirer to recognize the
      assets acquired, the liabilities assumed, and any noncontrolling interest in
      the
      acquiree at the acquisition date, measured at their fair values as of that
      date,
      with limited exceptions. This replaces SFAS 141’s cost-allocation process, which
      required the cost of an acquisition to be allocated to the individual assets
      acquired and liabilities assumed based on their estimated fair values. SFAS
      141R
      also requires the acquirer in a business combination achieved in stages
      (sometimes referred to as a step acquisition) to recognize the identifiable
      assets and liabilities, as well as the noncontrolling interest in the acquiree,
      at the full amounts of their fair values (or other amounts determined in
      accordance with SFAS 141R). SFAS 141R applies prospectively to business
      combinations for which the acquisition date is on or after the beginning of
      the
      first annual reporting period beginning on or after December 15, 2008. An entity
      may not apply it before that date. The Company is currently evaluating the
      impact that adopting SFAS No. 141R will have on its financial
      statements.




19




In
      March
      2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
      and Hedging Activities – an amendment of FASB Statement No. 133” (“SFAS 161”),
      which changes the disclosure requirements for derivative instruments and hedging
      activities. Entities are required to provide enhanced disclosures about (a)
      how
      and why an entity uses derivative instruments, (b) how derivative instruments
      and related hedged items are accounted for under Statement 133 and its related
      interpretations, and (c) how derivative instruments and related hedged items
      affect an entity’s financial position, financial performance and cash flows.
      SFAS 161 is effective for financial statements issued for fiscal years and
      interim periods beginning after November 15, 2008. The Company has not
      determined the effect that the application of SFAS 161 will have on its
      consolidated financial statements.





In
      April
      2008, the FASB issued 142-3 “Determination of the useful life of Intangible
      Assets”, which amends the factors a company should consider when developing
      renewal assumptions used to determine the useful life of an intangible asset
      under SFAS142. This Issue is effective for financial statements issued for
      fiscal years beginning after December 15, 2008, and interim periods within
      those
      fiscal years. SFAS 142 requires companies to consider whether renewal can be
      completed without substantial cost or material modification of the existing
      terms and conditions associated with the asset. FSP 142-3 replaces the previous
      useful life criteria with a new requirement—that an entity consider its own
      historical experience in renewing similar arrangements. If historical experience
      does not exist then the Company would consider market participant assumptions
      regarding renewal including 1) highest and best use of the asset by a market
      participant, and 2) adjustments for other entity-specific factors included
      in
      SFAS 142. The Company is currently evaluating the impact that adopting SFAS
      No.142-3 will have on its financial statements





In
      May
      2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
      Accounting Principles.” This Statement identifies the sources of accounting
      principles and the framework for selecting the principles to be used in the
      preparation of financial statements of nongovernmental entities that are
      presented in conformity with generally accepted accounting principles (GAAP)
      in
      the United States (the GAAP hierarchy). The Company is currently evaluating
      the
      impact that adopting SFAS No. 162 will have on its financial
      statements.





In
      May
      2008, the FASB issued SFAS No. 163, “Accounting for Financial Guarantee
      Insurance Contracts, an interpretation of FASB Statement No. 60.” The scope of
      this Statement is limited to financial guarantee insurance (and reinsurance)
      contracts, as described in this Statement, issued by enterprises included within
      the scope of Statement 60. Accordingly, this Statement does not apply to
      financial guarantee contracts issued by enterprises excluded from the scope
      of
      Statement 60 or to some insurance contracts that seem similar to financial
      guarantee insurance contracts issued by insurance enterprises (such as mortgage
      guaranty insurance or credit insurance on trade receivables). This Statement
      also does not apply to financial guarantee insurance contracts that are
      derivative instruments included within the scope of FASB Statement No. 133,
      “Accounting for Derivative Instruments and Hedging Activities.” This Statement
      will not have and impact on the Company’s financial statements.




20




In
      June
      2008, the FASB issued Emerging Issues Task Force Issue 07-5 “Determining whether
      an Instrument (or Embedded Feature) is indexed to an Entity’s Own Stock” (“EITF
      No. 07-5”). This Issue is effective for financial statements issued for fiscal
      years beginning after December 15, 2008, and interim periods within those fiscal
      years. Early application is not permitted. Paragraph 11(a) of Statement of
      Financial Accounting Standard No 133 “Accounting for Derivatives and Hedging
      Activities” (“SFAS 133”) specifies that a contract that would otherwise meet the
      definition of a derivative but is both (a) indexed to the Company’s own
      stock and (b) classified in stockholders’ equity in the statement of
      financial position would not be considered a derivative financial instrument.
      EITF No.07-5 provides a new two-step model to be applied in determining whether
      a financial instrument or an embedded feature is indexed to an issuer’s own
      stock and thus able to qualify for the SFAS 133 paragraph 11(a) scope exception
      This standard will triggered liability accounting on all options and warrants
      exercisable at strike prices denominated in any currency other than the
      functional currency of the operating entity in China (Renminbi).. The Company
      is
      currently evaluating the impact that adopting EITF 07-5 will have on its
      financial statements.





In
      June
      2008, FASB issued EITF Issue No. 08-4, “Transition Guidance for Conforming
      Changes to Issue No. 98-5 (“EITF No. 08-4”)”. The objective of EITF No.08-4
      is to provide transition guidance for conforming changes made to EITF No. 98-5,
      “Accounting for Convertible Securities with Beneficial Conversion Features or
      Contingently Adjustable Conversion Ratios”, that result from EITF No. 00-27
“Application of Issue No. 98-5 to Certain Convertible Instruments”, and SFAS No.
      150, “Accounting for Certain Financial Instruments with Characteristics of both
      Liabilities and Equity”. This Issue is effective for financial statements issued
      for fiscal years ending after December 15, 2008. Early application is
      permitted. The Company is currently evaluating the impact that adopting
      EITF 08-4 will have on its 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, 2008,
      and
      the effect these obligations are expected to have on our liquidity and cash
      flows in future periods.





Payment due by periodContractual obligations
            
            Total
            
            Less than 1 year
            
            1-3 years
            
            3-5 yearsDollars amounts in thousandsBank loans
                (1)
            
            $
            85,566
            
            $
            85,566
            
            $
            -
            
            $
            -Notes
                payable
            
            
            155,708
            
            
            155,708
            
            
            -
            
            
            -Deposits
                due to customers and sales representatives
            
            
            145,348
            
            
            145,348
            
            
            -
            
            
            -Convertible
                notes ( Principal plus Interest )
            
            
            54,000
            
            
            1,200
            
            
            4,800
            
            
            48,000Total
            
            $
            440,622
            
            $
            387,822
            
            $
            4,800
            
            $
            48,000




(1)
      Bank
      loans in China are due on demand or normally within one year. These loans can
      be
      renewed with the banks.





**ITEM
      3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
      RISK**





Commodity
      Price Risk and Related Risks





In
      the
      normal course of our business, we are exposed to market risk or price
      fluctuations related to the purchase, production or sale of steel products
      over
      which we have little or no control. We do not use any derivative commodity
      instruments to manage the price risk. Our market risk strategy has generally
      been to obtain competitive prices for our products and allow operating results
      to reflect market price movements dictated by supply and demand. Based upon
      an
      assumed 2008 annual production capacity of 4.8 million tons of steel, a $1
      change in the annual average price would change annual pre-tax profits by
      approximately $4.8 million.




21





Interest
      Rate Risk





We
      are
      subject to interest rate risk since our outstanding debts are short-term and
      bear interest at variable interest rates. The future interest expense would
      fluctuate in case of any change in the borrowing rates. We do not use swaps
      or
      other interest rate protection agreements to hedge this risk. We believe our
      exposure to interest rate risk is not material.





Foreign
      Currency Exchange Rate Risk





Our
      operating units, Daqiuzhuang Metal, Longmen Joint Venture and Baotou Steel
      Pipe
      Joint Venture and Maoming, are all located in China. They produce and sell
      all
      of their products domestically in the P.R.C. They are subject to the
      foreign currency exchange rate risks due to the effects of fluctuations in
      the
      Chinese Renminbi on revenues and operating costs and existing assets or
      liabilities. We have not generally used derivative instruments to manage this
      risk. Generally, a ten percent (10%) decrease in Renminbi exchange rate would
      result in a $744,667 decrease to income.





**ITEM
      4. CONTROLS AND PROCEDURES**





Disclosure
      Controls and Procedures




Our
      management, with the participation of our chief executive officer and chief
      financial officer, evaluated the effectiveness of our disclosure controls and
      procedures as of June 30, 2008. The term “disclosure controls and procedures,”
as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means
      controls and other procedures of a company that are designed to ensure that
      information required to be disclosed by a company in the reports that it files
      or submits under the Exchange Act is recorded, processed, summarized and
      reported, within the time periods specified in the Securities and Exchange
      Commission’s rules and forms. Disclosure controls and procedures include,
      without limitation, controls and procedures designed to ensure that information
      required to be disclosed by a company in the reports that it files or submits
      under the Exchange Act is accumulated and communicated to the company’s
      management, including its principal executive and principal financial officers,
      as appropriate to allow timely decisions regarding required disclosure.
      Management recognizes that any controls and procedures, no matter how well
      designed and operated, can provide only reasonable assurance of achieving their
      objectives and management necessarily applies its judgment in evaluating the
      cost-benefit relationship of possible controls and procedures. Based on the
      evaluation of our disclosure controls and procedures as of June 30, 2008, our
      chief executive officer and chief financial officer concluded that, as of such
      date, our disclosure controls and procedures were effective.





Changes
      in Internal Control Over Financial Reporting




There
      have been no changes in our internal control over financial reporting that
      occurred during the quarter ended June 30, 2008 that have materially
      affected, or are reasonably likely to materially affect, our internal control
      over financial reporting.





**PART
      II – OTHER INFORMATION**





**ITEM
      1. LEGAL PROCEEDINGS**





None
      for
      the period covered by this report.




22




**ITEM
      1A. RISK FACTORS**




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





**Risks
      Related to Our Business**





***We
      face substantial competition which, among other things, may lead to price
      pressure and adversely affect our sales.***





We
      compete with other market players on the basis of product quality,
      responsiveness to customer needs and price. There are two types of steel and
      iron companies in China: State Owned Enterprises (“SOEs”), and privately owned
      companies.





Criteria
      important to our customers when selecting a steel supplier include:





·
            Quality;





·
            Price/cost
                competitiveness;





·
            System
                and product performance;





·
            Reliability
                and timeliness of delivery;





·
            New
                product and technology development
                capability;





·
            Excellence
                and flexibility in operations;





·
            Degree
                of global and local presence;





·
            Effectiveness
                of customer service; and





·
            Overall
                management capability.




We
      compete with both SOEs and privately owned steel manufacturers. While we believe
      that our price and quality are superior to other manufacturers, many of our
      competitors are better capitalized, more experienced, and have deeper ties
      in
      the Chinese marketplace. We consider there to be the following eight major
      competitors of similar size, production capability and product line in the
      market place competing against our three operating subsidiaries as
      indicated:





·
            Competitors
                of Daqiuzhuang Metal include: Tianjin No. 1 Rolling Steel Plant,
                Tianjin
                Yinze Metal Sheet Plant and Tangshan Fengrun Metal Sheet
                Plant;





·
            Competitors
                of Longmen Joint Venture include: Shanxi Haixin Iron and Steel Co.,
                Ltd.
                and Gansu Jiuquan Iron and Steel Co., Ltd.;
                and




23




·
            Competitors
                of Baotou Steel Pipe Joint Venture include: Tianjin Bo Ai Steel Pipe
                Co.,
                Hebei Cangzhou Zhong Yuan Steel Pipe Co., and Shanxi Taiyuan Guo
                Lian
                Steel Pipe Co.





In
      addition, with China’s entry into the World Trade Organization and China’s
      agreements to lift many of the barriers to foreign competition, we believe
      that
      competition will increase as a whole with the entry of foreign companies into
      this market. This may limit our opportunities for growth, lead to price pressure
      and reduce our profitability. We may not be able to compete favorably and this
      increased competition may harm our business, our business prospects and results
      of operations.





***Our
      limited operating history may not serve as an adequate basis to judge our future
      prospects and results of operations.***





Our
      limited operating history may not provide a meaningful basis on which to
      evaluate our business. Although our revenues have grown rapidly since inception,
      we might not be able to maintain our profitability or we may incur net losses
      in
      the future. We expect that our operating expenses will increase as we expand.
      Any significant failure to realize anticipated revenue growth could result
      in
      significant operating losses. We will continue to encounter risks and
      difficulties frequently experienced by companies at a similar stage of
      development, including our potential failure to:





·
            Implement
                our business model and strategy and adapt and modify them as
                needed;





·
            Increase
                awareness of our brands, protect our reputation and develop customer
                loyalty;





·
            Manage
                our expanding operations and service offerings, including the integration
                of any future acquisitions;





·
            Maintain
                adequate control of our expenses;





·
            Anticipate
                and adapt to changing conditions in the markets in which we operate
                as
                well as the impact of any changes in government regulation;
                and





·
            Anticipate
                mergers and acquisitions, technological developments and other significant
                competitive and market dynamics involving our competitors. Our business,
                business prospects and results of operations will be affected if
                we are
                not successful in addressing any or all of these risks and
                difficulties.





***Our
      inability to fund our capital expenditure requirements may adversely affect
      our
      growth and profitability.***





Our
      continued growth is dependent upon our ability to raise additional capital
      from
      outside sources. Our strategy is to grow through aggressive mergers, joint
      ventures and acquisitions targeting SOE steel companies and selected entities
      with outstanding potential. Our growth strategy will require us to obtain
      additional financing through capital markets. In the future, we may be unable
      to
      obtain the necessary financing on a timely basis and on favorable terms, and
      our
      failure to do so may weaken our financial position, reduce our competitiveness,
      limit our growth and reduce our profitability. Our ability to obtain acceptable
      financing at any given time may depend on a number of factors,
      including:





·
            Our
                financial condition and results of
                operations;




·
            The
                condition of the PRC economy and the industry sectors in which we
                operate;
                and





·
            Conditions
                in relevant financial markets in the U.S., the PRC and elsewhere
                in the
                world.




24




***We
      may not be able to effectively control and manage our
      growth.***





If
      our
      business and markets grow and develop, it will be necessary for us to finance
      and manage such an expansion in an orderly fashion. This growth will lead to
      an
      increase in the responsibilities of existing personnel, the hiring of additional
      personnel and expansion of our scope of operations. It is possible that we
      may
      not be able to obtain the required financing under terms that are acceptable
      to
      us or hire additional personnel to meet the needs of our expansion.





***Our
      business, revenues and profitability are dependent on a limited number of large
      customers.***





Our
      revenue is dependent, in large part, on significant contracts with a limited
      number of large customers. For the six months ended June 30, 2008, approximately
      42.1% of our sales were to five customers and these customers accounted for
      58.7% of total account receivables. We believe that revenue derived from
      our current and future large customers will continue to represent a significant
      portion of our total revenue. Our inability to continue to secure and maintain
      a
      sufficient number of large contracts or the loss of, or significant reduction
      in
      purchases by, one or more of our major customers would have the effect of
      reducing our revenues and profitability.





Moreover,
      our success will depend in part upon our ability to obtain orders from new
      customers, as well as the financial condition and success of our customers
      and
      general economic conditions in China.





***Steel
      consumption is cyclical and worldwide overcapacity in the steel industry and
      the
      availability of alternative products have resulted in intense competition,
      which
      may have an adverse effect on profitability and cash flow.***





Steel
      consumption is highly cyclical and follows general economic and industrial
      conditions both worldwide and in regional markets. The steel industry has
      historically been characterized by excess world supply, which has led to
      substantial price decreases during periods of economic weakness. Future economic
      downturns could decrease the demand for our products. Substitute materials
      are
      increasingly available for many steel products, which further reduces demand
      for
      steel.





***We
      may not be able to pass on to customers the increases in the costs of our raw
      materials, particularly iron-ore and steel.***





The
      major
      raw materials that we purchase for production are iron-ore and steel coil.
      The
      price and availability of these raw materials are subject to market conditions
      affecting supply and demand. Our financial condition or results of operations
      may be impaired by further increases in raw material costs to the extent we
      are
      unable to pass those increases to our customers. In addition, if these materials
      are not available on a timely basis or at all, we may not be able to produce
      our
      products and our sales may decline.





***The
      price of steel may decline due to an overproduction by Chinese steel
      companies.***





According
      to the survey conducted by the China Iron and Steel Association, there are
      more
      than 1,100 steel companies in China. Among those, only 15 companies have over
      5
      million tons of production capacity. Each steel company has its own production
      plan. The Chinese government posted this guidance on the steel industry to
      encourage consolidation within the fragmented steel sector to mitigate problems
      of low-end repetitive production and inefficient use of resources. The current
      situation of overproduction may not be solved by these measures posted by the
      Chinese government and result in consolidation within the fragmented steel
      sector. If the current state of overproduction continues, our product shipments
      could decline, our inventory could build up and eventually we may be required
      to
      decrease our sales price, which may eventually decrease our profitability.




25




***Disruptions
      to our manufacturing processes could adversely affect our operations, customer
      service and financial results.***




Steel
      manufacturing processes are dependent on critical steel-making equipment, such
      as furnaces, continuous casters, rolling mills and electrical equipment (such
      as
      transformers), and such equipment may incur downtime as a result of
      unanticipated malfunctions or other events, such as fires or furnace breakdowns.
      Although our manufacturing plants have not experienced plant shutdowns or
      periods of reduced production as a result of such equipment failures or other
      events, we may experience such problems in the future. To the extent that lost
      production as a result of such a disruption could not be recovered by unaffected
      facilities, such disruptions could have an adverse effect on our operations,
      customer service and financial results.




***Because
      we are a holding company with substantially all of our operations conducted
      through our subsidiaries, our performance will be affected by the performance
      of
      our subsidiaries.***





We
      have
      no operations independent of those of Daqiuzhuang Metal, Baotou Steel Pipe
      Joint
      Venture and Longmen Joint Venture, and our principal assets are our investments
      in these subsidiaries. As a result, we are dependent upon the performance of
      Daqiuzhuang Metal, Baotou Steel Pipe Joint Venture ,Longmen Joint Venture and
      Maoming and we will be subject to the financial, business and other factors
      affecting our subsidiaries as well as general economic and financial conditions.
      As substantially all of our operations are and will be conducted through our
      subsidiaries, we will be dependent on the cash flow of our subsidiaries to
      meet
      our obligations.





Because
      virtually all of our assets are and will be held by operating subsidiaries,
      the
      claims of our stockholders will be structurally subordinate to all existing
      and
      future liabilities and obligations, and trade payables of such subsidiaries.
      In
      the event of our bankruptcy, liquidation or reorganization, our assets and
      those
      of our subsidiaries will be available to satisfy the claims of our stockholders
      only after all of our subsidiaries’ liabilities and obligations have been paid
      in full.





***We
      depend on acquiring companies to fulfill our growth
      plan.***





An
      important element of our planned growth strategy is the pursuit and acquisitions
      of other businesses that increase our existing production capacity. However,
      acquiring and integrating businesses involves a number of special risks,
      including the possibility that management may be distracted from regular
      business concerns by the need to integrate operations, unforeseen difficulties
      in integrating operations and systems, problems relating to assimilating and
      retaining employees of the acquired businesses, challenges in retaining
      customers, and potential adverse short-term effects on operation results. If
      we
      are unable to successfully complete and integrate strategic acquisitions in
      a
      timely manner, our growth strategy may be adversely impacted.





***We
      depend on bank financing for our working capital
      needs.***





We
      have
      various financing facilities amounting to approximately $321million, of which
      all are due on demand or within one year **.** So
      far,
      we have not experienced any difficulties in repaying such financing facilities.
      However, we may in the future encounter difficulties to repay or refinance
      such
      loans on time and may face severe difficulties in our operations and financial
      position.





***We
      rely on Mr. Zuosheng Yu for important business
      leadership.***





We
      depend, to a large extent, on the abilities and operations of our current
      management team. However, we have a particular reliance upon Mr. Zuosheng Yu,
      our Chairman, Chief Executive Officer and majority shareholder, for the
      direction of our business and leadership in our growth effort. The loss of
      the
      services of Mr. Yu, for any reason, may have a material adverse effect on our
      business and prospects. We cannot guarantee that Mr. Yu will continue to be
      available to us, or that we will be able to find a suitable replacement for
      Mr.
      Yu on a timely basis.




26




***There
      have been historical deficiencies with our internal controls which require
      further improvements, and we are exposed to potential risks from legislation
      requiring companies to evaluate controls under Section 404 of the Sarbanes-Oxley
      Act of 2002.***





While
      we
      believe that we currently have adequate internal control procedures in place,
      we
      are still exposed to potential risks from legislation requiring companies to
      evaluate controls under Section 404 of the Sarbanes-Oxley Act of 2002. Under
      the
      supervision and with the participation of our management, we have evaluated
      our
      internal controls systems in order to allow management to report on, and our
      registered independent public accounting firm to attest to, our internal
      controls, as required by Section 404 of the Sarbanes-Oxley Act. We have
      performed the system and process evaluation and testing required in an effort
      to
      comply with the management certification and auditor attestation requirements
      of
      Section 404. As a result, we have incurred additional expenses and a diversion
      of management’s time. If we are not able to continue to meet the requirements of
      Section 404 in a timely manner or with adequate compliance, we might be subject
      to sanctions or investigation by regulatory authorities, such as the SEC or
      the
      NYSE Market. Any such action could adversely affect our financial results and
      the market price of our stock.




***We
      do not presently maintain product liability insurance in the PRC, and our
      property and equipment insurance does not cover the full value of our property
      and equipment, which leaves us with exposure in the event of loss or damage
      to
      our properties or claims filed against us.***





We
      currently do not carry any product liability or other similar insurance in
      China. We cannot assure you that we would not face liability in the event of
      the
      failure of any of our products.





We
      have
      purchased automobile insurance with third party liability coverage for our
      vehicles. In addition, we have purchased property insurance from China United
      Property Insurance Company to cover real property and plant. Except for property
      and automobile insurance, we do not have other insurance such as business
      liability or disruption insurance coverage for our operations in the PRC. In
      the
      event of a significant product liability claim or other uninsured event, our
      financial results and the price of our common stock may be adversely affected.





**Risks
      Related to Operating Our Business in China**





***We
      face the risk that changes in the policies of the Chinese government could
      have
      significant impact upon the business we may be able to conduct in China and
      the
      profitability of such business.***





The
      economy of China is transitioning from a planned economy to a market oriented
      economy subject to five-year and annual plans adopted by the government that
      set
      down national economic development goals. Policies of the Chinese government
      can
      have significant effects on the economic conditions of China. The Chinese
      government has confirmed that economic development will follow a model of market
      economy under socialism. Under this direction, we believe that the PRC will
      continue to strengthen its economic and trading relationships with foreign
      countries and business development in China will follow market forces. While
      we
      believe that this trend will continue, there can be no assurance that such
      will
      be the case. A change in policies by the Chinese government could adversely
      affect our interests through, among other factors: changes in laws, regulations
      or the interpretation thereof; confiscatory taxation; restrictions on currency
      conversion, imports or sources of supplies; or the expropriation or
      nationalization of private enterprises. Although the Chinese government has
      been
      pursuing economic reform policies for approximately two decades, the Chinese
      government may significantly alter such policies, especially in the event of
      a
      change in leadership, social or political disruption, or other circumstances
      affecting China’s political, economic and social life.




27




***The
      PRC laws and regulations governing our current business operations and
      contractual arrangements are uncertain, and if we are found to be in violation,
      we could be subject to sanctions. In addition, any changes in such PRC laws
      and
      regulations may have a material and adverse effect on our
      business.***




There
      are
      substantial uncertainties regarding the interpretation and application of PRC
      laws and regulations, including but not limited to the laws and regulations
      governing our business, or the enforcement and performance of our arrangements
      with customers in the event of the imposition of statutory liens, death,
      bankruptcy and criminal proceedings. Along with our subsidiaries, we are
      considered foreign persons or foreign funded enterprises under PRC laws, and
      as
      a result, we are required to comply with PRC laws and regulations. These laws
      and regulations are relatively new and may be subject to future changes, and
      their official interpretation and enforcement may involve substantial
      uncertainty. The effectiveness of newly enacted laws, regulations or amendments
      may be delayed, resulting in detrimental reliance by foreign investors. New
      laws
      and regulations that affect existing and proposed future businesses may also
      be
      applied retroactively. In addition, the PRC authorities retain broad discretion
      in dealing with violations of laws and regulations, including levying fines,
      revoking business licenses and requiring actions necessary for compliance.
      In
      particular, licenses, permits and beneficial treatment issued or granted to
      us
      by relevant governmental bodies may be revoked at a later time under contrary
      findings of higher regulatory bodies. We cannot predict what effect the
      interpretation of existing or new PRC laws or regulations may have on our
      businesses. We may be subject to sanctions, including fines, and could be
      required to restructure our operations. Such restructuring may not be deemed
      effective or encounter similar or other difficulties. As a result of these
      substantial uncertainties, there is a risk that we may be found in violation
      of
      any current or future PRC laws or regulations.





***A
      slowdown or other adverse developments in the PRC economy may materially and
      adversely affect our customers, demand for our services and our
      business.***





All
      of
      our operations are conducted in the PRC and all of our revenues are generated
      from sales to businesses operating in the PRC. Although the PRC economy has
      grown significantly in recent years, such growth may not continue. We do not
      know how sensitive we are to a slowdown in economic growth or other adverse
      changes in the PRC economy which may affect demand for agricultural equipment.
      A
      slowdown in overall economic growth, an economic downturn or recession or other
      adverse economic developments in the PRC may materially reduce the demand for
      our products and in turn adversely effect our results of operations and our
      productivity.





***Inflation
      in China could negatively affect our profitability and
      growth.***





While
      the
      Chinese economy has experienced rapid growth, such growth has been uneven among
      various sectors of the economy and in different geographical areas of the
      country. Rapid economic growth can lead to growth in the money supply and rising
      inflation. If prices for our products rise at a rate that is insufficient to
      compensate for the rise in the costs of supplies, it may have an adverse effect
      on profitability. In order to control inflation in the past, the Chinese
      government has imposed controls on bank credits, limits on loans for fixed
      assets and restrictions on state bank lending. Such an austerity policy can
      lead
      to a slowing of economic growth. In October 2004, the People’s Bank of China,
      China’s central bank, raised interest rates for the first time in nearly a
      decade and indicated in a statement that the measure was prompted by
      inflationary concerns in the Chinese economy. Repeated increases in interest
      rates by the central bank will likely slow economic activity in China which
      could, in turn, materially increase our costs and also reduce demand for our
      products.





***If
      relations between the United States and China deteriorate, our stock price
      may
      decrease and we may experience difficulties accessing the U.S. capital
      markets.***





At
      various times during recent years, the United States and China have had
      disagreements over political and economic issues. Controversies may arise in
      the
      future between these two countries. Any political or trade controversies between
      the United States and China could impact the market price of our common stock
      and our ability to access U.S. capital markets.




28




***The
      Chinese Government could change its policies toward private enterprises, which
      could result in the total loss of our investments in
      China.***





Our
      business is subject to political and economic uncertainties in China and may
      be
      adversely affected by its political, economic and social developments. Over
      the
      past several years, the Chinese Government has pursued economic reform policies
      including the encouragement of private economic activity and greater economic
      decentralization. The Chinese Government may not continue to pursue these
      policies or may alter them to our detriment from time to time. Conducting our
      business might become more difficult or costly due to changes in policies,
      laws
      and regulations, or in their interpretation or the imposition of confiscatory
      taxation, restrictions on currency conversion, restrictions or prohibitions
      on
      dividend payments to stockholders, devaluations of currency or the
      nationalization or other expropriation of private enterprises. In addition,
      nationalization or expropriation could result in the total loss of our
      investments in China.





***The
      PRC State Administration of Foreign Exchange, or SAFE, requires PRC residents
      to
      register with, or obtain approval from SAFE regarding their direct or indirect
      offshore investment activities.***





PRC
      State
      Administration of Foreign Exchange Regulations regarding offshore financing
      activities by PRC residents has undertaken continuous changes which may increase
      the administrative burden we face and create regulatory uncertainties that
      could
      adversely affect the implementation of our acquisition strategy. A failure
      by
      our shareholders who are PRC residents to make any required applications and
      filings pursuant to such regulations may prevent us from being able to
      distribute profits and could expose us and our PRC resident shareholders to
      liability under PRC law.





***Our
      business, results of operations and overall profitability are linked to the
      economic, political and social conditions in China.***





All
      of
      our business, assets and operations are located in China. The economy of China
      differs from the economies of most developed countries in many respects,
      including government involvement, level of development, growth rate, control
      of
      foreign exchange, and allocation of resources. The economy of China has been
      transitioning from a planned economy to a more market-oriented economy. Although
      the Chinese Government has implemented measures recently emphasizing the
      utilization of market forces for economic reform, the reduction of state
      ownership of productive assets and the establishment of sound corporate
      governance in business enterprises, a substantial portion of productive assets
      in China is still owned by the Chinese Government. In addition, the Chinese
      Government continues to play a significant role in regulating industry by
      imposing industrial policies. It also exercises significant control over China’s
      economic growth through the allocation of resources, controlling payment of
      foreign currency denominated obligations, setting monetary policy and providing
      preferential treatment to particular industries or companies. Therefore, the
      Chinese Government’s involvement in the economy may negatively affect our
      business operations, results of operations and our financial
      condition.





***Governmental
      control of currency conversion may cause the value of your investment in our
      common stock to decrease.***





The
      PRC
      government imposes controls on the convertibility of Renminbi into foreign
      currencies and, in certain cases, the remittance of currency out of the PRC.
      We
      receive substantially all of our revenues in Renminbi, which is currently not
      a
      freely convertible currency. Shortages in the availability of foreign currency
      may restrict our ability to remit sufficient foreign currency to pay dividends,
      or otherwise satisfy foreign currency denominated obligations. Under existing
      PRC foreign exchange regulations, payments of current account items, including
      profit distributions, interest payments and expenditures from the transaction,
      can be made in foreign currencies without prior approval from the PRC State
      Administration of Foreign Exchange by complying with certain procedural
      requirements. However, approval from appropriate governmental authorities is
      required where Renminbi is to be converted into foreign currency and remitted
      out of China to pay capital expenses such as the repayment of bank loans
      denominated in foreign currencies.




29




The
      PRC
      government may also at its discretion restrict access in the future to foreign
      currencies for current account transactions. If the foreign exchange control
      system prevents us from obtaining sufficient foreign currency to satisfy our
      currency demands, we may not be able to pay certain of our expenses as they
      come
      due.




***The
      fluctuation of the Renminbi may cause the value of your investment in our common
      stock to decrease.***





The
      value
      of the Renminbi against the U.S. dollar and other currencies may fluctuate
      and
      is affected by, among other things, changes in the PRC’s political and economic
      conditions. As we rely entirely on revenues earned in the PRC, our cash flows,
      revenues and financial condition will be affected by any significant revaluation
      of the Renminbi. For example, to the extent that we need to convert U.S. dollars
      we receive from an offering of our securities into Renminbi for our operations,
      if the Renminbi appreciates against the U.S. dollar, the Renminbi equivalent
      of
      the US dollar we convert would be reduced. Conversely, if we decide to convert
      our Renminbi into U.S. dollars for the purpose of making payments for dividends
      on our common shares or for other business purposes and the U.S. dollar
      appreciates against the Renminbi, the U.S. dollar equivalent of the Renminbi
      we
      convert would be reduced. To date, however, we have not engaged in transactions
      of either type. In addition, the depreciation of significant U.S. dollar
      denominated assets could result in a charge to our income statement and a
      reduction in the value of these assets.





Since
      1994 the PRC has pegged the value of the Renminbi to the U.S. dollar. We do
      not
      believe that this policy has affected our business. However, there have been
      indications that the PRC government may be reconsidering its monetary policy
      in
      light of the overall devaluation of the U.S. dollar against the Euro and other
      currencies during the last two years. In July 2005, the PRC government revalued
      the Renminbi by 2.1% against the U.S. dollar, moving from Renminbi 8.28 to
      Renminbi 8.11 per dollar. If the pegging of the Renminbi to the U.S. dollar
      is
      loosened, we anticipate that the value of the Renminbi will appreciate against
      the dollar with the consequences discussed above. As of June 30, 2008, the
      exchange rate of the RMB to the U.S. dollar was 6.854 yuan to 1
      dollar.





***We
      are subject to environmental and safety regulations, which may increase our
      compliance costs and reduce our overall
      profitability.***





We
      are
      subject to the requirements of environmental and occupational safety and health
      laws and regulations in China. We may incur substantial costs or liabilities
      in
      connection with these requirements. Additionally, these regulations may become
      stricter, which will increase our costs of compliance in a manner that could
      reduce our overall profitability. The capital requirements and other
      expenditures that may be necessary to comply with environmental requirements
      could increase and become a significant expense linked to the conduct of our
      business.





***Our
      operating subsidiary must comply with environmental protection laws that could
      adversely affect our profitability.***





We
      are
      required to comply with the environmental protection laws and regulations
      promulgated by the national and local governments of the PRC. Yearly inspections
      of waste treatment systems require the payment of a license fee which could
      become a penalty fee if standards are not maintained. If we fail to comply
      with
      any of these environmental laws and regulations in the PRC, depending on the
      types and seriousness of the violation, we may be subject to, among other
      things, warning from relevant authorities, imposition of fines, specific
      performance and/or criminal liability, forfeiture of profits made, being ordered
      to close down our business operations and suspension of relevant permits.




30




***Because
      the Chinese legal system is not fully developed, our legal protections may
      be
      limited.***





The
      PRC
      legal system is based upon written statutes. Prior court decisions may be cited
      for reference but are not binding on subsequent cases and have limited value
      as
      precedents. Since 1979, the PRC legislative bodies have promulgated laws and
      regulations dealing with economic matters such as foreign investment, corporate
      organization and governance, commerce, taxation and trade. However, the PRC
      has
      not developed a fully integrated legal system and the array of new laws and
      regulations may not be sufficient to cover all aspects of economic activities
      in
      the PRC. In particular, because these laws and regulations are relatively new,
      and because of the limited volume of published decisions and their non-binding
      nature, the interpretation and enforcement of these laws and regulations involve
      uncertainties. In addition, published government policies and internal rules
      may
      have retroactive effects and, in some cases, the policies and rules are not
      published at all. As a result, we may be unaware of our violation of these
      policies and rules until some time later. The laws of the PRC govern our
      contractual arrangements with our affiliated entities. The enforcement of these
      contracts and the interpretation of the laws governing these relationships
      are
      subject to uncertainty. For the above reasons, legal compliance in China may
      be
      more difficult or expensive.





**Risks
      Related to Our Common Stock**





***Our
      officers, directors and affiliates control us through their positions and stock
      ownership and their interests may differ from other
      stockholders.***





Our
      officers, directors and affiliates beneficially own approximately 66% of our
      common stock. Mr. Zuosheng Yu our major shareholder, beneficially owns
      approximately 63% of our common stock. Mr. Yu can effectively control us and
      his
      interests may differ from other stockholders.





All
      our
      subsidiaries are located in China and substantially all of our assets are
      located outside the United States. It may therefore be difficult for investors
      in the United States to enforce their legal rights based on the civil liability
      provisions of the U.S. federal securities laws against us in the courts of
      either the U.S. and the PRC and, even if civil judgments are obtained in U.S.
      courts, such judgments may not be enforceable in PRC courts. All our directors
      and officers reside outside of the United States. It is unclear if extradition
      treaties now in effect between the United States and the PRC would permit
      effective enforcement against us or our officers and directors of criminal
      penalties under the U.S. federal securities laws or otherwise.




***We
      have never paid cash dividends and are not likely to do so in the foreseeable
      future.***





We
      currently intend to retain any future earnings for use in the operation and
      expansion of our business. We do not expect to pay any cash dividends in the
      foreseeable future but will review this policy as circumstances
      dictate.





***Our
      common stock is subject to price volatility unrelated to our
      operations.***





The
      market price of our common stock could fluctuate substantially due to a variety
      of factors, including market perception of our ability to achieve our planned
      growth, quarterly operating results of other steel makers, trading volume in
      our
      common stock, changes in general conditions in the economy and the financial
      markets or other developments affecting our competitors or us. In addition,
      the
      stock market is subject to extreme price and volume fluctuations. This
      volatility has had a significant effect on the market price of securities issued
      by many companies for reasons unrelated to their operating performance and
      could
      have the same effect on our common stock.




31




***Investors
      may experience dilution from any conversion of the senior convertible notes
      and
      the exercise of warrants we issued in December 2007.***




We
      are
      registering the shares of our common stock issuable upon conversion
      approximately $40,000,000 worth of senior convertible notes convertible into
      4,170,009 shares of our common stock assuming a conversion price of $12.47
      per
      share and applicable interest rates and upon the exercise warrants to purchase
      an additional aggregate amount of 1,154,958 shares of our common stock at an
      exercise price of $13.51 per share that we issued in December 2007. The issuance
      of shares of our common stock upon conversion of the notes and exercise of
      the
      warrants will dilute current shareholders’ holdings in our company. The senior
      convertible notes have a five year term through December 12, 2012 and the
      warrants are exercisable from May 13, 2008 to May 13, 2013.





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





**87,400
      share issuance of common stock as interim incentives to senior and mid-level
      management**





On
      April
      22, 2008, the Company issued senior management and directors 87,400 shares
      of
      our common stock as compensation. We valued the shares at the market price
      as of
      the date they were granted. We recorded $582,084 as compensation
      expense.





**ITEM
      3. DEFAULTS UPON SENIOR SECURITIES**





Not
      applicable.





**ITEM
      4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**





(a)
            Our
                Annual Meeting of Stockholders was held on July 25, 2008, during
                the third
                fiscal quarter of 2008.





(b)
            All
                of the matters voted upon were approved and the specific votes are
                as
                follows:




*1.*
            *To
                elect the members of the Board of
                Directors:*




Number
                of SharesName
            
            For
            
            Against
            
            AbstentionsZuosheng
                Yu
            
            
            30,435,092
            
            
            41,134
            
            
            18,884John
                Chen
            
            
            30,376,606
            
            
            100,643
            
            
            18,869Danli
                Zhang
            
            
            30,433,737
            
            
            40,305
            
            
            21,007Ross
                Warner
            
            
            30,452,315
            
            
            35,007
            
            
            7,732John
                Wong
            
            
            30,441,244
            
            
            35,007
            
            
            21,373Qinghai
                Du
            
            
            30,395,004
            
            
            49,911
            
            
            50,204Zhongkui
                Cao
            
            
            30,369,057
            
            
            107,178
            
            
            18,884Chris
                Wang
            
            
            30,436,729
            
            
            34,522
            
            
            23,869Fred
                Hsu
            
            
            30,441,529
            
            
            115,022
            
            
            18,569




*2.*
            *To
                approve and ratify the appointment of**Moore
                Stephens Wurth Frazer and Torbet LLP**as the Company’s independent auditors for the fiscal year ending December
                31, 2008:*




Number
                of SharesFor
            
            Against
            
            Abstentions30,480,953
            
            
            3,615
            
            
            10,553







*3.*
            *To
                approve and ratify the Company’s 2008 Equity Incentive
                Plan:*




Number
                of SharesFor
            
            Against
            
            Abstentions23,424,888
            
            
            71,107
            
            
            5,681





32




**ITEM
      5. OTHER INFORMATION**





Not
      applicable.




**ITEM
      6. EXHIBITS**





(a)
            Exhibits





31.1
            
            Certification
                of the CEO pursuant to 18 U.S.C. Section 1350 adopted pursuant to
                Section
                302 of the Sarbanes-Oxley Act of 2002, as filed herewith.31.2
            
            Certification
                of the CFO pursuant to 18 U.S.C. Section 1350 adopted pursuant to
                Section
                302 of the Sarbanes-Oxley Act of 2002, as filed herewith.32.1
            
            Certification
                of the CEO pursuant to 18 U.S.C. Section 1350 adopted pursuant to
                Section
                906 of the Sarbanes-Oxley Act of 2002, as filed herewith.32.2
            
            Certification
                of the CFO pursuant to 18 U.S.C. Section 1350 adopted pursuant to
                Section
                906 of the Sarbanes-Oxley Act of 2002, as filed herewith.




33




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:
                AUG 14, 2008
            By:
            /s/
                Zuosheng YuZuosheng
                YuChief
                Executive Officer and ChairmanDate:
                AUG 14, 2008
            By:
            /s/
                John ChenJohn
                ChenDirector
                and Chief Financial Officer




34