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UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C.
20549

FORM 10−Q

(Mark One)

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

For the quarterly period ended: March 31, 2011

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

For the transition period from ____________ to _____________

Commission File Number: 001-35017

LONGHAI STEEL INC.(Exact Name of Registrant as Specified in Its Charter)

|Nevada                          | 11-3699388                          
|------------------------------- | ------------------------------------
|(State or other jurisdiction of | (I.R.S. Employer Identification No.)
|incorporation or organization)  |                                     

No. 1 Jingguang Road, Neiqiu CountyXingtai City,
Hebei Province 054000Peoples Republic of China(Address of principal executive offices, Zip Code)

(+86) 319-686-1111(Registrants telephone
number, including area code)

_____________________________________________________(Former
name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]

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

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

|Large accelerated filer [_]                                               | Accelerated filer [_]        
|------------------------------------------------------------------------- | -----------------------------
|Non-accelerated filer (Do not check if a smaller reporting
      company) | Smaller reporting company [X]

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

The number of shares outstanding of each of the issuers
classes of common stock, as of May 13, 2011 is as follows:

|Class of Securities            | Shares Outstanding
|------------------------------ | ------------------
|Common Stock, $0.001 par value | 10,000,418        

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|                        
|------------------------
|LONGHAI STEEL
      INC.

TABLE OF CONTENTS

|PART I FINANCIAL
      INFORMATION
|----------------------------------
|                                  
|Item 1.                           
|Item 2.                           
|Item 3.                           
|Item 4.                           
|                                  
|PART II OTHER INFORMATION         
|                                  
|Item 1.                           
|Item 1A.                          
|Item 2.                           
|Item 3.                           
|Item 4.                           
|Item 5.                           
|Item 6.                           

i

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PART I

FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

|LONGHAI STEEL INC. AND SUBSIDIARIES                          
|-------------------------------------------------------------
|CONSOLIDATED QUARTERLY FINANCIAL STATEMENTS
      (UNAUDITED)
|MARCH 31, 2011 AND 2010                                      

|                                                                 | Page(s)
|---------------------------------------------------------------- | -------
|Financial Statements                                             |        
|Consolidated Balance Sheets                                      | 2      
|Consolidated Statements of Income and
      Comprehensive Income | 3      
|Consolidated Statements of Cash Flows                            | 4      
|Notes to Consolidated Financial Statements                       | 5-16   

1

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|LONGHAI STEEL INC.                        
|------------------------------------------
|CONSOLIDATED BALANCE SHEETS               
|AS OF MARCH 31, 2011 AND DECEMBER 31, 2010
|(UNAUDITED)                               

|                                                                                                                                                     |   | March 31, 2011 |  |   | December 31, 2010 | 
|---------------------------------------------------------------------------------------------------------------------------------------------------- | - | -------------- |  | - | ----------------- | 
|ASSETS                                                                                                                                               |   |                |  |   |                   | 
|Current Assets                                                                                                                                       |   |                |  |   |                   | 
|Cash and cash equivalents                                                                                                                            | $ | 591,259        |  | $ | 293,445           | 
|Accounts receivable, net                                                                                                                             |   | 60             |  |   | 908,327           | 
|Inventory, net                                                                                                                                       |   | 22,258,412     |  |   | 8,500,770         | 
|Advance to suppliers                                                                                                                                 |   | 27,166,697     |  |   | 36,690,325        | 
|Tax receivable                                                                                                                                       |   | 22,849         |  |   | 276,638           | 
|Prepaid expenses                                                                                                                                     |   | 57,922         |  |   | 10,465            | 
|Notes receivable                                                                                                                                     |   | 14,306,800     |  |   | 226,867           | 
|Other current assets                                                                                                                                 |   | 8,187,558      |  |   | 6,350,750         | 
|Current deferred tax assets                                                                                                                          |   | 140,135        |  |   | 74,976            | 
|Total current assets                                                                                                                                 |   | 72,731,692     |  |   | 53,332,563        | 
|                                                                                                                                                     |   |                |  |   |                   | 
|Property, plant and equipment, net                                                                                                                   |   | 24,019,495     |  |   | 24,648,690        | 
|Construction in progress                                                                                                                             |   | 39,513         |  |   | -                 | 
|TOTAL ASSETS                                                                                                                                         | $ | 96,790,700     |  | $ | 77,981,253        | 
|                                                                                                                                                     |   |                |  |   |                   | 
|LIABILITIES AND STOCKHOLDERS' EQUITY                                                                                                                 |   |                |  |   |                   | 
|Current Liabilities                                                                                                                                  |   |                |  |   |                   | 
|Accounts payable                                                                                                                                     | $ | 21,883,658     |  | $ | 8,355,457         | 
|Advance from customers                                                                                                                               |   | 20,161,998     |  |   | 15,692,067        | 
|Income tax payable                                                                                                                                   |   | 5,665,591      |  |   | 5,701,872         | 
|Accrued liabilities                                                                                                                                  |   | 2,157,124      |  |   | 2,209,976         | 
|Due to related party                                                                                                                                 |   | 173,098        |  |   | 1,531,755         | 
|Total current
      liabilities                                                                                                                      |   | 50,041,469     |  |   | 33,491,127        | 
|                                                                                                                                                     |   |                |  |   |                   | 
|Non-current deferred tax liabilities                                                                                                                 |   | 165,185        |  |   | 170,686           | 
|TOTAL LIABILITIES                                                                                                                                    |   | 50,206,654     |  |   | 33,661,813        | 
|                                                                                                                                                     |   |                |  |   |                   | 
|STOCKHOLDERS'S EQUITY                                                                                                                                |   |                |  |   |                   | 
|                                                                                                                                                     |   |                |  |   |                   | 
|Common Stock, .001 par value, 100,000,000 shares
      authorized, 10,000,000 shares and 9,850,000 shares issued and outstanding,
      respectively |   | 10,000         |  |   | 10,000            | 
|Additional paid-in capital                                                                                                                           |   | 3,236,178      |  |   | 3,173,897         | 
|Statutory reserve                                                                                                                                    |   | 1,475,198      |  |   | 1,475,198         | 
|Accumulated other comprehensive income                                                                                                               |   | 2,455,200      |  |   | 2,166,544         | 
|Retained earnings                                                                                                                                    |   | 39,407,470     |  |   | 37,493,801        | 
|TOTAL STOCKHOLDERS EQUITY                                                                                                                           |   | 46,584,046     |  |   | 44,319,440        | 
|                                                                                                                                                     |   |                |  |   |                   | 
|TOTAL LIABILITIES AND STOCKHOLDERS
      EQUITY                                                                                                     | $ | 96,790,700     |  | $ | 77,981,253        | 

The accompanying notes are an integral part of these unaudited
consolidated financial statements

2

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|LONGHAI STEEL INC.                                                  
|--------------------------------------------------------------------
|CONSOLIDATED STATEMENTS OF OPERATIONS AND
      COMPREHENSIVE INCOME
|FOR THREE MONTHS ENDED MARCH 31, 2011 AND 2010                      
|(UNAUDITED)                                                         

|                                                        |   | Three Months Ended March 31, |  
|------------------------------------------------------- | - | ---------------------------- | -
|                                                        |   | 2011                         |  
|                                                        |   |                              |  
|Revenue                                                 | $ | 126,315,862                  |  
|Cost of revenue                                         |   | (122,369,415                 | )
|Gross profit                                            |   | 3,946,447                    |  
|                                                        |   |                              |  
|General and administrative expenses                     |   | (794,967                     | )
|Income from operations                                  |   | 3,151,480                    |  
|                                                        |   |                              |  
|Interest income                                         |   | 1,549                        |  
|Interest expense                                        |   | (572,380                     | )
|Other expenses                                          |   | (6,843                       | )
|Total other income and expenses                         |   | (577,674                     | )
|                                                        |   |                              |  
|Income before income taxes                              |   | 2,573,806                    |  
|Income tax expense                                      |   | (660,137                     | )
|                                                        |   |                              |  
|Net income                                              | $ | 1,913,669                    |  
|                                                        |   |                              |  
|Net Income per share  basic and diluted                | $ | 0.19                         |  
|                                                        |   |                              |  
|Weighted average shares outstanding  basic and diluted |   | 10,000,000                   |  
|                                                        |   |                              |  
|Comprehensive Income                                    |   |                              |  
|Net income                                              | $ | 1,913,669                    |  
|Other comprehensive income                              |   | 288,656                      |  
|Comprehensive income                                    | $ | 2,202,325                    |  

The accompanying notes are an integral part of these unaudited
consolidated financial statements

3

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|LONGHAI STEEL INC.                            
|----------------------------------------------
|CONSOLIDATED STATEMENTS OF CASH FLOWS         
|FOR THREE MONTHS ENDED MARCH 31, 2011 AND 2010
|(UNAUDITED)                                   

|                                                            |   | Three Months Ended March 31, |  
|----------------------------------------------------------- | - | ---------------------------- | -
|                                                            |   | 2011                         |  
|                                                            |   |                              |  
|Cash flows from operating
      activities:                 |   |                              |  
|Net income                                                  | $ | 1,913,669                    |  
|Adjustments to reconcile net income to cash
      provided  |   |                              |  
|by operating activities:                                    |   |                              |  
|Depreciation and amortization                               |   | 782,813                      |  
|Deferred tax assets / liabilities                           |   | (71,078                      | )
|Stock option expenses                                       |   | 62,281                       |  
|Changes in operating assets and liabilities:                |   |                              |  
|Accounts receivable                                         |   | 911,601                      |  
|Inventory                                                   |   | (13,667,935                  | )
|Advance to suppliers                                        |   | 9,729,725                    |  
|Prepaid expenses and other current assets                   |   | (1,839,241                   | )
|Tax receivable                                              |   | 254,865                      |  
|Due to / from related parties                               |   | (876,783                     | )
|Accounts payable                                            |   | 13,440,013                   |  
|Accrued liabilities                                         |   | 495,955                      |  
|Advance from customers                                      |   | 4,359,333                    |  
|Income tax payable                                          |   | (72,103                      | )
|CASH PROVIDED BY OPERATING ACTIVITIES                       |   | 15,423,115                   |  
|                                                            |   |                              |  
|Cash flows from investing
      activities:                 |   |                              |  
|Cash received from related parties                          |   |                              |  
|Cash paid for fixed assets purchased by
      related party |   | (561,948                     | )
|Cash advance to third parties                               |   | -                            |  
|Purchase of notes receivable                                |   | (14,041,500                  | )
|Purchase of property and equipment                          |   | (39,410                      | )
|CASH USED IN INVESTING ACTIVITIES                           |   | (14,642,858                  | )
|                                                            |   |                              |  
|Cash flows from financing
      activities:                 |   |                              |  
|Cash advance from related parties                           |   | 11,688,341                   |  
|Cash repayment to related parties                           |   | (12,176,549                  | )
|Financing cost on fixed assets purchase                     |   | -                            |  
|CASH USED IN FINANCING ACTIVITIES                           |   | (488,208                     | )
|Effect of exchange rate changes on cash                     |   | 5,765                        |  
|Net (decrease) increase in cash and cash
      equivalents  |   | 297,814                      |  
|                                                            |   |                              |  
|Cash and cash equivalents, beginning
      balance          |   | 293,445                      |  
|Cash and cash equivalents, ending balance                   | $ | 591,259                      |  
|                                                            |   |                              |  
|SUPPLEMENTARY DISCLOSURE:                                   |   |                              |  
|Interest paid                                               | $ | 572,391                      |  
|Income tax paid                                             | $ | 805,434                      |  

The accompanying notes are an integral part of these
consolidated financial statements

4

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LONGHAI STEEL INC.NOTES TO UNAUDITED INTERIM
FINANCIAL STATEMENTS

NOTE 1 - ORGANIZATION AND BUSINESS OPERATIONS

Longhai Steel Inc., a Nevada corporation (formerly Action
Industries, Inc.) (the Company) was originally incorporated under the laws of
the State of Georgia on December 4, 1995. On March 14, 2008, the Georgia
corporation was merged with and into a newly formed Nevada corporation also
named Action Industries, Inc. and all of the outstanding shares of the Georgia
corporation were exchanged for shares in the surviving Nevada corporation.

On March 26, 2010, the Company completed a reverse acquisition
transaction through a share exchange with Kalington Limited (hereafter referred
to as Kalington), a Hong Kong entity established on November 5, 2009, and its
shareholders, whereby the Company acquired 100% of the issued and outstanding
capital stock of Kalington in exchange for 10,000 shares of our Series A
Preferred Stock which constituted 98.5% of the Companys issued and outstanding
capital stock on an as-converted basis as of and immediately after the
consummation of the reverse acquisition. On July 16, 2010, the Company effected
a 1-for-125 reverse stock split of our issued and outstanding common stock (the
Reverse Stock Split). Upon the date of the Reverse Stock Split all of the
issued and outstanding shares of Series A Preferred Stock automatically
converted into 9,850,000 shares of common stock. Following the effectiveness of
the Reverse Stock Split and conversion of Series A Preferred Stock into common
stock, there were 10,000,000 shares of our common stock issued and outstanding
and no shares of preferred stock issued and outstanding. As a result of the
reverse acquisition, Kalington became the Companys wholly-owned subsidiary and
the former stockholders of Kalington became our controlling stockholders. The
share exchange transaction with Kalington and the Shareholders was treated as a
reverse acquisition for accounting and financial reporting purposes, with
Kalington as the acquirer and the Company as the acquired party. After the
reverse acquisition, the Company changed its name to Longhai Steel Inc.

As a result of the reverse acquisition transaction, the Company
now owns all of the issued and outstanding capital stock of Kalington.

By virtue of its ownership in Kalington, the Company also owns
Kalington Consulting, which is a wholly foreign owned subsidiary of Kalington
and effectively and substantially controls Longhai, a leading producer of steel
wire products in northeastern China, through a series of captive agreements
known as variable interest agreements (the VIE Agreements) with Kalington
Consulting.

Immediately prior to the reverse acquisition, the common stock
of Kalington was owned by the following persons in the indicated percentages:
William Hugh Luckman (3.51%); Wealth Index Capital Group LLC (a US company)
(7.3%); K International Consulting Ltd. (a BVI company) (2.08%); Merrill King
International Investment Consulting Ltd. (a BVI company) (0.31%); Shanchun Huang
(3.12%); Xiucheng Yang (1.53%); Jianxin Wang (0.92%); Xingfang Zhang (29.45%);
and Merry Success Limited (a BVI company) (51.78%) . Our Chief Financial Officer
and Director, Dr. Eberhard Kornotzki, directly controls the shares held by K
International Consulting Ltd. and has a beneficial interest in Wealth Index
Capital Group LLC, and Chaojun Wang, our Chief Executive Officer, serves as a
director of Merry Success Limited, our principal stockholder after the reverse
acquisition, along with Jinhai Guo, its sole shareholder.

Kalington was established on November 5, 2009 in Hong Kong to
serve as an intermediate holding company. Chaojun Wang currently serves as the
director of Kalington. Kalington Consulting was established in the PRC on March
18, 2010, and is 100% owned by Kalington. On March 5, 2010, the local government
of the PRC issued a certificate of approval regarding the foreign ownership of
Kalington Consulting. Chaojun Wang serves as the executive director of Kalington
Consulting. Longhai, our operating VIE, was established in the PRC on August 26,
2008, as a result of the carve-out of the division of the Longhai Steel Group,
for the purpose of engaging in the production of steel wire. Chaojun Wang serves
as the Chairman of the Board of Directors and General Manager of Longhai and
owns 80% of the capital stock in Longhai. Longhais additional shareholders are
Wealth Index International (Beijing) Investment Co., Ltd. (15% owner), an entity
in which Dr. Eberhard Kornotzki, our Chief Financial Officer, has a beneficial
interest, and Wenyi Chen (5% owner). Chaojun Wang also owns 80% of the capital
stock of and is the chief executive officer of the Longhai Steel Group.

On March 19, 2010, prior to the reverse acquisition
transaction, Kalington Consulting and Longhai entered into a series of
agreements, the VIE Agreements, pursuant to which Longhai became Kalington
Consultings variable interest entity. The use of VIE agreements is a common
structure used to acquire PRC corporations, particularly in certain industries
in which foreign investment is restricted or forbidden by the PRC government.
The VIE Agreements include:

- A Consulting Services Agreement through which Kalington
Consulting has the right to advise, consult, manage and operate Longhai and
collect and own all of the net profits of Longhai;
- an Operating Agreement through which Kalington Consulting has
the right to recommend director candidates and appoint the senior executives of
Longhai, approve any transactions that may materially affect the assets,
liabilities, rights or operations of Longhai, and guarantee the contractual
performance by Longhai of any agreements with third parties, in exchange for a
pledge by Longhai of its accounts receivable and assets;
- a Proxy Agreement under which the three owners of Longhai
have vested their collective voting control over Longhai to Kalington Consulting
and will only transfer their respective equity interests in Longhai to Kalington
Consulting or its designee(s);
- an Option Agreement under which the owners of Longhai have
granted to Kalington Consulting the irrevocable right and option to acquire all
of their equity interests in Longhai; and
- an Equity Pledge Agreement under which the owners of Longhai
have pledged all of their rights, titles and interests in Longhai to Kalington
Consulting to guarantee Longhais performance of its obligations under the
Consulting Services Agreement.

5

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On March 18, 2010, prior to the reverse acquisition
transaction, Mr. Wang entered into a call option agreement, the Merry Success
Option Agreement, with Jinhai Guo, the sole shareholder of Merry Success
Limited, pursuant to which Mr. Wang has the right to acquire up to 100% of the
shares of Merry Success Limited for fixed consideration within the next three
years. The Merry Success Option Agreement also provides that Mr. Guo shall not
dispose any of the shares of Merry Success Limited without Mr. Wangs consent.
As a result of the Merry Success Option Agreement, Chaojun Wang, our Chief
Executive Officer, beneficially owns a majority of our capital stock and voting
power, as well as of Longhai and the Longhai Steel Group. Because of the common
control between Kalington, Kalington Consulting and Longhai, for accounting
purposes, the acquisition of these entities has been treated as a
recapitalization with no adjustment to the historical basis of their assets and
liabilities based on FASB rules on business combinations and transactions among
entities under common control. The restructuring has been accounted for using
the as if pooling method of accounting and the operations were consolidated as
if the restructuring had occurred as of the beginning of the earliest period
presented in our consolidated financial statements and the current corporate
structure had been in existence throughout the periods covered by our
consolidated financials.

Prior to the reverse acquisition of Kalington, the Company was
primarily in the business of providing prepaid long distance calling cards and
other telecommunication products, was in the development stage, and had not
commenced planned principal operations. As a result of our reverse acquisition
of Kalington, the Company was no longer a shell company and active business
operations were revived.

All of the Companys business operations are now conducted
through its Hong Kong and Chinese subsidiaries, Kalington and Kalington
Consulting, respectively, and controlled affiliate, Longhai. The Companys
principal business is the production of steel wire ranging from 6.5mm to 10mm in
diameter. The Company operates two wire production lines which have a combined
annual capacity of approximately 900,000 metric tons per year. The Companys
products are sold to a number of distributors who transport the wire to nearby
wire processing facilities. The Companys wire is then further processed by
third party wire refiners into a variety of products such as nails, screws, and
wire mesh for use in reinforced concrete and fencing. The Companys facilities
and head office are located in the town of Xingtai in southern Hebei Province.

Kalington was established in Hong Kong on November 5, 2009 to
serve as an intermediate holding company. Chaojun Wang currently serves as the
director of Kalington. Kalington Consulting was established in the PRC on March
18, 2010.

Longhai PRC was originally formed on August 26, 2008 as a
carve-out from the Longhai Steel Group of companies. Chaojun Wang serves as the
Chairman of the Board of Directors and General Manager of Longhai PRC and owns
80% of the capital stock of Longhai PRC. Longhai PRC's additional shareholders
are Wealth Index International (Beijing) Investment Co., Ltd. (15% owner) and
Wenyi Chen (5% owner). Chaojun Wang also owns 80% of the capital stock of and is
the chief executive officer of the Longhai Steel Group.

Longhai leases a five-story office space and the building which
houses our production facilities from the Longhai Steel Group. Until 2008,
Longhai purchased 100% of its steel billet directly from the Longhai Steel
Group. Since 2009, Longhai has purchased steel billet from third party vendors.
Steel Billet is the principal raw material used in our production of steel wire.
Longhai also purchases production utilities from the Longhai Steel Group.

6

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Since there is common control between the Company and Longhai
PRC, for accounting purposes, the acquisition of Longhai PRC has been treated as
a recapitalization with no adjustment to the historical basis of the assets and
liabilities of the consolidated company. The restructuring has been accounted
for using the as if pooling method of accounting and the operations were
consolidated as if the restructuring had occurred as of the beginning of the
earliest period presented in our consolidated financial statements and the
current corporate structure had been in existence throughout the periods covered
by our consolidated financial statements.

NOTE 2 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES

Basis of Presentation

The accompanying unaudited interim consolidated financial
statements have been prepared in accordance with accounting principles generally
accepted in the United States of America ("U.S. GAAP") and pursuant to the rules
and regulations of the Securities and Exchange Commission. Certain information
and footnote disclosures normally included in financial statements prepared in
accordance with U.S. GAAP have been condensed or omitted pursuant to such rules
and regulations. The consolidated financial statements in this report should be
read in conjunction with the December 31, 2010 audited financial statements of
the Company and the notes thereto included. In the opinion of management, all
adjustments, consisting of normal recurring adjustments, necessary for fair
presentation of financial position and results of operations for the interim
periods presented have been reflected herein. The results of operations for
interim periods are not necessarily indicative of the results to be expected for
the full year.

All significant inter-company balances and transactions have
been eliminated in consolidation. Certain prior period numbers are reclassified
to conform to current period presentation.

Principles of Consolidation

The accompanying consolidated financial statements include the
accounts of Longhai Steel Inc. and its 100%-owned subsidiary Kalington and
variable interest entity (VIE) Longhai as of March 31, 2011 and December 31,
2010, and for the three months ended March 31, 2011 and 2010. All significant
inter-company accounts and transactions were eliminated in consolidation.

Use of Estimates

The preparation of consolidated financial statements in
conformity with US GAAP requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the dates of the consolidated financial
statements and the amount of revenues and expenses during the reporting periods.
Management makes these estimates using the best information available at the
time the estimates are made. However, actual results could differ materially
from those results.

Risks and Uncertainties

The Company is subject to substantial risks from, among other
things, intense competition associated with the industry in general, other risks
associated with financing, liquidity requirements, rapidly changing customer
requirements, foreign currency exchange rates and the volatility of public
markets.

Concentration of Risk

Financial instruments that potentially subject the Company to
significant concentrations of credit risk consist principally of cash and cash
equivalents and trade and bills receivables. As of as of March 31, 2011 and
December 31, 2010, substantially all of the Companys cash and cash equivalents
were held by major financial institutions located in the PRC, which management
believes are of high credit quality. With respect to trade receivables, the
Company extends credit based on an evaluation of the customers financial
condition. The Company generally does not require collateral for trade
receivables. The Company operates principally in the PRC and grants credit to
some of its customers in this geographic region. Although the PRC is
economically stable, it is always possible that unanticipated events in foreign
countries could disrupt the Companys operations.

7

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Comprehensive Income

Comprehensive income consists of two components, net income and
other comprehensive income/(loss). Other comprehensive income refers to revenue,
expenses, gains and losses that under generally accepted accounting principles
are recorded as an element of stockholders equity but are excluded from net
income. During the periods presented, other comprehensive income includes
cumulative translation adjustment from foreign currency translation.

Foreign Currency Transactions

The reporting currency of the Company is the U.S. dollar. The
functional currency of the Company's PRC subsidiaries is the RMB. Assets and
liabilities of non-U.S. subsidiaries that operate in a local currency
environment, where that local currency is the functional currency, are
translated into U.S. dollars at exchange rates in effect at the balance sheet
date; with the resulting translation adjustments directly recorded to a separate
component of accumulated other comprehensive income. Income and expense accounts
are translated at average exchange rates during the year. Gains and losses from
foreign currency transactions are recorded in other income (loss), net. The
functional currency is the local currency for all non-U.S. subsidiaries.

The balance sheet amounts at March 31, 2011, with the exception
of shareholders' equity, were translated at the exchange rate of 6.5701 RMB to
the U.S. $1.00 compared to the exchange rate of 6.6118 RMB to the U.S. $1.00 at
December 31, 2010. The equity accounts were stated at their historical exchange
rates. The average translation rates applied to the income and cash flow
statement amounts for the three months ended March 31, 2011 and 2010 were 6.5987
RMB and 6.83604 RMB to the U.S. $1.00, respectively.

Translation adjustments resulting from this process are
included in "accumulated other comprehensive income" in the consolidated
statement of stockholders equity and were $2,455,200 and $2,166,544 as of March
31, 2011 and December 31, 2010, respectively.

Cash and Cash Equivalents

For Statement of Cash Flow purposes, the Company considers all
cash on hand and in banks, including accounts in book overdraft positions,
certificates of deposit and other highly-liquid investments with original
maturity of three months or less, when purchased, to be cash and cash
equivalents. The Company maintains cash with various banks and trust companies
located in China. Cash accounts are not insured or otherwise protected. Should
any bank or trust company holding cash deposits become insolvent, or if the
Company is otherwise unable to withdraw funds, the Company would lose the cash
on deposit with that particular bank or trust company.

Accounts Receivable

The Companys policy is to maintain reserves for potential
credit losses on accounts receivable. Management reviews the composition of
accounts receivable and analyzes historical bad debts, customer concentrations,
customer credit worthiness, current economic trends and changes in customer
payment patterns to evaluate the adequacy of these reserves. Accounts are
written off against the allowance when it becomes evident collection will not
occur. As of March 31, 2011 and December 31, 2010, the accounts receivable were
$60 and $908,327, respectively.

Inventory

Inventories are stated at the lower of cost or market. Cost is
determined on a weighted average basis and includes all expenditures incurred in
bringing the goods to the point of sale and putting them in a saleable
condition. In assessing the ultimate realization of inventories, the management
makes judgments as to future demand requirements compared to current or
committed inventory levels. Our reserve requirements generally increase as our
projected demand requires; or decrease due to market conditions and product life
cycle changes. The Company estimates the demand requirements based on market
conditions, sales contracts and orders in hand.

In addition, the Company estimates net realizable value based
on intended use, current market value and inventory ageing analyses. The Company
writes down inventories for estimated obsolescence or unmarketable inventory
equal to the difference between the cost of inventories and their estimated
market value based upon assumptions about future demand and market conditions.
Historically, the actual net realizable value has been close to managements
estimate. There was no allowance for inventory impairment as of March 31, 2011
and December 31, 2010.

8

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Property, Plant and Equipment

Property, plant and equipment are recorded at cost. Gains or
losses on disposals are reflected as gain or loss in the year of disposal. All
ordinary repair and maintenance costs are expensed as incurred. Expenditures for
maintenance and repairs are expensed as incurred. Major renewals and betterments
are charged to the property accounts while replacements, maintenance and
repairs, which do not improve or extend the lives of the respective assets, are
expensed in the current period.

Depreciation for financial reporting purposes is provided using
the straight-line method over the estimated useful lives of assets as set
outlined below.

|                               | Estimated Useful Life
|------------------------------ | ---------------------
|Plant and building             | 20 years             
|Machinery and equipment        | 10 years             
|Office furniture and equipment | 10 years             
|Transportation equipment       | 5 years              

Impairment of Long-Lived Assets

In accordance with ASC 360, Property, Plant and Equipment,
previously SFAS No. 144, the Company reviews the carrying values of long-lived
assets, including property, plant and equipment and other intangible assets,
whenever facts and circumstances indicate that the assets may be impaired.
Recoverability of assets to be held and used is measured by a comparison of the
carrying amount of an asset to future net undiscounted cash flows expected to be
generated by the asset. If an asset is considered impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of the asset
exceeds the fair value. Assets to be disposed of are reported at the lower of
the carrying amount or fair value, less costs of disposal. For the three months
ended March 31, 2011 and 2010, the Company performed an annual impairment review
of long-lived assets and concluded that there was no impairment loss for
long-term investments.

Revenue Recognition

Revenue Recognition

The Company recognizes sales in accordance with the U.S.
Securities and Exchange Commission (SEC) Staff Accounting Bulletin (SAB) No.
101, Revenue Recognition in Financial Statements and SAB No. 104, Revenue
Recognition.

The Company recognizes revenue when the following criteria are
met:

(i) Persuasive evidence of an arrangement exists;

(ii) Delivery has occurred or services were rendered;

(iii) The price to the customer is fixed or determinable and,

(iv) Collection of the resulting receivable is reasonably
assured. Revenue is not recognized until title and risk of loss is transferred
to the customer, which occurs upon delivery of goods, and objective evidence
exists that customer acceptance provisions were met.

The Company bases its estimates on historical experience taking
into consideration the type of products sold, the type of customer, and the type
of specific transaction in each arrangement. Revenues represent the invoiced
value of goods, net of value added tax (VAT).

9

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The Company does not offer promotional payments, customer
coupons, rebates or other cash redemption offers to its customers. Deposits or
advance payments from customers prior to delivery of goods and passage of title
of goods are recorded as advances from customers.

Income Taxes

The Company accounts for income taxes in accordance with ASC
740 Income Taxes, previously SFAS No. 109. Under this method, deferred income
taxes are recognized for the estimated tax consequences in future years of
differences between the tax bases of assets and liabilities and their financial
reporting amounts and each year-end based on enacted tax laws and statutory
rates applicable to the periods in which the differences are expected to affect
taxable income. Valuation allowances are established to reduce deferred tax
assets to the amount expected to be realized when, in managements opinion, it
is more likely than not that some portion of the deferred tax assets will not be
realized. The provision for income taxes represents current taxes payable net of
the change during the period in deferred tax assets and liabilities.

Earnings Per Share

The Company reports earnings per share in accordance with the
provisions of ASC 260 Earnings Per Share. ASC 260 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
excludes dilution and is 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 using the treasury method.

Common stock equivalents represent the dilutive effect of the
assumed exercise of the outstanding stock options and warrants, using the
treasury stock method, at either the beginning of the respective period
presented or the date of issuance, whichever is later, and only if the common
stock equivalents are considered dilutive based upon the Companys net income
(loss) position at the calculation dates. As of March 31, 2011, the stock
options issued to the Companys executive were anti-dilutive and excluded from
the calculation of diluted earnings per share. As of March 31, 2011 and December
31, 2010, the Company does not have any dilutive securities.

Fair Value of Financial Instruments

ASC 820 Fair Value Measurements and Disclosures, previously
FAS 157, adopted January 1, 2008, defines fair value, establishes a three-level
valuation hierarchy for disclosures of fair value measurement and enhances
disclosure requirements for fair value measures. The carrying amounts reported
in the balance sheets for current receivables and payables qualify as financial
instruments. Management concluded the carrying values are a reasonable estimate
of fair value because of the short period of time between the origination of
such instruments and their expected realization and if applicable, their stated
interest rate approximates current rates available. The three levels are defined
as follows:

· 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.

10

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The assets measured at fair value on a recurring basis subject
to the disclosure requirements of ASC 820 as of March 31, 2011 are as follows:

|                          |   | Carrying value |  |   | Active markets |  |  | Significant other |  |  | Significant  | 
|------------------------- | - | -------------- |  | - | -------------- |  |  | ----------------- |  |  | ------------ | 
|                          |   |                |  |   | for identical  |  |  | observable inputs |  |  | Unobservable | 
|                          |   |                |  |   | assets         |  |  |                   |  |  | Inputs       | 
|                          |   | March 31, 2011 |  |   | (Level 1)      |  |  | (Level 2)         |  |  | (Level 3)    | 
|                          |   |                |  |   |                |  |  |                   |  |  |              | 
|Cash and cash equivalents | $ | 591,259        |  | $ | 591,259        |  |  | -                 |  |  | -            | 

The Company's financial instruments include cash and cash
equivalents, restricted cash, accounts receivable, notes receivable, other
receivables, accounts payable, notes payable. Cash and cash equivalents consist
primarily of high rated money market funds at a variety of well-known
institutions with original maturities of three months or less. Management
estimates that the carrying amounts of the non related party financial
instruments approximate their fair values due to their short-term nature.

Recent Accounting Pronouncements

On February 25, 2010, the FASB issued ASU 2010-09 Subsequent
Events Topic 855 Amendments to Certain Recognition and Disclosure
Requirements, effective immediately. The amendments in the ASU remove the
requirement for an SEC filer to disclose a date through which subsequent events
have been evaluated in both issued and revised financial statements. Revised
financial statements include financial statements revised as a result of either
correction of an error or retrospective application of US GAAP. The FASB
believes these amendments remove potential conflicts with the SECs literature.
The adoption of this ASU did not have a material impact on the Companys
consolidated financial statements.

On March 5, 2010, the FASB issued ASU No. 2010-11 Derivatives
and Hedging Topic 815 Scope Exception Related to Embedded Credit Derivatives.
This ASU clarifies the guidance within the derivative literature that exempts
certain credit related features from analysis as potential embedded derivatives
requiring separate accounting. The ASU specifies that an embedded credit
derivative feature related to the transfer of credit risk that is only in the
form of subordination of one financial instrument to another is not subject to
bifurcation from a host contract under ASC 815-15-25, Derivatives and Hedging 
Embedded Derivatives  Recognition. All other embedded credit derivative
features should be analyzed to determine whether their economic characteristics
and risks are clearly and closely related to the economic characteristics and
risks of the host contract and whether bifurcation is required. The ASU is
effective for the Company on July 1, 2010. Early adoption is permitted. The
adoption of this ASU did not have a material impact on the Companys
consolidated financial statements.

In April 2010, the FASB (Financial Accounting Standards Board)
issued Accounting Standards Update 2010-17 (ASU 2010-17), Revenue
Recognition-Milestone Method (Topic 605): Milestone Method of Revenue
Recognition. The amendments in this Update are effective on a prospective basis
for milestones achieved in fiscal years, and interim periods within those years,
beginning on or after June 15, 2010. Early adoption is permitted. If a vendor
elects early adoption and the period of adoption is not the beginning of the
entitys fiscal year, the entity should apply the amendments retrospectively
from the beginning of the year of adoption. The Company did not expect the
provisions of ASU 2010-17 to have a material effect on the financial position,
results of operations or cash flows of the Company.

NOTE 3 - INVENTORY

Inventory as of March 31, 2011 and December 31, 2010 were as
follows:

|                                  |   | March 31, 2011 |  |   | December 31, 2010 | 
|--------------------------------- | - | -------------- |  | - | ----------------- | 
|Raw material                      | $ | 526,757        |  | $ | 235,152           | 
|Finished goods                    |   | 19,945,921     |  |   | 6,423,029         | 
|Auxiliary inventory (spare parts) |   | 1,785,734      |  |   | 1,842,589         | 
|                                  |   |                |  |   |                   | 
|Total inventory                   | $ | 22,258,412     |  | $ | 8,500,770         | 

11

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NOTE 4 - ADVANCE TO SUPPLIERS AND NOTES RECEIVABLE

|                     |   | March 31, 2011 |  |   | December 31, 2010 | 
|-------------------- | - | -------------- |  | - | ----------------- | 
|                     |   |                |  |   |                   | 
|Advance to suppliers | $ | 27,166,697     |  | $ | 36,690,325        | 
|Notes receivable     |   | 14,306,800     |  |   | 226,867           | 

Advance to suppliers represents amounts prepaid for raw
materials. The advances are applied against amounts due to the supplier as the
materials are received.

Notes receivable represents bank acceptance bills that were not
redeemed at the bank as of March 31, 2011. The Company uses bank acceptance
bills regularly as method of payment between the Company and its customers. The
Company has an internal policy requiring most bank acceptance bills to be
redeemed by the end of each calendar year. However, there is no such requirement
regarding the end of quarter.

NOTE 5  OTHER CURRENT ASSETS

As of March 31, 2011 and December 31, 2010, there were
$8,187,558 and $6,350,750 unverified input VAT that represents input VAT amounts
that were pending verification by the local tax bureau. These balances were
fully verified and offset against output VAT in April and January 2011
respectively.

NOTE 6 - PROPERTY, PLANT AND EQUIPMENT

As of March 31, 2011and December 31, 2010, property, plant and
equipment consisted of the following:

|                                               |   | March 31, 2011 |   |   | December 31, 2010 |  
|---------------------------------------------- | - | -------------- | - | - | ----------------- | -
|Plant and building                             | $ | 7,770,435      |   | $ | 7,721,664         |  
|Machinery and equipment                        |   | 20,140,532     |   |   | 20,014,123        |  
|Office furniture and equipment                 |   | 8,741,672      |   |   | 8,686,807         |  
|Transportation equipment                       |   | 97,600         |   |   | 96,988            |  
|                                               |   |                |   |   |                   |  
|Total property, plant and equipment            |   | 36,750,239     |   |   | 36,519,582        |  
|Less: accumulated depreciation                 |   | (12,730,744    | ) |   | (11,870,892       | )
|                                               |   |                |   |   |                   |  
|Total property, plant and equipment,
      net | $ | 24,019,495     |   | $ | 24,648,690        |  

Depreciation for the three months ended March 31, 2011 and 2010
was $782,813 and $749,831, respectively.

NOTE 7 - RELATED PARTY BALANCE AND TRANSACTIONS

Due to related parties

As of March 31, 2011 and December 31, 2010, due to related
parties was summarized as follows:

|                                      |   | March 31, 2011 |  |   | December 31, 2010 | 
|------------------------------------- | - | -------------- |  | - | ----------------- | 
|Xingtai Longhai Steel Group Co., Ltd. | $ | 173,098        |  | $ | 1,531,755         | 

The Company purchases gas and other utilities used in the
production of steel wire, from Xingtai Longhai Steel Group Co., Ltd., a related
party under the control of Mr. Wang Chaojun, the Company's Chief Executive
Officer. As of March 31, 2011 and December 31, 2010, accounts payable related to
the purchase of such utilities were $173,098 and $1,531,755, respectively.

The Company offered customers sales discounts in return for
cash deposits. These cash deposits were subsequently loaned to Xingtai Longhai
Steel Group Co., Ltd. In consideration for the foregoing loans, the Company
received reimbursements from Xingtai Longhai Steel Group Co., Ltd. on sales discounts
to third party customers in the amount of Nil and $1,527,203 in the three months
ended March 31, 2011 and 2010, respectively. The Company recorded these
reimbursements as earned finance income which is included in net revenue.

12

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During normal operations, the Company incurs short-term
borrowing from its related parties. These borrowings do not bear interest and
the Company normally repays the amount within a short period of time. During the
three months ended March 31, 2011 and 2010, the Company borrowed $9,563,400 and
Nil from and repaid $10,613,297 and Nil to Xingtai Longhai Steel Group Co.,
Ltd., respectively. During the three months ended March 31, 2011 and 2010, the
Company borrowed from Shenrui Trading Company (Xingtai Shenrui), a related
party under indirect control of Mr. Wang Chaojun, the Company's Chief Executive
Officer, $2,125,000 and Nil, respectively. As of March 31, 2011, the Company has
repaid the entire amount borrowed from Xingtai Shenrui.

Related party transactions

Revenue

During the three months ended March 31, 2011 and 2010, the
Company sold scrap metal to members of the Longhai Group of companies in the
amount of $1,849,947 and $1,128,405, respectively. These amounts are included in
the Company's income statement as net revenue.

Revenue from the sale of steel wire to Xingtai Shenrui in the
three months ended March 31, 2011 and 2010 was Nil and $15,450,433,
respectively.

Expenses

During the three months ended March 31, 2011 and 2010, the
Company purchased gas and other utilities from the Longhai Group in the amount
of $972,966 and $2,573,640, respectively.

In addition, the Longhai Group rents office and workshop space
to the Company. Rent expense for the three months ended March 31, 2011 and 2010
was $7,356 and $7,089, respectively.

NOTE 8  ACCOUNTS PAYABLE, ACCRUED EXPENSES AND OTHER
PAYABLES

As of March 31, 2011 and December 31, 2010, the accounts
payable, unearned revenue and accrued liabilities of the Company were summarized
as follows:

|                                                      |   | March 31, 2011 |  |   | December 31, 2010 | 
|----------------------------------------------------- | - | -------------- |  | - | ----------------- | 
|Accounts payable                                      | $ | 21,883,658     |  | $ | 8,355,457         | 
|                                                      |   |                |  |   |                   | 
|Unearned revenue                                      |   | 20,161,998     |  |   | 15,692,067        | 
|                                                      |   |                |  |   |                   | 
|Accrued liabilities and other payables:               |   |                |  |   |                   | 
| payroll payable                                     |   | 259,282        |  |   | 198,171           | 
| Accrued utility                                     |   | -              |  |   | 103,096           | 
| customer deposits                                   |   | 1,108,712      |  |   | 801,790           | 
| payable for equipment purchased                     |   | 447,825        |  |   | 1,004,907         | 
| others                                              |   | 341,305        |  |   | 102,012           | 
|Subtotal of accrued expenses and other
      payables | $ | 2,157,124      |  | $ | 2,209,976         | 

NOTE 9 - INCOME TAX

Longhai is governed by the Income Tax Law of the PRC concerning
privately-run enterprises, which are generally subject to tax at a statutory
rate of 25% on income reported in the statutory financial statements after
appropriate tax adjustments.

The following table summarizes the temporary differences which
result in deferred tax assets and liabilities as of March 31, 2011 and December
31, 2010:

13

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|                                  |   | March 31, 2011 |  |   | December 31, 2010 | 
|--------------------------------- | - | -------------- |  | - | ----------------- | 
|Current deferred tax assets:      |   |                |  |   |                   | 
|Expenses deductible in next year  |   | 140,135        |  |   | 74,976            | 
|Total current deferred tax assets |   | 140,135        |  |   | 74,976            | 
|                                  |   |                |  |   |                   | 
|Total deferred tax assets         | $ | 140,135        |  | $ | 74,976            | 

|                                               |   | March 31, 2011 |  |   | December 31, 2010 | 
|---------------------------------------------- | - | -------------- |  | - | ----------------- | 
|Non-current deferred tax liabilities:          |   |                |  |   |                   | 
|Depreciation of fixed assets                   | $ | 165,185        |  | $ | 170,686           | 
|Total deferred tax liabilities                 | $ | 165,185        |  | $ | 170,686           | 
|                                               |   |                |  |   |                   | 
|Net current deferred tax liabilities           |   | -              |  |   | -                 | 
|Net current deferred tax assets                |   | 140,135        |  |   | 74,976            | 
|Net non-current deferred tax
      liabilities |   | 165,185        |  |   | 170,686           | 

The following table reconciles the U.S. statutory rates to the
Companys effective tax rate for the three months ended March 31, 2011 and 2010:

|                             |  | **2011** |   |  | **2010** |  
|---------------------------- |  | -------- | - |  | -------- | -
|US statutory rates           |  | 34.0%    |   |  | 34.0%    |  
|Tax rate difference          |  | (9.2%    | ) |  | (9.0%    | )
|Valuation allowance          |  | 0.9%     |   |  | -        |  
|                             |  |          |   |  |          |  
|Tax per financial statements |  | 25.7%    |   |  | 25.0%    |  

NOTE 10 SHAREHOLDERS EQUITY

Series A Convertible Preferred Stock

On March 25, 2010, the Company filed a Certificate of
Designation establishing the Series A Preferred Stock and setting forth the
rights, preferences and privileges of the Series A Preferred Stock. On or about
March 25, 2010, the Company issued 10,000 shares of Series A Preferred Stock.

Pursuant to the Certificate of Designation, the shares of
Series A Preferred Stock automatically convert into shares of common stock on
the basis of one share of Series A Preferred Stock for every 985 shares of
common stock immediately subsequent to the effectiveness of the Company's
1-for-125 reverse split of its outstanding common stock (the "Reverse Stock
Split").

The Reverse Stock Split was effective on July 16, 2010 and the
10,000 outstanding shares of Series A Preferred Stock automatically converted
into 9,850,000 shares of common stock, which constitutes 98.5% of the Company's
outstanding common stock. For accounting purposes, we treated the Series A
Preferred Stock as being converted fully to common stock on a post- reverse
split basis for all periods presented.

Following the Reverse Stock Split and the conversion of Series
A Preferred Stock into common stock, the Company has 10,000,000 shares of common
stock issued and outstanding and no shares of preferred stock issued and
outstanding.

Statutory Reserve

Our PRC subsidiary is required under PRC laws and regulations
to allocate at least 10% of our annual after-tax profits determined in
accordance with PRC GAAP to a statutory general reserve fund until the amounts
in said fund reach 50% of our PRC subsidiarys registered capital. Allocations
to these statutory reserve funds can only be used for specific purposes and are
not transferable to us in the form of loans, advances or cash dividends.

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NOTE 11 STOCK OPTION PLAN

On April 1, 2010, the Company granted a newly appointed
executive officer a 5-year option to purchase 200,000 shares of the Companys
common stock. According to the stock option agreement, the option has a per
share exercise price equal to $6.00, the fair market value of the stock on the
date of grant. Half of the options are immediately exercisable and one-fourth
will vest on each anniversary date of the grant over the next two years.

The Company uses the Black-Scholes option-pricing model to
estimate the fair value of its stock options. The fair value of options was
estimated on the date of grant. Valuation assumptions used in the Black-Scholes
option-pricing model for options issued include (1) discount rate of 1.63% based
upon United States Treasury yields in effect at the time of the grant, (2)
expected term of 2.875 years based upon simplified calculations due to the
limited period of time the Companys equity shares have been publicly traded,
(3) expected volatility of 88%, and (4) zero expected dividends. The calculated
fair value of the grant at grant date was $664,328. No stock options were
exercised during the three months ended March 31, 2011.

NOTE 12  COMMITMENTS AND CONTINGENCIES

Social insurance for employees

According to the prevailing laws and regulations of the PRC,
the Company is required to cover its employees with medical, retirement and
unemployment insurance programs. The Company fully complies with these laws and
regulations and has ensured all employees are properly covered.

Tax issues

The tax authority of the PRC Government conducts periodic and
ad hoc tax filing reviews on business enterprises operating in the PRC after
those enterprises had completed their relevant tax filings, hence the Companys
tax filings may not be finalized. It is therefore uncertain as to whether the
PRC tax authority may take different views about the Companys tax filings which
may lead to additional tax liabilities.

NOTE 13 - OPERATING RISKS

 Country risk

Currently, the Companys revenues are primarily derived from
the sale of steel wire to customers in the Peoples Republic of China (PRC).
The Company hopes to expand its operations to other countries, however, such
expansion has not commenced and there is no assurance that the Company will be
able to achieve such expansion. Therefore, a downturn or stagnation in the
economic environment of the PRC could have a material adverse effect on the
Companys financial condition.

 Products risk

In addition to competing with other manufacturers of steel
wires, the Company competes with larger PRC companies which have greater funds
available for expansion, marketing, research and development and the ability to
attract more qualified personnel. These PRC companies may be able to offer
products at a lower price. There can be no assurance the Company will remain
competitive should this occur.

 Exchange risk

The Company cannot guarantee that the Renminbi - U.S. Dollar
exchange rate will remain steady, therefore the Company could post the same
profit for two comparable periods based on Renminbi and post higher or lower
profit in U.S. Dollars depending on this exchange rate. The exchange rate could
fluctuate depending on changes in the political and economic environments
without notice.

 Political risk

Currently, the PRC is in a period of growth and is openly
promoting business development in order to bring more business into the PRC.
Additionally, the PRC currently allows a Chinese corporation to be owned by a
United States corporation. If the laws or regulations relating to ownership of a
Chinese corporation are changed by the PRC government, the Company's ability to
operate the PRC subsidiaries could be affected.

15

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 Interest risk

The Company is exposed to interest rate risk arising from
short-term variable rate borrowings from time to time. The Companys future
interest expense will fluctuate in line with any change in borrowing rates. The
Company does not have any derivative financial instruments as of March 31, 2011
and believes its exposure to interest rate risk is not material.

NOTE 14 - MAJOR CUSTOMERS AND MAJOR VENDORS

The Company generated 59.9 percent and 60.4 percent of its
revenues from five customers during the three months ended March 31, 2011 and
2010 respectively.

The Company incurred 78.5 percent of its total purchases from
three vendors during the three months ended March 31, 2011, and 83.5 percent
during the three months ended March 31, 2010.

16

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

Special Note Regarding Forward Looking Statements

In addition to historical information, this report contains
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. We use words such as believe, expect, anticipate, project,
target, plan, optimistic, intend, aim, will or similar expressions
which are intended to identify forward-looking statements. Such statements
include, among others, those concerning market and industry segment growth and
demand and acceptance of new and existing products; any projections of sales,
earnings, revenue, margins or other financial items; any statements of the
plans, strategies and objectives of management for future operations; any
statements regarding future economic conditions or performance; as well as all
assumptions, expectations, predictions, intentions or beliefs about future
events. You are cautioned that any such forward-looking statements are not
guarantees of future performance and involve risks and uncertainties, including
those identified in Item 1A Risk Factors included in our Annual Report on Form
10-K for the year ended December 31, 2010, as well as assumptions, which, if
they were to ever materialize or prove incorrect, could cause the results of the
Company to differ materially from those expressed or implied by such
forward-looking statements.

Readers are urged to carefully review and consider the various
disclosures made by us in this report and our other filings with the SEC. These
reports attempt to advise interested parties of the risks and factors that may
affect our business, financial condition and results of operations and
prospects. The forward-looking statements made in this report speak only as of
the date hereof and we disclaim any obligation, except as required by law, to
provide updates, revisions or amendments to any forward-looking statements to
reflect changes in our expectations or future events.

Use of Terms

Except where the context otherwise requires and for the
purposes of this report only:

- we, us, our, or the Company refers to the combined business of
  Longhai Steel and its consolidated subsidiaries;
- Longhai Steel refers to Longhai Steel Inc., a Nevada corporation;
- Longhai refers to Xingtai Longhai Wire Rod Co. Ltd., a PRC company;
- Kalington refers to Kalington Limited, a Hong Kong company;
- Kalington Consulting refers to Xingtai Kalington Consulting Service Co.,
  Ltd., a PRC company;
- Hong Kong refers to the Hong Kong Special Administrative Region of the
  Peoples Republic of China;
- MT refers to metric tons;
- PRC and China refer to the Peoples Republic of China;
- SEC refers to the Securities and Exchange Commission;
- Securities Act refers to the Securities Act of 1933, as amended;
- Exchange Act refers to the Securities Exchange Act of 1934, as amended;
- Renminbi and RMB refer to the legal currency of China;
- U.S. dollars, dollars and $refer to the legal currency of the United
  States; and
- VIE refers to variable interest entity.

17

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Overview of our Business

Through our PRC operating variable interest entity, or VIE,
Longhai, we are a manufacturer of steel wire products in eastern China. We
produce steel wire ranging from 6.5 mm to 10 mm in diameter on two wire
production lines which have a combined annual capacity of approximately 0.9
million metric tons (MMT) per year. Our products are sold to a number of
distributors who transport the wire to nearby wire processing facilities. Our
wire is then further processed by these third party wire refiners into a variety
of products such as nails, screws, and wire mesh for use in reinforced concrete
and fencing.

Demand for our steel wire is driven primarily by spending in
the construction and infrastructure industries. We have benefited from strong
fixed asset investment and construction growth as the PRC has rapidly grown
increasingly urbanized and invested in modernizing its infrastructure.

We sell our products to a number of distribution companies that
transport our wire to nearby wire processors. Our products are manufactured on
an on-demand basis, and we usually collect payment in advance. Sales prices are
set at the market price for wire on a daily basis. Our customers generally
prepay for their orders, and the final price may be adjusted to the market price
on the day of pick up. This allows us to maintain a low inventory of both wire
and billet and protects us from exposure to commodity price volatility. In order
to increase sales and be competitive in the market, we occasionally offer
discounted wholesale prices to customers at our discretion. Our sales efforts
are directed toward developing long-term relationships with customers who are
able to purchase in large quantities. During the year ended December 31, 2010,
our top five distributors accounted for approximately 35% of our revenues, and
during the year ended December 31, 2009, our top five distributors accounted for
approximately 39% of our revenues.

Our production facilities are located at a 107,000 square meter
property in Xingtai, Hebei Province. Our production facilities include a steel
rolling mill, the unique feature of which is that two rolling lines are arranged
in a Y-layout, i.e. two wire drawing lines share one furnace, one coarse and
intermediate rolling mill, and other supporting equipment. This particular
design facilitates cost savings and higher output at higher quality.

All our business has been conducted in Renminbi, the official
currency of China. The Renminbi is still not a free floating currency. The value
of the Renminbi is subject to changes in the Chinese governments policies and
depends to a large extent on Chinas domestic and international economic and
political developments, as well as supply and demand in the local market. The
Renminbi has slowly but steadily appreciated against the U.S. dollar since July
2005.

Our corporate headquarters is located at No. 1 Jingguang Road,
Neiqiu County, Xingtai City, Hebei Province, 054000, Peoples Republic of China,
and our telephone number is (86) 319 686-1111.

First Quarter Financial Performance Highlights

We experienced strong growth in revenues, gross profit, and net
income, primarily as a result of the rapid growth in our production and sales
volume. The following summarizes certain key financial information for the first
quarter of 2011:

- Sales Revenue:Sales revenue increased $20.34 million, or 19.2%, to
  $126.32 million for 2011 from $105.98 million for 2010.
- Gross Profit:Gross profit decreased $0.98 million to $3.95 million
  in the period ended March 31, 2011 from $4.04 million in the same period in
  2010.
- Net Income attributable to the Companys common stockholders:Net
  income decreased $0.97 million, or 33.6%, to $1.91 million for 2011, from
  $2.88 million for 2010.
- Basic and fully diluted earnings per share:Basic and fully diluted
  earnings per share were $0.19 for 2011, compared with $0.29 for 2010.

Results of Operations

Comparison of the Three Months Ended March 31, 2011 and
March 31, 2010 (Unaudited)

The following table shows key components of our results of
operations during the three months ended March 31, 2011 and 2010, in both
dollars and as a percentage of our total sales.

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|                                    |   | Three Months Ended |   |  | Three Months Ended | 
|----------------------------------- | - | ------------------ | - |  | ------------------ | 
|                                    |   | 31-Mar-11          |   |  | 31-Mar-10          | 
|                                    |   |                    |   |  | % of               | 
|                                    |   | Amount             |   |  | Revenues           | 
|Net revenues                        | $ | 126,315,862        |   |  |                    | 
|Cost of sales                       |   | (122,369,415       | ) |  | 96.9%              | 
|Gross profit                        |   | 3,946,447          |   |  | 3.1%               | 
|General and administrative expenses |   | (794,967           | ) |  | 0.6%               | 
|Income from operations              |   | 3,151,480          |   |  | 2.5%               | 
|Income before income tax            |   | 2,573,806          |   |  | 2.0%               | 
|Income tax expense                  |   | (660,137           | ) |  | 0.5%               | 
|Net income                          |   | 1,913,669          |   |  | 1.5%               | 
|Other comprehensive income          |   | 288,656            |   |  | 0.2%               | 
|Comprehensive income                | $ | 2,202,325          |   |  | 1.7%               | 

Net Revenues Net revenues consist of revenue from the
sale of steel wire and scrap metal. Roughly 99% of revenues are derived from
wire. Our net revenues increased to $126.32 million in the period ended March
31, 2011 from $105.98 million in the same period in 2010, representing a 19.2%
increase. This increase was due to a period over period increase in our revenue
per ton of wire sold of 20.4%, due primarily to an increase in average wire
prices. Our tons sold decreased from 218,168MT to 210,880MT, representing a
period over period decrease of 3.3% .

Cost of Sales Our cost of sales increased $20.44
million, or 20.0%, to $122.37 million in the period ended March 31, 2011, from
$101.93 million in the same period in 2010. The cost of sales as a percentage of
revenues increased from 96.2% to 96.9% between the periods. Our cost of sales is
largely dictated by movements in steel billet prices as billet typically
represents more than 95% of our cost of goods sold. Cost of goods sold per ton
of wire sold increased 20.0% period over the period.

Gross Profit and Gross Margin Our gross profit decreased
$0.1 million to $3.95 million in the period ended March 31, 2011 from $4.04
million in the same period in 2010. Gross margin declined from 3.8% for the
period ended March 31, 2010 to 3.1% for the period ended March 31, 2011. The
decrease in gross margin was primarily due to the narrowing of the spread
between billet purchase prices and wire sales prices discussed above, as billet
prices increased more than wire prices.

General and Administrative Expenses Our general and
administrative expenses increased $0.64 million to $0.79 million in the period
ended March 31, 2011, from $0.15 million in the same period in 2010. The
increase was due to expenses related to audit, legal, consulting and travel
expenses associated with Longhais public offering.

Income Before Income Taxes Our income before income
taxes decreased to $2.57 million in the period ended March 31, 2011 from $3.84
million in the same period in 2010. This decrease was due to a decrease in our
gross profit and an increase in our general and administrative expenses as
discussed above. In addition, we experienced higher interest expenses in
association with increased use of bank acceptance bills.

Bank acceptance bills are common instruments used by companies
in China to secure credit terms from their suppliers. These instruments feature
a local bank guarantee of the payment risk, which is provided for a fee. In
these arrangements, a company and a bank enter into a bank acceptance agreement
pursuant to which the bank agrees to accept and pay when due the company's bills
payable to the supplier. Cashing in such bank acceptance bills before they
mature enables us to purchase more steel billet, our main production input, at a
discount. The discounts are greater than the cost of cashing in said bank
acceptance bills early.

Income Tax. Income tax decreased to $0.66 million in the
period ended March 31, 2011 from $0.96 million in the same period in 2010 as we
had lower taxable income at our Chinese operating entity.

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Net Income. In the period ended March 31, 2011, we
generated net income of $1.91 million, compared to $2.88 million in the same
period in 2009. This decrease was primarily attributable to the factors
discussed above.

Liquidity and Capital Resources

At March 31, 2011, we had cash and cash equivalents of
$591,259, consisting primarily of cash on hand and demand deposits. The
following table provides detailed information about our net cash flows for the
period ended March 31, 2011. To date, we have financed our operations
organically and through cash flows from equity contributions by our
shareholders.

The following table sets forth a summary of our cash flows for
the periods indicated:

Cash Flows

|                                                           |   | Three Months Ended |  
|---------------------------------------------------------- | - | ------------------ | -
|                                                           |   | March 31,          |  
|                                                           |   | 2011               |  
|                                                           |   |                    |  
|Net cash provided by (used in) operating
      activities  | $ | 15,423,115         |  
|Net cash provided by (used in) investing activities        |   | (14,642,858        | )
|                                                           |   |                    |  
|Net cash provided by (used in) financing activities        |   | (488,208           | )
|Effect of exchange rate changes on cash                    |   | 5,765              |  
|                                                           |   |                    |  
|Net increase (decrease) in cash and cash
      equivalents |   | 297,814            |  
|                                                           |   |                    |  
|Cash and cash equivalents at beginning of
      the year   |   | 293,445            |  
|Cash and cash equivalents at end of the year               |   | 591,259            |  

Operating activities

Net cash provided by operating activities was $15.42 million
for the period ended March 31, 2011, as compared to net cash used in operating
activities of $41.50 million for the same period in 2010.

Our cash flows from operating activities changed significantly
because we took measures to eliminate loans to related parties. We had
previously passed prepayments from our wholesale customers straight to the
Longhai Steel Group to provide liquidity to the Longhai Steel Group for iron ore
purchases. In consideration of those prepayments, these wholesale customers
would receive a discount on our steel wire, and Longhai Steel Group would
reimburse us for these discounts by way of a reduced purchase price for steel
billet. This was treated as a loan to a related party, and the reimbursement for
the discounts granted to wholesale customers were recorded as financing income
according to US GAAP. The passed-through prepayments were recorded as cash used
in financing activities.

Management determined to eliminate this type of related party
transactions and instead conduct business with the Longhai Steel Group on an
arms-length basis as of the second quarter of 2010. This action required that
the loan granted to Longhai Steel Group be repaid. This resulted in an increase
of approximately $43 million in operating cash that was accompanied by a
matching increase in cash from financing activities.

Wholesale customers prepay large amounts in order to get a
discount on our steel wire. These prepayments cover up to 3 months of
deliveries. We continue to deliver steel wire until the prepayments are
exhausted, at which time the prepayments are replenished by the customer.
Occasionally, delivery takes place before the top-up payments arrive, which may
result in comparatively small accounts receivable that are usually cleared
during the course of the following month. We collect cash on or before delivery
from non-wholesale customers. This practice does not cause any cost risk as all
purchases and sales are priced according to market price in effect on the day
delivery is taken.

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Investing activities

Net cash used in investing activities for the period ended
March 31, 2011 was $14.64 million, as compared to net cash provided in investing
activities of $41.60 million during the same period of 2010. This decrease in
cash used in investing activities was mainly due to no payment to related
parties and advances to others.

Financing activities

Net cash used by financing activities for the period ended
March 31, 2011 was $0.49 million, as compared to zero activities during the same
period of 2010. The cash outflow in financing activities for the quarter ended
March 31, 2010 mainly consisted of payment to related party as discussed above.

Other than a lease contingent on the completion of a wire
facility, we have no material commitments for capital expenditures.

We believe that our cash on hand and cash flows from operations
will meet our present cash needs, but we may require additional cash resources
to implement our expansion through the acquisition of additional facilities. If
our own financial resources are insufficient to satisfy our capital
requirements, we may seek to sell additional equity or debt securities or obtain
additional credit facilities. The sale of additional equity securities could
result in dilution to our stockholders. The incurrence of indebtedness would
result in increased debt service obligations and could require us to agree to
operating and financial covenants that would restrict our operations. Financing
may not be available in amounts or on terms acceptable to us, if at all. Any
failure by us to raise additional funds on terms favorable to us, or at all,
could limit our ability to expand our business operations and could harm our
overall business prospects. On July 20, 2010, we filed a registration statement
with the SEC in order to be able to issue additional common stock at a proposed
maximum aggregate offering price of 20 million U.S. Dollars for the purpose of
expanding our business through acquisitions and to better meet our working
capital needs.

Inflation

Inflation and changing prices have not had a material effect on
our business and we do not expect that inflation or changing prices will
materially affect our business in the foreseeable future. However, our
management will closely monitor price changes in the steel industry and
continually maintain effective cost control in operations.

Off Balance Sheet Arrangements

We do not have any off balance sheet arrangements that have or
are reasonably likely to have a current or future effect on our financial
condition, changes in financial condition, revenues or expenses, results of
operations, liquidity or capital expenditures or capital resources that is
material to an investor in our securities.

Seasonality

Our operating results and operating cash flows have not
historically been subject to seasonal variations, however, the first quarter is
usually the slowest quarter because fewer projects are undertaken during and
around the Chinese spring festival.

Significant Accounting Policies

The preparation of financial statements in conformity with
accounting principles generally accepted in the United States (U.S. GAAP)
requires our management to make assumptions, estimates and judgments that affect
the amounts reported, including the notes thereto, and related disclosures of
commitments and contingencies, if any. We have identified certain accounting
policies that are significant to the preparation of our financial statements.
These accounting policies are important for an understanding of our financial
condition and results of operation. Critical accounting policies are those that
are most important to the portrayal of our financial conditions and results of
operations and require managements difficult, subjective, or complex judgment,
often as a result of the need to make estimates about the effect of matters that
are inherently uncertain and may change in subsequent periods. Certain
accounting estimates are particularly sensitive because of their significance to
financial statements and because of the possibility that future events affecting
the estimate may differ significantly from managements current judgments. We
believe the following critical accounting policies involve the most significant
estimates and judgments used in the preparation of our financial statements:

Revenue Recognition

Retail sales are recognized at the point of sale to customers,
are recorded net of estimated returns, and exclude VAT. Wholesales to contracted
customers are recognized as revenue at the time the product is shipped and title
passes to the customer FOB shipping point.

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Use of Estimates

The preparation of consolidated financial statements in
conformity with U.S. GAAP requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the dates of the consolidated financial
statements and the amount of revenues and expenses during the reporting periods.
Management makes these estimates using the best information available at the
time the estimates are made. However, actual results could differ materially
from those results

Accounts Receivable

Accounts receivable consists of unpaid balances due from
wholesale customers. Such balances generally are cleared in the subsequent month
when the wholesale customers place another order. We do not provide an allowance
for doubtful accounts because we have not experienced any credit losses in
collecting these amounts from whole-sale customers.

Impairment of Long-Lived Assets

We account for impairment of property and equipment and
amortizable intangible assets in accordance with ASC 360, Accounting for
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of, which
requires us to evaluate a long-lived asset for recoverability when there is
event or circumstance that indicate the carrying value of the asset may not be
recoverable. An impairment loss is recognized when the carrying amount of a
long-lived asset or asset group is not recoverable (when carrying amount exceeds
the gross, undiscounted cash flows from use and disposition) and is measured as
the excess of the carrying amount over the assets (or asset groups) fair
value. There was no impairment of long-lived assets for the period ended March
31, 2011 or the period ended March 31, 2010.

Inventories

Merchandise inventories are stated at the lower of cost or
market. Cost is determined on a weighted average basis and includes all
expenditures incurred in bringing the goods to the point of sale and putting
them in a salable condition. In assessing the ultimate realization of
inventories, the management makes judgments as to future demand requirements
compared to current or committed inventory levels. Our reserve requirements
generally increase as our projected demand requirements or decrease due to
market conditions and product life cycle changes. We estimate the demand
requirements based on market conditions, forecasts prepared by customers, sales
contracts and orders in hand.

In addition, we estimate net realizable value based on intended
use, current market value and inventory ageing analyses. We write down
inventories for estimated obsolescence or unmarketable inventory equal to the
difference between the cost of inventories and their estimated market value
based upon assumptions about future demand and market conditions.

Comprehensive Income

We have adopted the provisions of ASC 220 Reporting
Comprehensive Income, which establishes standards for the reporting and display
of comprehensive income, its components and accumulated balances in a full set
of general purpose financial statements.

ASC 220 defines comprehensive income as comprised of net income
and all changes to the statements of stockholders equity, except those due to
investments by stockholders, changes in paid-in capital and distributions to
stockholders, including adjustments to minimum pension liabilities, accumulated
foreign currency translation, and unrealized gains or losses on marketable
securities. Our other comprehensive income arose from the effect of foreign
currency translation adjustments.

Foreign Currency Translation/Transactions

The reporting currency of the Company is the U.S. dollar. The
functional currency of the Company's PRC subsidiaries is the RMB. Assets and
liabilities of non-U.S. subsidiaries that operate in a local currency
environment, where that local currency is the functional currency, are
translated into U.S. dollars at exchange rates in effect at the balance sheet
date; with the resulting translation adjustments directly recorded to a separate
component of accumulated other comprehensive income. Income and expense accounts
are translated at average exchange rates during the year. Gains and losses from
foreign currency transactions are recorded in other income (loss), net. The
functional currency is the local currency for all non-U.S. subsidiaries.

The balance sheet amounts at March 31, 2011, with the exception
of shareholders' equity, were translated at the exchange rate of 6.5501 RMB to
the 1.00 U.S. dollar compared to the exchange rate of 6.8161 RMB to the 1.00
U.S. dollar at March 31, 2010. The equity accounts were stated at their
historical exchange rates. The average translation rates applied to the income
and cash flow statement amounts for the three months ended March 31, 2011 and
2010 was 6.5713 RMB and 6.8193 RMB to the 1.00 U.S. dollar, respectively.

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Translation adjustments resulting from this process are
included in "accumulated other comprehensive income" in the consolidated
statement of stockholders equity and were $288,656 and $4,977 as of March 31,
2011 and March 31, 2010, respectively.

Recent Accounting Pronouncements

On February 25, 2010, the FASB issued ASU 2010-09 Subsequent
Events Topic 855 Amendments to Certain Recognition and Disclosure
Requirements, effective immediately. The amendments in the ASU remove the
requirement for an SEC filer to disclose a date through which subsequent events
have been evaluated in both issued and revised financial statements. Revised
financial statements include financial statements revised as a result of either
correction of an error or retrospective application of US GAAP. The FASB
believes these amendments remove potential conflicts with the SECs literature.
The adoption of this ASU did not have a material impact on the Companys
consolidated financial statements.

On March 5, 2010, the FASB issued ASU No. 2010-11 Derivatives
and Hedging Topic 815 Scope Exception Related to Embedded Credit Derivatives.
This ASU clarifies the guidance within the derivative literature that exempts
certain credit related features from analysis as potential embedded derivatives
requiring separate accounting. The ASU specifies that an embedded credit
derivative feature related to the transfer of credit risk that is only in the
form of subordination of one financial instrument to another is not subject to
bifurcation from a host contract under ASC 815-15-25, Derivatives and Hedging 
Embedded Derivatives  Recognition. All other embedded credit derivative
features should be analyzed to determine whether their economic characteristics
and risks are clearly and closely related to the economic characteristics and
risks of the host contract and whether bifurcation is required. The ASU is
effective for the Company on July 1, 2010. Early adoption is permitted. The
adoption of this ASU did not have a material impact on the Companys
consolidated financial statements.

In April 2010, the FASB (Financial Accounting Standards Board)
issued Accounting Standards Update 2010-17 (ASU 2010-17), Revenue
Recognition-Milestone Method (Topic 605): Milestone Method of Revenue
Recognition. The amendments in this update are effective on a prospective basis
for milestones achieved in fiscal years, and interim periods within those years,
beginning on or after June 15, 2010. Early adoption is permitted. If a vendor
elects early adoption and the period of adoption is not the beginning of the
entitys fiscal year, the entity should apply the amendments retrospectively
from the beginning of the year of adoption. The Company did not expect the
provisions of ASU 2010-17 to have a material effect on the financial position,
results of operations or cash flows of the Company.

Foreign Currency Exchange Rates

All of our revenues are collected in and substantially all of
our expenses are paid in Chinese RMB. We face foreign currency rate translation
risks when our results are translated to U.S. dollars. The registered equity
capital denominated in the functional currency is translated at the historical
rate of exchange at the time of capital contribution.

The Chinese RMB was relatively stable against the U.S. dollar
at approximately 8.28 RMB to the $1.00 U.S. dollar until July 21, 2005 when the
Chinese currency regime was altered resulting in a 2.1% revaluation versus the
U.S. dollar. This move initially had the effect of pegging the exchange rate of
the RMB at 8.11 RMB per U.S. dollar. Now the RMB exchange rate is no longer
linked to the U.S. dollar but rather to a basket of currencies with a 0.3%
margin of fluctuation resulting in further appreciation of the RMB against the
U.S. dollar. Since June 30, 2009, the exchange rate had remained stable at
6.8307 RMB to 1.00 U.S. dollar until June 30, 2010 when the Chinese Central Bank
allowed a further appreciation of the RMB by 0.43% to 6.798 RMB to 1.00 U.S.
dollar. On May 10, 2011, the RMB traded at 6.4866 to the U.S. dollar.

There remains international pressure on the Chinese government
to adopt an even more flexible currency policy and the exchange rate of RMB is
subject to changes in Chinas government policies which are, to a large extent,
dependent on the economic and political development both internationally and
locally and the demand and supply of RMB in the domestic market. There can be no
assurance that such exchange rate will continue to remain stable in the future
amongst the volatility of currencies, globalization and the unstable economies
in recent years. Since (i) our income and profit are denominated in RMB, and
(ii) the payment of dividends, if any, will be in U.S. dollars, any decrease in
the value of the RMB against other foreign currencies would adversely affect the
value of the shares and dividends payable to shareholders, in foreign currency
terms.

Commodity Prices

We are generally exposed to commodity price swings. Although
there is no guaranteed correlation, steel wire prices generally fluctuate with
steel prices, but the differential between market prices of steel billet and
steel wire also fluctuates. Although we generally hold inventory for the
duration of our 24-hour production cycle, sudden changes in the market price of
steel and wire may directly impact the valuation of inventory and goods in
progress, which influences earnings. So long as the market price differential between billets and wire does
not shrink disproportionally, rising steel prices generally work in our favor as
inventory purchased at lower prices would appreciate in such a scenario,
resulting in additional profits when the wire is sold.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK.

Not Applicable.

ITEM 4. CONTROLS AND PROCEDURES.

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures (as defined in
Rule 13a-15(e) under the Exchange Act). Disclosure controls and procedures refer
to controls and other procedures designed to ensure that information required to
be disclosed in the reports we file or submit under the Securities Exchange Act
is recorded, processed, summarized and reported within the time periods
specified in the rules and forms of the SEC and that such information is
accumulated and communicated to our management, including our Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure.

As required by Rule 13a-15(e), our management has carried out
an evaluation, with the participation and under the supervision of our Chief
Executive Officer, Mr. Chaojun Wang, and Chief Financial Officer, Mr. Eberhard
Kornotzki, of the effectiveness of the design and operation of our disclosure
controls and procedures, as of March 31, 2011. Based upon, and as of the date of
this evaluation, Messrs. Wang and Kornotzki, determined that, because of the
material weaknesses described in Item 9A Controls and Procedures of our Annual
Report on Form 10-K for the year ended December 31, 2010, which we are still in
the process of remediating as of March 31, 2011, our disclosure controls and
procedures were not effective. Investors are directed to Item 9A of our Annual
Report on Form 10-K for the year ended December 31, 2010 for the description of
these weaknesses.

Changes in Internal Control over Financial Reporting

We regularly review our system of internal control over
financial reporting and make changes to our processes and systems to improve
controls and increase efficiency, while ensuring that we maintain an effective
internal control environment. Changes may include such activities as
implementing new, more efficient systems, consolidating activities, and
migrating processes.

During its evaluation of the effectiveness of internal control
over financial reporting as of December 31, 2010, our management concluded that
we still need to hire qualified accounting personnel and enhance the
supervision, monitoring and review of the financial statements preparation
processes. Although our accounting staff is professional and experienced in
accounting requirements and procedures generally accepted in the PRC, management
has determined that they require additional training and assistance in U.S.
GAAP. We are actively searching for additional personnel with relevant
accounting experience, skills and knowledge in the preparation of financial
statements in accordance with of U.S. GAAP and financial reporting disclosure
requirements under SEC rules. In addition, we plan to establish an audit
committee and appoint qualified committee members to strengthen our internal
control over financial reporting.

Other than the foregoing changes, there were no changes in our
internal controls over financial reporting during the first quarter of fiscal
2011 that have materially affected, or are reasonably likely to materially
affect our internal control over financial reporting.

PART IIOTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

From time to time, we may become involved in various lawsuits
and legal proceedings, which arise, in the ordinary course of business. However,
litigation is subject to inherent uncertainties, and an adverse result in these,
or other matters, may arise from time to time that may harm our business. We are
currently not aware of any such legal proceedings or claims that we believe will
have a material adverse affect on our business, financial condition or operating
results.

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ITEM 1A. RISK FACTORS.

Not Applicable.

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

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

None.

ITEM 4. (REMOVED AND RESERVED).

ITEM 5. OTHER INFORMATION.

We have no information to disclose that was required to be in a
report on Form 8-K during the period covered by this report, but was not
reported. There have been no material changes to the procedures by which
security holders may recommend nominees to our board of directors.

ITEM 6. EXHIBITS.

The following exhibits are filed as part of this report or
incorporated by reference:

|Exhibit No. |  | Description                                                                                                                                                                  
|----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|31.1        |  | Certifications of Principal Executive Officer filed
      pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                         
|31.2        |  | Certifications of Principal Financial Officer filed
      pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                         
|32.1        |  | Certifications of Principal Executive Officer furnished
      pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
      the Sarbanes-Oxley Act of 2002.
|32.2        |  | Certifications of Principal Financial Officer furnished
      pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
      the Sarbanes-Oxley Act of 2002.

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SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.

|Date: May 16, 2011 | LONGHAI STEEL INC.
|------------------ | ------------------
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|                   | By:               
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|                   | By:               
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