UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549





FORM
10-K





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





For the
fiscal year ended December 31, 2008





OR





o
            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: 333-105903





GENERAL
STEEL HOLDINGS, INC.


(Exact
name of registrant as specified in its charter)




NEVADA
              
              412079252(State or other jurisdiction
      of
                incorporation
      or organization)
              
              (I.R.S.
      Employer
                Identification
      No.)Kuntai International Mansion
      Building, Suite 2315
                Yi
      No. 12 Chaoyangmenwai Avenue, Chaoyang District,
                Beijing,
      China
              
              100020(Address
      of principal executive offices)
              
              (Zip
      Code)




Incorp
Services Inc.


375 N.
Stephanie St. Suite 1411


Henderson,
NV 89014-8909


Tel:
(702) 866-2500


(Name,
address and telephone number for Agent for Service)





+86 (10)
5879-7346


(Registrant's
telephone number, including area code)





Securities
registered pursuant to Section 12(b) of the Act:





Title of each class
              Name
      of each exchange on which
registeredCommon Stock, $ .001 par value
      per share
              New
      York Stock Exchange




Securities
registered pursuant to Section 12(g) of the Act: None




Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes o  No x




Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Exchange Act. Yes o No x




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 xNo o




Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this


Form
10-K. o




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




Large
accelerated filer oAccelerated filer xNon-accelerated
filer o




Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes oNo x




As of
March 6, 2009, the aggregate market value of the registrant's common stock held
by non-affiliates of the registrant was $28,645,401 based on the $1.98 per
share as reported on the NYSE.




Indicate
the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date.




Class
                Outstanding
      at March10,
      2009Common Stock, $ .001 par value
      per share
                36,281,074DOCUMENTS INCORPORATED BY
      REFERENCEDocument
                Parts
      Into Which IncorporatedNone
                Not
      applicable





TABLE OF
CONTENT




PART
      IITEM
      1
                BUSINESS
                4ITEM
      1A
                RISK
      FACTORS
                11ITEM
      1B
                UNRESOLVED
      STAFF COMMENTS
                20ITEM
      2
                PROPERTIES
                20ITEM
      3
                LEGAL
      PROCEEDINGS.
                22ITEM
      4
                SUBMISSION
      OF MATTERS TO A VOTE OF SECURITY HOLDERS.
                22PART
      IIITEM
      5
                MARKET
      FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
      PURCHASES OF EQUITY SECURITIES.
                22ITEM
      6
                SELECTED
      FINANCIAL DATA
                24ITEM
      7
                MANAGEMENT
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS
                25ITEM
      7A
                QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
                35ITEM
      8
                FINANCIAL
      STATEMENTMENTS AND SUPPLEMENTARY DATA
                35ITEM
      9
                CHANGES
      IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURES.
                35ITEM
      9A
                CONTROLS
      AND PROCEDURES.
                35ITEM
      9B
                OTHER
      INFORMATION.
                37PART
      IIIITEM
      10
                DIRECTORS
      AND EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
                39ITEM
      11
                EXECUTIVE
      COMPENSATION
                43ITEM
      12
                SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
      STOCKHOLDER MATTERS
                45ITEM
      13
                CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS
                47ITEM
      14
                PRINCIPAL
      ACCOUNTING FEES AND SERVICES
                49PART
      IVITEM
      15
                EXHIBITS
      AND FINANCIAL STATEMENT SCHEDULES
                50SIGNATURES
                94




3





PART
I





Forward
Looking Statements





This Form 10-K contains forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934.  Such
forward-looking statements are described in Item 7, Management’s Discussion and
Analysis of Financial Condition and Results of Operations, in the section,
“Forward Looking Statements.”  Our actual results could differ
materially from those set forth in each forward-looking
statement.  Certain factors that might cause such a difference are
discussed in this report, including Item 1A, Risk Factors of this Form
10-K.





ITEM
1. BUSINESS





Overview





General Steel Holdings Inc. (“General
Steel”) (the “Company”) is a merger and acquisition company consolidating
Chinese steel companies within the fragmented Chinese steel industry. General
Steel is currently comprised of 4 operating subsidiaries; the largest is Shaanxi
Longmen Iron and Steel Co., Ltd. (“Longmen Joint Venture”) located in Shaanxi
province. It comprises approximately 87% of our sales revenue.





Our goal is to become one of the
largest and most profitable non-government owned steel companies in China
through a two-pronged strategy of acquisitions and internal
development.





Among the
highlights of 2008


·
            Merger
      and Acquisitions


Acquired
through our subsidiary Qiu Steel Investments Ltd., 96.8% ownership of Maoming
Hendga Steel Co., Ltd. (“Maoming”) for approximately $7.1 million.





Signed a
letter of intent to form a joint venture with Yantai Steel Pipe Co.,
Ltd.





·
            Internal
      Developments


Completed
two 1280m3 blast
furnaces at our Longmen Joint Venture subsidiary increasing our crude steel
making capacity by 2 million metric tons annually.





Migrated
to the NYSE





·
            Growth


Increased
sales 75% from $772,439,165 in 2007 to $1,351,203,149 in 2008.





Background




Our company was initially incorporated
as “American Construction Company” (“ACC”) on August 5, 2002, in the State of
Nevada.





On October 14, 2004, ACC, Northwest
Steel Company, a wholly-owned Nevada subsidiary of ACC (“Merger Sub”), and
General Steel Investment Co., Ltd., a British Virgin Islands company (“General
Steel Investment”) entered into an Agreement and Plan of Merger pursuant to
which ACC acquired General Steel Investment through a merger between Merger Sub
and General Steel Investment and then merger of Merger Sub with ACC, and its 70%
ownership in its subsidiary Tianjin Daqiuzhuang Metal Sheet Co., Ltd., a Chinese
company of limited liability (“Daqiuzhuang Metal”) in exchange for shares of
ACC’s common stock.


4





Effective
March 7, 2005, ACC changed its name to “General Steel Holdings, Inc.” (“General
Steel”).





On May
18, 2007, General Steel entered into a Purchase Agreement with Victory New
Holdings Limited (“Victory New”), a British Virgin Islands registered company
under the control of the Company’s Chairman, CEO and majority shareholder,
Zuosheng Yu (aka Henry Yu), to acquire Victory New’s 30% interest in Daqiuzhuang
Metal. General Steel agreed to issue to Victory New an aggregate of 3,092,899
shares of its Series A Preferred Stock with a fair value of $8,374,000, and
these shares of Series A Preferred Stock carry a voting power of 30% of the
combined voting power of General Steel’s common and preferred stock while
outstanding. As a result of the acquisition, General Steel has increased its
equity interest in Daqiuzhuang Metal from 70% to 100%, and Daqiuzhuang Metal is
a wholly owned subsidiary of the Company.





On April
27, 2007, Daqiuzhuang Metal and Baotou Iron and Steel Group Co., Ltd. ("Baotou
Steel") entered into an Amended and Restated Joint Venture Agreement (the
"Agreement"), amending the Joint Venture Agreement entered into on September 28,
2005 ("Original Joint Venture Agreement"). The Agreement increased Daqiuzhuang
Metal's ownership interest in the Joint Venture to 80%. The joint venture
company’s name is Baotou Steel - General Steel Special Steel Pipe Joint Venture
Company Limited a Chinese company of limited liability (“Baotou Steel Pipe Joint
Venture”). Baotou Steel Pipe Joint Venture obtained its business license from
China on May 25, 2007, and started its normal operation in July
2007.





On May
18, 2007, Daqiuzhuang Metal established Yangpu Shengtong Investment Co., Ltd.
(“Yangpu Investment”) and injected registered capital totaling RMB100,000,000,
or approximately $13,030,000, into the investment. The total registered capital
of Yangpu Investment is RMB110,000,000, or approximately $14,333,000, and
Daqiuzhuang Metal has a 99.3% ownership interest in Yangpu
Investment.





Qiu Steel
Investment Co., Ltd. (“Qiu Steel Investment”) was founded on June 1, 2006. In
June 2007, Yangpu Investment agreed to invest RMB148,000,000, or approximately
$19,284,400, through a capital injection and equity transfer with former
shareholders. The total registered capital of Qiu Steel Investment is
RMB150,000,000, or approximately $19,545,000. As a result of the above mentioned
equity transaction, Yangpu Investment acquired 98.7% equity of Qiu Steel
Investment making Qiu Steel Investment a subsidiary of Yangpu Investment and
Daqiuzhuang Metal.





Yangpu
Investment and Qiu Steel Investment are Chinese registered limited liability
companies with a legal structure similar to a limited liability company
organized under state laws in the United States of America. Those two companies
were formed to acquire other businesses.





On June
15, 2007, General Steel and Shaanxi Longmen Iron and Steel (Group) Co., Ltd., a
Chinese company of limited liability (“Longmen Group”), signed an agreement to
form Shaanxi Longmen Iron and Steel Co., Ltd. (“Longmen Joint Venture”). The
parties agreed to make the effective date of the transaction June 1, 2007.
General Steel contributed RMB300 million, or approximately $39,450,000, through
its subsidiaries, Daqiuzhuang Metal and Qiu Steel Investment, to the Longmen
Joint Venture. General Steel and Longmen Group own a 60% and 40% ownership
interest, respectively, in Longmen Joint Venture. The Longmen Joint Venture
obtained its business license from China on June 22, 2007. The total registered
capital of Longmen Joint Venture is RMB500 million, or approximately $65.8
million. Pursuant to the joint venture agreement, Longmen Group contributed
land, buildings, iron making, steel making, and steel rolling facilities whereas
General Steel contributed cash through its subsidiaries Daqiuzhuang Metal and
Qiu Steel Investment to the Longmen Joint Venture. In the Longmen Joint Venture,
Longmen Group has a 40% ownership interest, Daqiuzhuang Metal has a 32%
ownership interest and Qiu Steel Investment has a 28% ownership interest,
respectively. In total, General Steel controls approximately 60% of the Longmen
Joint Venture through Daqiuzhuang Metal and Qiu Steel
Investment.


5




On
September 24, 2007, Longmen Joint Venture further acquired 74.92% ownership
interest in Environmental Protection Industry Development Co., Ltd., a Chinese
company of limited liability (“EPID”), for RMB18,080,930, or approximately
$2,380,000, and a 36% equity interest in Hualong Fire Retardant Materials Co.,
Ltd., a PRC company of limited liability (“Hualong”), for RMB3,287,980, or
approximately $430,000. The parties agreed to make the effective date of the
transaction July 1, 2007.




On
December 12, 2007, Longmen Joint Venture entered into an investment agreement
with Hancheng Tongxing Metallurgy Co., Ltd., a Chinese company of limited
liability (“Tongxing”), contributing 217,478.47 square meters of land use rights
at an appraised value of approximately RMB 30,227,333, or approximately
$4.1million. Pursuant to the agreement, the land was converted into shares
valued at RMB22,744,419, or approximately $3.1million, which gave Longmen Joint
Venture a 22.76% stake in Tongxing.




On June 25, 2008, through our
subsidiary, Qiu Steel Investment, Ltd. (“Qiu Steel Investment”) we paid RMB50
million cash, or approximately $7.1 million, to private parties to purchase
96.8% of Maoming Hengda Steel Group, Ltd. (“Maoming”).  Maoming
obtained its business license from China on June 20, 2008. The total registered
capital of Maoming is RMB544.6 million, or approximately $77.8
million.





The following table reflects the
Company’s current organization structure:







6


Our
Operating Subsidiaries and Products





Daqiuzhuang
Metal





Daqiuzhuang
Metal started its operation in 1988, and was incorporated under its current form
on August 18, 2000, in Jinghai county, Tianjin municipality, China. Daqiuzhuang
Metal is a wholly-owned subsidiary of the Company.





Daqiuzhuang
Metal’s core business is the manufacturing of high quality hot-rolled carbon and
silicon steel sheets which are mainly used in the production of tractors,
agricultural vehicles, shipping containers and in other specialty markets.
Daqiuzhuang Metal uses a traditional rolling mill production sequence, such as
heating, rolling, cutting, annealing, and flattening to process coil into steel
sheets. The sheet sizes are approximately 2,000 mm (length) x 1,000 mm (width) x
0.75 to 2.0 mm (thickness). Limited size adjustments can be made to meet order
requirements. “Qiu Steel” is the registered trademark under which we sell these
products.




Daqiuzhuang
Metal currently has ten steel sheet production lines capable of processing
approximately 400,000 metric tons of 0.75-2.0 mm hot-rolled carbon and silicon
steel sheets per year. The raw materials we use to produce our hot-rolled sheets
are hot-rolled steel coils which we purchase from a variety of local sources.
There are many sources of hot-rolled steel coil in Tianjin and neighboring Hebei
province. There is little seasonality in the demand for the products
manufactured by Daqiuzhuang Metal; however, the first quarter typically shows
the least demand attributable to the Chinese New Year holiday. In 2005, to
comply with a Daqiuzhuang County environmental clean-up campaign, we invested
$94,000 to remodel our industrial water recycling system. We do not believe
future costs to environmental compliance will be material to our financial
position. We allow some customers to purchase on credit which contributes to our
accounts receivable balance. For the hot-rolled steel coil which we purchase as
the raw material for our flat-rolled sheets, we generally pay in arrears.
However, when based on our experience in the market we feel that raw material
prices are at a low point, we will pre-pay for a large amount to lock-in the low
price.




Until 2007, Daqiuzhuang Metal was our
only production facility and accounted for 100% of our operating
revenue.





Baotou Steel Pipe Joint
Venture





Baotou
Steel Pipe Joint Venture is located at Kundulun District, Baotou city, Inner
Mongolia Autonomous Region, China. It produces and sells spiral-weld steel pipes
and primarily serves customers in the oil, gas and petrochemical markets. The
raw materials used to produce the pipes are hot-rolled carbon and low alloy
steel coils and strips which we purchase from our Joint Venture partner, Baotou
Steel. Pipes produced have a diameter ranging from 219-1240 mm; a wall thickness
ranging from 6-13 mm; and a length ranging from 6-12 m. The facility
has two production lines with current annual production capacity of 100,000
metric tons. Due primarily to harsh winter weather conditions slowing regional
construction projects, seasonal demand for products typically drops in the
fourth and first quarters and peaks in the second and third
quarters.  Baotou Steel Pipe Joint Venture began sales efforts in July
2007.




Longmen Joint
Venture




Longmen
Joint Venture is located in Hancheng city, Shaanxi province, China. Longmen
Joint Venture is the largest integrated steel producer in Shaanxi. It uses iron
ore and coke as primary raw materials for steel production. Longmen Joint
Venture has annual crude steel production capability of 4.0 million metric tons.
It produces pig iron, crude steel, reinforced bars (rebar) and high-speed wire
which are sold mostly in the domestic market. Approximately 90% of finished
production is devoted to rebar. Rebar produced has a diameter range from 12-32
mm and a length range of 6-12 m. We follow the traditional industry pattern for
demand of construction products, whereby demand typically peaks in the third
quarter owing to favorable summer weather conditions for construction and dips
in the first quarter typically owing to a slowing in construction due to weather
impairments and the Chinese New Year holiday. In 2005, our joint venture
partner, the Longmen Group, received ISO 14001 certification for is overall
environmental management system. We do not believe future costs to environmental
compliance will be material to our financial position. Longmen Joint Venture is
also engaged in other business activities, most of which are related to steel
manufacturing, such as the production of coke and iron ore
pellets from taconite. Additional business activities include transportation
services, real estate services and hotel operations. These operations are all
located in Shaanxi province and primarily serve regional customers in the
construction industry.




7





The
purposes of the Longmen Joint Venture are, among others, to produce and sell
construction steel and to improve our product quality, production capacity and
competitiveness by adopting advanced technology in the production of steel
products.





As is
common practice in the construction steel products industry, most customers pay
for products in advance. At Longmen Joint Venture, most customers pay
approximately 2 weeks in advance. This allows us to maintain a low accounts
receivable balance. Additionally, since we require our customers to place their
orders at the beginning of each month and there is little unpredicted volume
variance in these orders, we are able to keep a minimum amount of inventory for
backlog. For the majority of our raw materials purchases, we generally pay in
arrears.





Maoming





Maoming is located in Maoming city,
Guangzhou province, China.  It has two production lines capable of
producing 1.8 million metric tons per year of high-speed wire and rebar,
products commonly used in construction. Presently, we only produce high-speed
wire at this site. These products have a diameter range of 5 mm-16
mm.   We sell our high-speed wire in coils that can be cut by the
customer at the construction site to the desired length. The raw material used
to produce these products is steel billet which we primarily purchase from
sources in Guangdong and Guangxi provinces. We believe there is little
seasonality of demand for our products beyond the traditional slowing in the
first quarter owing to the Chinese New Year. We acquired Maoming on June 25,
2008, and this is the first year to include their revenue in our yearly
financial results.





Marketing
and Customers





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





Demand
for our products





Overall, domestic economic growth is an
important demand driver of our products. Specifically, industry demand drivers
for our products include construction and infrastructure projects, rural income
growth and energy demand.


At Longmen Joint Venture, growth in
regional construction and infrastructure projects drives demand for our
products. According to the 11th Five
Year National Economic and Social Development Plan (“NESDP”) (2006-2010),
development of China’s western region is one of the top-five economic priorities
of the nation. Shaanxi, the province where Longmen Joint Venture is located, has
been designated as a bridgehead for development into the western region, and
Xi’an, the provincial capital has been designated as a focal point for this
development. Our Longmen Joint Venture is 180 km from Xi’an and does not have
another major competitor within a 250 km radius. According to a Shaanxi
provincial government report issued January 16, 2008, there were 150
construction and infrastructure projects scheduled to begin in the province in
2008. Some of the major projects include: six new highways, one new airport,
expansion of the Xi’an airport, a new ring subway system and 3 new dams. We see
strong demand for our products driven by these and many other construction and
infrastructure projects. We believe there will be sustained regional demand for
several years as the government continues to drive western region development
efforts.




8




At Daqiuzhuang Metal, rural income
growth drives demand for our hot-rolled carbon sheets. According to the Asian
Development Bank statistics, well over 60% of the nations’ 1.3 billion total
population is comprised of low-income, rural farmers. Our steel sheets are used
in the construction of light agricultural vehicles targeted for sale to
low-income, rural farmers. Our sheets are light and of great ductility and are
highly competitive in the market for the manufacturers of light agricultural
vehicles. According to the 11thFive Year NESDP (2006-2010), raising
the level of rural income is a top economic and social goal for the country.
Many government programs, including removing agricultural taxes and special
local product taxes, designed to spur rural income development have been
initiated. The government expects annual rural income to grow between 5% and 10%
through 2010. Transportation asset growth only slightly lags behind the growth
in rural net income, so we anticipate demand for light agricultural vehicles to
grow between 4.7% and 9.6% through 2010.





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





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





Supply of
raw materials





Our primary raw materials consist of
iron ore and hot-rolled steel coil. Longmen Joint Venture uses iron ore as its
main raw material; Daqiuzhuang Metal, Baotou Steel Pipe Joint Venture and
Maoming use hot-rolled steel coil as their main raw material.





Longmen Joint Venture accounts for 4.0
million metric tons of our aggregate 6.3 million metric tons annual production
capacity. At Longmen Joint Venture, approximately 90% of production costs are
raw materials, with iron ore being the largest component.





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




We source approximately 15% of our iron
ore from the Mulonggou and Daxigou mines, 70%-75% from local mines and only
10-15% of our iron ore from abroad. Having access to iron ore from the Mulonggou
and Daxigou mines gives us greater direct control over key raw material input
costs and enhances our raw material source protection.


9




Our
revenue is dependent, in large part, on significant contracts from a limited
number of customers. We have five major customers which represented
approximately 34% and 59% of our total sales for the fiscal year ended December
31, 2008 and 2007, respectively, and accounted for 1% of total account
receivables as of December 31, 2008. These customers are: Shaanxi Longmen Iron
and Steel Group Co., Ltd., China Mine Metals Steel Co., Ltd., Xi’an Sanyi Steel
Products Sales Co., Ltd., Xi’an Wanlong Materials Trading Co., Ltd., China
Railway Material Commercial Corporation. We believe that revenue derived from
current and future large customers will continue to represent a significant
portion of our total revenue.





Competitors





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




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





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





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





ŸCompetitors of Maoming
include:  Guangdong Shao Guan Iron and Steel Group, Zhuhai Yue Yu Feng
Iron and Steel Co., Ltd.





Intellectual Property
Rights





“Qiu
Steel” is the registered trademark under which we sell hot-rolled carbon and
silicon steel sheets products produced at Daqiuzhuang Metal. The “Qiu Steel”
logo has been registered with the China National Trademark Bureau under No.
586433. “Qiu Steel” is registered under the GB 912-89 national quality standard,
and certified under the National Quality Assurance program.





“Baogang
Tongyong” is the trademark under which we sell spiral-weld steel pipes products
produced at Baotou Steel Pipe Joint Venture. This trademark is currently being
registered with China National Trademark Bureau.





“Yu Long”
is the registered trademark under which we sell rebar and round bar products
produced in Longmen Joint Venture. The trademark is registered under the
ISO9001:2000 international quality standard.




“Heng Da”
is the registered trademark under which we sell high-speed wire and rebar
products produced at our Maoming facility. The trademark is registered under the
ISO9001:2000 international quality standard.


10





Employees





As of
December 31, 2008, we had approximately 6,860 full-time employees. The increase
from year-end 2007 is mainly due to the new joint ventures we consummated in
2008.




ITEM
1A. RISK FACTORS




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





Risks
Related to Our Business





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





We
compete with other market players on the basis of product quality,
responsiveness to customer needs and price. There are two types of steel and
iron companies in China: state-owned enterprises and privately owned
companies.





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





·
Quality;





· Price/cost
competitiveness;




·System and product
performance;





· Reliability and
timeliness of delivery;





· New product and
technology development capability;





· Excellence and
flexibility in operations;





· Degree of global
and local presence;





· Effectiveness of
customer service; and





· Overall management
capability.




We
compete with both SOEs and privately owned steel manufacturers. While we believe
that our price and quality are superior to other manufacturers, many of our
competitors are better capitalized, more experienced, and have deeper ties in
the Chinese marketplace. We consider there to be the following 10 major
competitors of similar size, production capability and product line in the
market place competing against our four operating subsidiaries as
indicated:





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





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




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





· Competitors
of Maoming include: Guangdong Shao Guan Iron and Steel Group and Zhuhai Yue Yu
Feng Iron and Steel Co., Ltd.




11




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





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





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





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





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





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




· Maintain
adequate control of our expenses;





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





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





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





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





· Our financial
condition and results of operations;




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





· Conditions in
relevant financial markets in the United States, China and elsewhere in the
world.


12





Disruptions in world financial markets
and the resulting governmental action of the United States and other countries
could have a material adverse impact on our ability to obtain financing, our
results of operations, financial condition and cash flows and could cause the
market price of our common shares to decline.




The current deep and potentially
prolonged global recession that officially began in the United States in
December 2007 has, since the beginning of the third quarter of 2008, had a
material adverse effect on demand for our products and consequently the results
of our operations, financial condition and cash flows. In mid-February 2009, the
Federal Reserve warned that the United States economy faces an “unusually
gradual and prolonged” period of recovery from this deep and recessionary
period.





The credit markets worldwide and in the
United States have experienced significant contraction, de-leveraging and
reduced liquidity, and the United States government and foreign governments have
either implemented or are considering a broad variety of governmental action
and/or new regulation of the financial markets. Securities and futures markets
and the credit markets are subject to comprehensive statutes, regulations and
other requirements.





The uncertainty surrounding the future
of the global credit markets has resulted in reduced access to credit worldwide.
Major market disruptions and the current adverse changes in global market
conditions, and the regulatory climate in the United States and worldwide, may
adversely affect our business or impair our ability to borrow funds as needed.
The current market conditions may last longer than we anticipate. These recent
and developing economic and governmental factors may have a material adverse
effect on our results of operations, financial condition or cash flows and could
cause the price of our common stock to decline significantly.





We have made and may continue to make
acquisitions which could divert management's attention, cause ownership dilution
to our stockholders, or be difficult to integrate, which may adversely affect
our financial results.





We have made several acquisitions, and
it is our current plan to continue to acquire companies and technologies that we
believe are strategic to our future business. Integrating newly acquired
businesses or technologies could put a strain on our resources, could be costly
and time consuming, and might not be successful. Such acquisitions could divert
our management's attention from other business concerns. In addition, we might
lose key employees while integrating new organizations. Acquisitions could also
result in customer dissatisfaction, performance problems with an acquired
company or technology, potentially dilutive issuances of equity securities or
the incurrence of debt, the assumption or incurrence of contingent liabilities,
possible impairment charges related to goodwill or other intangible assets or
other unanticipated events or circumstances, any of which could harm our
business. We might not be successful in integrating any acquired businesses,
products or technologies, and might not achieve anticipated revenues and cost
benefits.





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





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





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





Our
revenue is dependent, in large part, on significant contracts with a limited
number of large customers. For the fiscal year ended December 31, 2008,
approximately 34% of our sales were to five customers and these customers
accounted for 1% of total account receivables.  We believe that revenue
derived from our current and future large customers will continue to represent a
significant portion of our total revenue. Our inability to continue to secure
and maintain a sufficient number of large contracts or the loss of, or
significant reduction in purchases by, one or more of our major customers would
have the effect of reducing our revenues and profitability.




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


13




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





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




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





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





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





According
to the survey conducted by the China Iron and Steel Association, there are
approximately 1000 steel companies in China. Among those, approximately 25
companies have over 5 million metric tons of crude steel production capacity.
Each steel company has its own production plan. The Chinese government posted
this guidance on the steel industry to encourage consolidation within the
fragmented steel sector to mitigate problems of low-end repetitive production
and inefficient use of resources. The current situation of overproduction may
not be solved by these measures posted by the Chinese government and result in
consolidation within the fragmented steel sector. If the current state of
overproduction continues, our product shipments could decline, our inventory
could build up and eventually we may be required to decrease our sales price,
which may eventually decrease our profitability.




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




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




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





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




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




14




We
depend on acquiring companies to fulfill our growth plan.





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





We
depend on bank financing for our working capital needs.





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





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





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




We did not have effective internal
control over financial reporting as of December 31, 2008 due to material
weaknesses, which relate primarily to the disclosure and presentation of
financial information under generally accepted accounting principles in the
United States, or U.S. GAAP. We can make no assurances that additional material
weaknesses will not be identified in the future. Our failure to implement and
maintain effective internal control over financial reporting could result in
material misstatements in our financial statements which could
require us to restate financial statements, cause investors to lose confidence
in our reported financial information and have a negative effect on our stock
price.
 
 Our
management concluded that our disclosure controls and procedures were not
effective as of December 31, 2008, because of the material weaknesses that had
been identified and described in Item 9A. “Controls and Procedures” of the 2008
Form 10-K. Our management has carried out an evaluation, with the participation
and under the supervision of our chief executive officer and chief financial
officer, of the effectiveness of the design and operation of our disclosure
controls and procedures as of December 31, 2008 covered by Management’s Report
on Internal Control over Financial Reporting. We have identified the following
material weaknesses as of December 31, 2008:
  Insufficient personnel with
appropriate accounting knowledge and training. We
did not maintain a sufficient complement of personnel with an appropriate level
of accounting knowledge, experience, and training in the application of
generally accepted accounting principles commensurate with financial reporting
requirements and did not implement adequate supervisory review to ensure the
financial statements at the subsidiary level were prepared in conformity with
generally accepted accounting principles in the United States of
America.  This material weakness resulted in audit adjustments that
corrected interest capitalization, raw material reserves and long term
investment in the consolidated financial statements for the year ended December
31, 2008.
  Incomplete related party transaction
identification.We did
not design and maintain effective controls to identify related party and
intercompany transactions, which resulted in material adjustments for
intercompany transactions and disclosures of related party transactions in the
consolidated financial statements for the year ended December 31,
2008.
  See Item
9A. “Controls and Procedures” for a more detailed discussion of these material
weaknesses.
 
 We can
make no assurances that additional material weaknesses in our internal control
over financial reporting will not be identified in the future. Any failure to
maintain or implement required new or improved controls, or any difficulties we
encounter in their implementation, could result in additional significant
deficiencies or material weaknesses, cause us to fail to meet our periodic
reporting obligations or result in material misstatements in our financial
statements. Any such failure could adversely affect the results of periodic
management evaluations and annual auditor attestation reports regarding the
effectiveness of our internal control over financial reporting that are required
under Section 404 of the Sarbanes-Oxley Act of 2002. The existence of a material
weakness could result in errors in our financial statements that could result in
restatement of financial statements, cause us to fail to meet our reporting
obligations and cause investors to lose confidence in our reported financial
information, leading to a decline in our stock price.
 
 Failure
to achieve and maintain effective internal controls could have a material
adverse effect on our business, results of operations and the trading price of
our common stock.
  We are
subject to the reporting obligations under the U.S. securities laws. The SEC,
under Section 404 of the Sarbanes-Oxley Act of 2002, has adopted rules requiring
public companies to include a report of management on such companies’ internal
control over financial reporting in their annual reports that contain an
assessment by management of the effectiveness of their internal control over
financial reporting at a reasonable assurance level. In addition, pursuant to
Auditing Standard No. 5, which is in effect for the fiscal year ended December
31, 2008, our independent registered public accounting firm must attest to and
report on the operating effectiveness of the company’s internal
controls.
  Management
has determined that, as of the fiscal year ended December 31, 2008, the two
material weaknesses as described in Item 9A. “Controls and Procedures,” resulted
from material weaknesses in our internal control over financial reporting. To
remediate these material weaknesses, we have taken and will continue to take a
number of remediation measures, as described in Item 9A. “Controls and
Procedures.” However, we can make no assurances that we can fully remediate all
our material weaknesses or address additional material weaknesses or significant
deficiencies that may subsequently arise by the year end date of fiscal year
2009, so that our management will be able to conclude that we will have
effective internal control over financial reporting as of December 31, 2009. If
we cannot implement the requirements of Section 404 of the Sarbanes-Oxley Act of
2002 in a timely manner or with adequate compliance, our registered independent
public accounting firm may not be able to provide a written attestation as to
the effectiveness of our internal controls over financial reporting, in which
event, our registered independent public accounting firm may issue a disclaimer
of their audit opinion. Our failure to achieve and maintain effective internal
control over financial reporting may result in sanctions or investigations by
regulatory authorities, such as the SEC, and loss of investor confidence in the
reliability of our financial statements, which in turn could harm our business
and negatively impact the trading price of our common stock. Furthermore, we
anticipate that we will continue to incur considerable costs and use significant
management and other resources in an effort to comply with Section 404 and other
requirements of the Sarbanes-Oxley Act of 2002.
  We
do not presently maintain product liability insurance in China, and our property
and equipment insurance does not cover the full value of our property and
equipment, which leaves us with exposure in the event of loss or damage to our
properties or claims filed against us.





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




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




15





Risks
Related to Operating Our Business in China





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





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





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




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





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





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


16




Inflation
in China could negatively affect our profitability and growth.





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





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





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





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





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





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





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




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





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




17





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





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





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




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





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





Since
1994, China pegged the value of the Renminbi to the U.S. dollar. We do not
believe that this policy has affected our business. However, there have been
indications that the Chinese government may be reconsidering its monetary policy
in light of the overall devaluation of the U.S. dollar against the Euro and
other currencies during the last two years. In July 2005, the Chinese government
revalued the Renminbi by 2.1% against the U.S. dollar, moving from Renminbi 8.28
to Renminbi 8.11 per dollar. If the pegging of the Renminbi to the U.S. dollar
is loosened, we anticipate that the value of the Renminbi will appreciate
against the dollar with the consequences discussed above. As of December 31,
2008, the exchange rate of the Remminbi to the U.S. dollar was
6.82 Renminbi to 1 dollar.




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




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




18





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





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





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





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





Risks
Related to Our Common Stock





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





Our
officers, directors and affiliates beneficially own approximately 60% of our
common stock. Mr. Zuosheng Yu, our major shareholder, beneficially owns
approximately 58% of our common stock. Mr. Yu can effectively control us and his
interests may differ from other stockholders.





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




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





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





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





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




19





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




We
registered the shares of our common stock issuable upon conversion of
approximately $40,000,000 worth of senior convertible notes convertible into
4,170,009 shares of our common stock with a conversion price of $12.47 per share
and applicable interest rates and upon the exercise of warrants to purchase an
additional aggregate amount of 1,154,958 shares of our common stock at an
exercise price of $13.51 per share, both issued in December 2007. The issuance
of shares of our common stock upon conversion of the notes and exercise of the
warrants will dilute current shareholders’ holdings in our company. The senior
convertible notes have a five year term through December 12, 2012, and the
warrants are exercisable from May 13, 2008, to May 13, 2013. The conversion
price will be reset to the Market Price on May 7, 2009, if the conversion price
is lower than the Market Price. Market Price means, for any given date, the
lower of (x) the arithmetic average of the Weighted Average Price of the Common
Stock for the thirty (30) consecutive Trading Day period ending on the Trading
Day immediately preceding such date and (y) the Weighted Average Price of the
Common Stock on the Trading Day immediately preceding such
date.





ITEM
1B. UNRESOLVED STAFF COMMENTS





None.





ITEM
2. PROPERTIES





Daqiuzhuang
Metal





The properties of Daqiuzhuang Metal
consist of manufacturing sites and office buildings located in Jinghai county,
about 20 miles (45 kilometers) southwest of the Tianjin city center on a total
of 17.81 acres (7.21 hectares) of land, which includes 320,390 sq. ft. (29,667
sq. m.) of building space.





Under Chinese law, all land in China is
owned by the government, which grants a “land use right” to an individual or
entity after a purchase price for such “land use right” is paid to the
government. The land use right allows the holder the right to use the land for a
specified long-term period of time and enjoy all the ownership incidents to the
land. We are the registered owner of the land use rights for the parcels of land
identified in the chart below.





Registered
      Owner of Land use
              Right
            
            Location
      & Certificate of Land Use
              Right
            
            Usage
            
            Life
      of
              Land
      Use
              RightTianjin
      Daqiuzhuang Metal Sheet Co., Ltd.
            
            No.
      6 West Gangtuan Road, Daqiuzhuang, Jinghai Country,
Tianjin
            
            Industrial
      Use
            
            50
      yearsTianjin
      Daqiuzhuang Metal Sheet Co., Ltd.
            
            No.
      35 Baiyi Road, Daqiuzhuang, Jinghai County, Tianjin
            
            Industrial
      Use
            
            50
      yearsTianjin
      Daqiuzhuang Metal Sheet Co., Ltd.
            
            Ying
      Fong Road North, Daqiuzhouang, Jinghai country Tianjin
            
            Commercial
      Use
            
            50
      years




20




Baotou Steel Pipe Joint
Venture





The properties of Baotou Steel Pipe
Joint Venture consist of our production and administrative sites located on the
main production campus of the Baotou Steel located in Baotou, Inner Mongolia
Autonomous Region. The land is rented from Baotou Iron and Steel Group Co.,
Ltd., our strategic partner in the Baotou Steel Pipe Joint Venture.





Longmen Joint
Venture





The properties of Longmen Joint Venture
consist of production and administrative sites located in various locations
throughout the southern half of Shaanxi province on land totaling approximately
300.2 acres (121.5 hectares).





We are the registered owner of the land
use rights for the parcels of land identified in the chart below.





Registered
      Owner of Land use
              Right
            
            Location
      & Certificate of Land Use
              Right
            
            Usage
            
            Life
      of
              Land
      Use
              RightShaanxi
      Longmen Iron and Steel Co., Ltd.
            
            North
      Huanyuan Road, Weiyang District, Xi'an, Shaanxi
            
            Industrial
      Use
            
            50
      YearsShaanxi
      Longmen Iron and Steel Co., Ltd.
            
            Longmen
      Town, Hancheng, Shaanxi
            
            Industrial
      Use
            
            40-48
      YearsShaanxi
      Longmen Iron and Steel Co., Ltd.
            
            Sanping
      Village, Shipo Town, Zhashui County, Shaanxi
            
            Industrial
      Use
            
            50
      YearsShaanxi
      Longmen Iron and Steel Co., Ltd.
            
            Zhaikouhe
      Village, Xunjian Town, Zhashui County, Shaanxi
            
            Industrial
      Use
            
            50
      YearsShaanxi
      Longmen Iron and Steel Co., Ltd.
            
            East
      Taishi Avenue, Xincheng District, Hancheng, Shaanxi
            
            Commercial
      Use
            
            40
      Years





Maoming





The properties of Maoming consist of
our production and administrative sites located in two separated sites inside
Maoming city, Guangdong province, on land totaling approximately 239.6 acres
(96.9 hectares).




21





We are the registered owner of the land
use rights for the parcels of land identified in the chart below.





Registered
      Owner of Land use
              Right
            
            Location
      & Certificate of Land Use
              Right
            
            Usage
            
            Life
      of
              Land
      Use
              RightMaoming
      Hengda Steel Co., Ltd.
            
            Diancheng
      Town, Dianbai County, Maoming City, Industrial Zone of Bohe Port,
      Guangdong
            
            Industrial
      Use
            
            50
      YearsMaoming
      Hengda Steel Co., Ltd.
            
            Diancheng
      Town, Dianbai County, Maoming City, Industrial Zone of Bohe Port,
      Guangdong
            
            Industrial
      Use
            
            50
      YearsMaoming
      Hengda Steel Co., Ltd.
            
            Diancheng
      Town, Dianbai County, Maoming City, Industrial Zone of Bohe Port,
      Guangdong
            
            Industrial
      Use
            
            50
      YearsMaoming
      Hengda Steel Co., Ltd.
            
            Diancheng
      Town, Dianbai County, Maoming City, Industrial Zone of Bohe Port,
      Guangdong
            
            Industrial
      Use
            
            50
      YearsMaoming
      Hengda Steel Co., Ltd.
            
            Diancheng
      Town, Dianbai County, Maoming City, Industrial Zone of Bohe Port,
      Guangdong
            
            Industrial
      Use
            
            50
      YearsMaoming
      Hengda Steel Co., Ltd.
            
            Diancheng
      Town, Dianbai County, Maoming City, Industrial Zone of Bohe Port,
      Guangdong
            
            Commercial
      Use
            
            50
      Years





ITEM
3. LEGAL PROCEEDINGS.





None.





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





None.





PART
II





ITEM
5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES.





Prior to
March 4, 2005, our common stock was listed on the OTC Bulletin Board under the
name of American Construction Company and traded with the symbol “ACNS.” From
March 4, 2005, through October 2, 2007, our common stock was listed on the OTC
Bulletin Board under the name General Steel Holdings, Inc., and traded with the
ticker symbol "GSHO." From October 3, 2007, through March 5, 2008, our common
stock was listed on the American Stock Exchange under the name General Steel
Holdings, Inc., and traded with the ticker symbol of “GSI.” On March 6, 2008,
our common stock began trading on the NYSE Arca under the name General Steel
Holdings, Inc., and trading with the ticker symbol “GSI.” On August 8, 2008, our
common stock began trading on the NYSE main board with the same ticker symbol.
The information regarding the high and low sales prices for the common stock for
each quarter of the last two years is as follows:





HIGH
      AND LOW STOCK PRICES
                
                1ST QTR
                
                
                2ND QTR
                
                
                3RD QTR
                
                
                4TH QTR2008High
                
                $
                9.08
                
                
                $
                15.70
                
                
                $
                15.50
                
                
                $
                7.16Low
                
                $
                6.23
                
                
                $
                6.66
                
                
                $
                7.14
                
                
                $
                2.532007High
                
                $
                5.80
                
                
                $
                4.09
                
                
                $
                9.00
                
                
                $
                19.20Low
                
                $
                1.12
                
                
                $
                2.76
                
                
                $
                5.05
                
                
                $
                7.76




22




As
of December 31, 2008, there were approximately 8,050 holders of record
of our common stock.





Dividend
Policy





Our board of directors currently does
not intend to declare dividends or make any other distributions to our
shareholders. Any determination to pay dividends in the future will be at our
board’s discretion and will depend upon our results of operations, financial
condition and prospects as well as other factors deemed relevant by our board of
directors.





Unregistered
Sale of Securities





87,550
share issuance of common stock as interim incentives to senior and mid-level
management.


On
October 9, 2008, we issued senior and mid-level management and directors 90,250
shares of our common stock as compensation. We valued the shares at the market
price as of the date they were granted. We recorded $306,425 as compensation
expense.





25,000
share issuance of common stock as part of the compensation for investor
relations ser vices.


On
October 28, 2008, we issued 25,000 shares of our common stock as compensation to
Hayden Communication International Inc. for their investor relations service. We
valued the shares at the market price as of the date they were granted. We
recorded $90,000 as SG&A expense.





100,000
share issuance of common stock as part of the compensation for consulting ser
vices.


On
October 28, 2008, we issued 100,000 shares of our common stock as compensation
to Teamlink Investments Limited for their business consulting services for one
year. We valued the shares at the market price as of the date they were granted.
We recorded $60,000 as SG&A expense and $300,000 as prepaid
expense.




23




ITEM 6. SELECTED FINANCIAL
DATA




SUMMARY OF OPERATIONS
                    
                    2008
                    
                    
                    2007
                    
                    
                    2006
                    
                    
                    2005
                    
                    
                    2004(USD in thousands, except per share amounts)
                    
                    
                    
                    
                    
                    (Restated)Total
      sales
                    
                    $
                    1,351,203
                    
                    
                    $
                    772,439
                    
                    
                    $
                    139,495
                    
                    
                    $
                    89,740
                    
                    
                    $
                    87,832Cost
      of sales
                    
                    $
                    1,343,275
                    
                    
                    $
                    715,750
                    
                    
                    $
                    135,324
                    
                    
                    $
                    81,166
                    
                    
                    $
                    81,613Selling,
      general, and administrative expenses
                    
                    $
                    36,942
                    
                    
                    $
                    16,164
                    
                    
                    $
                    2,421
                    
                    
                    $
                    2,781
                    
                    
                    $
                    2,317(Loss)
      Income from operations
                    
                    $
                    (29,014
                    )
                    
                    $
                    40,525
                    
                    
                    $
                    1,750
                    
                    
                    $
                    5,793
                    
                    
                    $
                    3,902Net
      (loss) income
                    
                    $
                    (11,324
                    )
                    
                    $
                    22,426
                    
                    
                    $
                    1,033
                    
                    
                    $
                    2,740
                    
                    
                    $
                    915Net
      (loss) income per common share, basic and diluted
                    
                    $
                    (0.32
                    )
                    
                    $
                    0.69
                    
                    
                    $
                    0.03
                    
                    
                    $
                    0.09
                    
                    
                    $
                    0.03Basic
      weighted average shares outstanding
                    
                    
                    35,381
                    
                    
                    
                    32,425
                    
                    
                    
                    31,250
                    
                    
                    
                    31,250
                    
                    
                    
                    30,260Diluted
      weighted average shares outstanding
                    
                    
                    35,381
                    
                    
                    
                    32,558
                    
                    
                    
                    31,250
                    
                    
                    
                    31,250
                    
                    
                    
                    30,260LONG
      TERM OBILIGATIONSConvertible
      Notes Payables
                    
                    $
                    7,155
                    
                    
                    $
                    5,440Derivative
      Liabilities
                    
                    $
                    9,903
                    
                    
                    $
                    28,483




As of December 31FINANCIAL DATA
                  
                  2008
                  
                  
                  2007
                  
                  
                  2006
                  
                  
                  2005
                  
                  
                  2004(USD in thousands, except the ratio )Total
      assets
                  
                  $
                  865,713
                  
                  
                  $
                  478,407
                  
                  
                  $
                  73,822
                  
                  
                  $
                  58,993
                  
                  
                  $
                  52,969Depreciation
      and amortization
                  
                  $
                  22,414
                  
                  
                  $
                  10,337
                  
                  
                  $
                  1,917
                  
                  
                  $
                  1,344
                  
                  
                  $
                  1,255Current
      Ratio
                  
                  
                  0.43
                  
                  
                  
                  0.67
                  
                  
                  
                  0.87
                  
                  
                  
                  0.96
                  
                  
                  
                  0.92




24





Three months ended December31 (Unaudited)STATEMENT OF OPERATIONAL
    DATA
                                                                
                                                                2008
                                                                
                                                                
                                                                2007
                                                                
                                                                
                                                                2006
                                                                
                                                                
                                                                2005In thousands, except share and
      per share amounts)Statement of Operations
DataSales revenues
                                                                
                                                                $
                                                                261,087
                                                                
                                                                
                                                                $
                                                                268,192
                                                                
                                                                
                                                                $
                                                                42,496
                                                                
                                                                
                                                                $
                                                                17,719Cost of goods sold
                                                                
                                                                $
                                                                282,663
                                                                
                                                                
                                                                $
                                                                247,239
                                                                
                                                                
                                                                $
                                                                42,838
                                                                
                                                                
                                                                $
                                                                17,509Gross profit
                                                                
                                                                $
                                                                (21,576
                                                                )
                                                                
                                                                $
                                                                20,953
                                                                
                                                                
                                                                $
                                                                (342
                                                                )
                                                                
                                                                $
                                                                210Selling, general, and administrative
      expenses
                                                                
                                                                $
                                                                8,578
                                                                
                                                                
                                                                $
                                                                5,894
                                                                
                                                                
                                                                $
                                                                266
                                                                
                                                                
                                                                $
                                                                1,017(Loss) Income from
    operations
                                                                
                                                                $
                                                                (30,154
                                                                )
                                                                
                                                                $
                                                                15,059
                                                                
                                                                
                                                                $
                                                                (607
                                                                )
                                                                
                                                                $
                                                                (808
                                                                )Net (loss) income
                                                                
                                                                $
                                                                (9,706
                                                                )
                                                                
                                                                $
                                                                12,057
                                                                
                                                                
                                                                $
                                                                514
                                                                
                                                                
                                                                $
                                                                386Net (loss) income per shareBasic
                                                                
                                                                
                                                                -0.27
                                                                
                                                                
                                                                
                                                                0.36
                                                                
                                                                
                                                                
                                                                0.01
                                                                
                                                                
                                                                
                                                                0.01Diluted
                                                                
                                                                
                                                                -0.27
                                                                
                                                                
                                                                
                                                                0.36
                                                                
                                                                
                                                                
                                                                0.01
                                                                
                                                                
                                                                
                                                                0.01Balance Sheet DataCurrent assets
                                                                
                                                                $
                                                                316,031
                                                                
                                                                
                                                                $
                                                                232,608
                                                                
                                                                
                                                                $
                                                                44,670
                                                                
                                                                
                                                                $
                                                                37,017Total assets
                                                                
                                                                $
                                                                865,713
                                                                
                                                                
                                                                $
                                                                478,407
                                                                
                                                                
                                                                $
                                                                73,822
                                                                
                                                                
                                                                $
                                                                58,993Total liabilities
                                                                
                                                                $
                                                                751,476
                                                                
                                                                
                                                                $
                                                                382,974
                                                                
                                                                
                                                                $
                                                                53,575
                                                                
                                                                
                                                                $
                                                                41,256Minority interest
                                                                
                                                                $
                                                                49,398
                                                                
                                                                
                                                                $
                                                                42,044
                                                                
                                                                
                                                                $
                                                                6,186
                                                                
                                                                
                                                                $
                                                                5,387Total Stockholder’s
      equity
                                                                
                                                                $
                                                                64,839
                                                                
                                                                
                                                                $
                                                                53,389
                                                                
                                                                
                                                                $
                                                                4,060
                                                                
                                                                
                                                                $
                                                                12,350





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





Forward-Looking
Statements:





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





OVERVIEW


General Steel was founded on the
strategy to aggressively merge, create Joint Ventures, and acquire
State-Owned-Enterprises and private steel companies, within China’s highly
fragmented steel industry. As of December 31, 2008, General Steel was comprised
of 4 operating subsidiaries of which the largest is the Longmen Joint
Venture.The Longmen
Joint Venture contributes approximately 87.5% of our total revenue and its main
product is reinforcing steel bar (“rebar”) which is used in infrastructure and
construction related projects.





25





2008 was
a difficult year with unique challenges.


·
            1st
      Quarter – In January, southern China experienced an unusually severe ice
      storm.  The storm caused a nationwide disruption to commerce
      including a diversion of coal and transportation resources from the
      northern part of China, indirectly impacting our Longmen Joint Venture
      with delayed deliveries and shipments due to iced roads and higher coke
      prices.


·
            3rd
      Quarter – In August, Beijing hosted the Olympic and Paralympics Games.
      Prior to and during the Games, the government halted construction projects
      and heavy industry commerce within a 500 km radius of Beijing in an
      attempt to improve air quality. The action caused an economic ripple
      effect dampening the overall industrial
demand.


·
            4th
      Quarter – The financial crisis and global economic slowdown caused
      commodity prices to collapse and significantly weakened demand for steel
      products worldwide.





Even with
many challenges during 2008, General Steel:


·
            Achieved
      record revenue results of $1.35 billion, a 75% increase over 2007
      revenue;


·
            Completed
      the acquisition of Maoming Hengda Steel Group in Guangdong
      province;


·
              Opened
      a new sales office in Sichuan province;·
              Selected
      as a “Preferred Supplier” of rebar by the national government for Sichuan
      earthquake rebuilding
efforts;


·
            Completed
      the construction of two 1,280 m3
      blast furnaces at our Longmen Joint Venture.  We capitalized
      approximately $180.4 million for the construction of the two blast
      furnaces and financed the project with cash flow from operations
      (including customer prepayment and vendor financing) and local borrowing.
      The new blast furnaces are more efficient, requiring less manpower, coke
      and energy, which will lower our cost of goods, enabling us to be more
      competitive in the long-run.


·
            Migrated
      to NYSE; and


·
            Celebrated
      the 20th
      year anniversary of our company’s founding subsidiary, Tianjin Daqiuzhuang
      Metal Sheet Co., Ltd.





The
global financial crisis and subsequent economic downturn that began in
the third quarter has caused international steel prices to drop
significantly. General Steel has been negatively impacted along with other steel
companies and the decline in steel prices is a large contributing factor to our
negative results for 2008 (see Operating Results for further
details).





Globally,
governments are combating the economic downturn with various economic stimulus
plans. China has already announced and started spending related to its $586
billion economic stimulus plan, of which a large portion will be directed
towards infrastructure-related projects.





General
Steel is somewhat buffered from the global economic downturn because, unlike
many Chinese steel producers, we do not export steel. Our sales focus is on the
domestic Chinese market in inland areas such as Shaanxi province and China’s
western region.





Our
Longmen Joint Venture is the dominant supplier of construction steel in Shaanxi
province with approximately 70% market share. We are already supplying rebar for
Shaanxi infrastructure projects directly linked to the China economic stimulus
spending such as: the Xi’an subway line 1 and 4 extension, Xi’an to Baotou
railway, Shiyen to Gansu expressway and others. General Steel is in a unique
position to directly benefit from China’s economic stimulus infrastructure
spending.





In Sichuan province, our Longmen Joint
Venture opened a new sales office and is supplying rebar for the reconstruction
of communities devastated by the May 12, 2008 earthquake. Our Longmen Joint
Venture has been selected by the national government as one of the “Preferred
Suppliers” of construction steel for the earthquake rebuilding efforts. Sichuan
province is adjacent to Shaanxi province, where our Longmen Joint Venture is
located, giving us a unique advantage in location to ship rebar to
reconstruction areas. According to articles in China Daily, around 37 million
metric tons of steel related products are expected to be used for the
reconstruction efforts over the next 3 years.




26







RESULTS
OF OPERATIONS


Fiscal
year ended December 31, 2008 compared with Fiscal year ended December 31,
2007





General


During
the first three quarters of the year, raw material prices rose dramatically to
record heights. Many steel producers assumed prices would continue upward and
hoarded raw material inventory to lock-in prices. In fact, due to the harsh
winter weather, some steel producers in northern China hoarded enough
inventories to last through the entire winter.





In the fourth quarter, edged by the
financial crisis, global demand stalled and commodity prices abruptly
plummeted.  With weakened demand, market forces kicked-in and the
price of steel dropped substantially.





Many steel producers in China
experienced significant losses in the fourth quarter as they were forced to work
through raw material inventories purchased at high prices at a time when market
selling prices for finished goods had dropped below the Cost of Goods. This
resulted in many steel companies reporting negative margins and inventory
write-downs. According to Xinhua news agency, China’s steel producers lost
approximately $6.97 billion in the fourth quarter alone.





We
achieved record sales of approximately $1.35 billion for the year, which we
believe validates the foundation of our strategy: aggressively grow through
mergers and acquisitions and ultimately improve the profitability of existing
and acquired assets.  Unfortunately, we were not immune from the
contagions of the global slowdown and share the same bottom-line result as many
other steel companies, posting a full-year 2008 net loss of $11.3 million. The
primary factor for our net loss is attributable to negative gross profit, which
resulted from selling finished product made with raw materials purchased during
a period of rising raw material prices.





Management decided it was in the best
interest of our shareholders to sell-out of the high priced inventory as quickly
as possible, even at a loss. This is because raw material prices were dropping
along with finished product prices. Only by clearing out the high-cost inventory
at a loss could we make room for the lower cost inventory. For example, our
largest raw material input, iron ore, was bought at an average price of $ 161
per ton in August versus $ 103 per ton in November. There is a lag time between
the purchase of raw materials, their delivery and conversion to finished product
for sales.  So, some of the raw materials we used in the fourth
quarter were purchased at high prices before commodity prices dropped and used
up during the fourth quarter. Beginning in the first quarter, we expect to see
margins improve due to the use of lower-cost inventory.





Because the majority of our iron ore
supply is purchased from the domestic spot market, we were better able to
quickly take advantage of falling raw material prices compared to many of our
competitors with long term fix price supply contracts. We also minimized our
inventory levels instead of hoarding which kept our loss due to high cost
inventory at a lower level relative to our peers.





27





Income
Statement





Income Statement
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        Percent Change(USD
      in - thousands, except share data)
                                                        
                                                        2008
                                                        
                                                        
                                                        2007
                                                        
                                                        
                                                        2006
                                                        
                                                        
                                                        2008 vs 2007
                                                        
                                                        
                                                        2007 vs 2006REVENUES
                                                        
                                                        $
                                                        1,351,203
                                                        
                                                        
                                                        $
                                                        772,439
                                                        
                                                        
                                                        $
                                                        139,495
                                                        
                                                        
                                                        
                                                        75
                                                        %
                                                        
                                                        
                                                        454
                                                        %COST
      OF SALES
                                                        
                                                        $
                                                        1,343,275
                                                        
                                                        
                                                        $
                                                        715,750
                                                        
                                                        
                                                        $
                                                        135,324
                                                        
                                                        
                                                        
                                                        88
                                                        %
                                                        
                                                        
                                                        429
                                                        %GROSS
      PROFIT
                                                        
                                                        $
                                                        7,928
                                                        
                                                        
                                                        $
                                                        56,689
                                                        
                                                        
                                                        $
                                                        4,171
                                                        
                                                        
                                                        
                                                        -86
                                                        %
                                                        
                                                        
                                                        1259
                                                        %-
      Gross Profit Margin %
                                                        
                                                        
                                                        0.59
                                                        %
                                                        
                                                        
                                                        7.34
                                                        %
                                                        
                                                        
                                                        2.99
                                                        %
                                                        
                                                        
                                                        -92
                                                        %
                                                        
                                                        
                                                        145
                                                        %SG&A
                                                        
                                                        $
                                                        36,942
                                                        
                                                        
                                                        $
                                                        16,164
                                                        
                                                        
                                                        $
                                                        2,421
                                                        
                                                        
                                                        
                                                        129
                                                        %
                                                        
                                                        
                                                        568
                                                        %(Loss)
      Income from Operations
                                                        
                                                        $
                                                        (29,014
                                                        )
                                                        
                                                        $
                                                        40,525
                                                        
                                                        
                                                        $
                                                        1,749
                                                        
                                                        
                                                        
                                                        -172
                                                        %
                                                        
                                                        
                                                        2217
                                                        %Total
      other (income) expense, net
                                                        
                                                        $
                                                        (3,737
                                                        )
                                                        
                                                        $
                                                        1,262
                                                        
                                                        
                                                        $
                                                        (83
                                                        )
                                                        
                                                        
                                                        -396
                                                        %
                                                        
                                                        
                                                        -1621
                                                        %(Loss)
      Income before provision for Income Tax and minority
    Interest
                                                        
                                                        $
                                                        (25,277
                                                        )
                                                        
                                                        $
                                                        39,263
                                                        
                                                        
                                                        $
                                                        1,832
                                                        
                                                        
                                                        
                                                        -164
                                                        %
                                                        
                                                        2043
                                                        %Total
      provision for income taxes
                                                        
                                                        $
                                                        (5,411
                                                        )
                                                        
                                                        $
                                                        4,836
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        -212
                                                        %(Loss)
      Income before minority interest
                                                        
                                                        $
                                                        (19,866
                                                        )
                                                        
                                                        $
                                                        34,427
                                                        
                                                        
                                                        $
                                                        1,832
                                                        
                                                        
                                                        
                                                        -158
                                                        %
                                                        
                                                        
                                                        1779
                                                        %Less
      Minority Interest
                                                        
                                                        $
                                                        (8,542
                                                        )
                                                        
                                                        $
                                                        12,001
                                                        
                                                        
                                                        $
                                                        799
                                                        
                                                        
                                                        
                                                        -171
                                                        %
                                                        
                                                        
                                                        1402
                                                        %NET (LOSS) INCOME
                                                        
                                                        $
                                                        (11,324
                                                        )
                                                        
                                                        $
                                                        22,426
                                                        
                                                        
                                                        $
                                                        1,033
                                                        
                                                        
                                                        
                                                        -150
                                                        %
                                                        
                                                        2071
                                                        %EARNINGS
      PER SHAREBasic
                                                        
                                                        $
                                                        (0.32
                                                        )
                                                        
                                                        $
                                                        0.69
                                                        
                                                        
                                                        $
                                                        0.03
                                                        
                                                        
                                                        
                                                        -146
                                                        %
                                                        
                                                        1992
                                                        %Diluted
                                                        
                                                        $
                                                        (0.32
                                                        )
                                                        
                                                        $
                                                        0.69
                                                        
                                                        
                                                        $
                                                        0.03
                                                        
                                                        
                                                        
                                                        -146
                                                        %
                                                        
                                                        1983
                                                        %





Revenues


Revenue in 2008, achieved a record
result of $1.35 billion, a 75% increase over 2007. This increase in sales is
attributed to our acquisition strategy, notably the full year consolidation of
Shaanxi Longmen Iron and Steel Co., Ltd. in 2008, versus 7 months consolidated
results in 2007. Baotou Steel Pipe Joint Venture is a full-year consolidation in
2008 versus 6 months consolidated results in 2007. Our Maoming subsidiary was
acquired June 25, 2008 and contributed 6 months consolidated results for 2008
versus nothing in 2007.





Revenue
by Subsidiary and Product


The product range of each subsidiary is
focused. Our revenue by products can be determined by looking at the products
produced in each subsidiary.





Revenue
      by Subsidiary and Product
                                      (USD
      in thousands)Subsidiary
                                    Product
                                    
                                    2008
                                    
                                    
                                    2007
                                    
                                    
                                    2006Longmen
      Joint Venture
                                    Rebar
                                    
                                    $
                                    1,182,433
                                    
                                    
                                    $
                                    618,315
                                    
                                    
                                    $
                                    —Daqiuzhuang
      Metal
                                    Hot-Rolled
      Sheets
                                    
                                    $
                                    132,458
                                    
                                    
                                    $
                                    147,727
                                    
                                    
                                    $
                                    139,495Maoming
                                    High-Speed
      Wire
                                    
                                    $
                                    23,280
                                    
                                    
                                    $
                                    —
                                    
                                    
                                    $
                                    —Baotou
      Steel Pipe
                                    Spiral-Welded
      Steel Pipes
                                    
                                    $
                                    13,032
                                    
                                    
                                    $
                                    6,397
                                    
                                    
                                    $
                                    —Total
      Revenue
                                    
                                    $
                                    1,351,203
                                    
                                    
                                    $
                                    772,439
                                    
                                    
                                    $
                                    139,495





Gross
Profit


Gross Profit in 2008, was $7.9 million,
compared with $56.7 million in 2007. The decrease was due primarily to the
market conditions in the fourth quarter. During this time steel prices abruptly
dropped to levels below raw material inventory value. The inventory was
purchased during a time of rising prices as discussed earlier.





Management decided it was in the best
interest of shareholders to sell-out the high priced inventory as quickly as
possible, even with negative Gross Profit. This is because raw material prices
were also dropping along with finished product prices. By clearing out the high
cost inventory at a loss we generated cash to purchase the new lower cost
inventory. With the lower cost inventory, our margins would return to
positive.





Longmen
Joint Venture Q4 Margin Analysis


Since our Longmen Joint Venture
contributed approximately 87.5% to our total revenue, it is useful to study this
subsidiary’s fourth quarter Gross Profit Margin trend to better understand
management’s decision in dealing with the challenging fourth
quarter.





28





Longmen
Joint Venture


(USD
in thousands)


Oct
      2008
                            
                            
                            Nov 2008
                            
                            
                            Dec 2008
                            
                            
                            
                            Q4 2008REVENUES
                            
                            $
                            74,863,219
                            
                            
                            $
                            65,782,148
                            
                            
                            $
                            88,458,195
                            
                            
                            $
                            229,103,561COST
      of GOODS SOLD
                            
                            $
                            89,182,987
                            
                            
                            $
                            68,193,108
                            
                            
                            $
                            87,277,050
                            
                            
                            $
                            244,653,144-
      Inventory Provision1
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            $
                            1,770,588GROSS
      PROFIT
                            
                            $
                            -14,319,767
                            
                            
                            $
                            -2,410,960
                            
                            
                            $
                            1,181,145
                            
                            
                            $
                            -17,320,171-
      Gross Profit Margin %
                            
                            
                            -19.13
                            %
                            
                            
                            -3.67
                            %
                            
                            
                            1.34
                            %
                            
                            
                            -7.56
                            %





Inventory
Provision1 –
Longmen Joint Venture only











In October, sales prices and raw
material costs both dropped substantially. Sales prices stabilized at a point
allowing a positive Gross Profit. Although a positive Gross Profit existed
between sales price and spot price for raw materials for that month, the
positive Gross Profit did not yet show in our financial statements. The
financial results for October still showed a negative Gross Profit of 19.13%
because raw material inventory was carried using weighted average cost
valuation. We needed to consume the high value inventory purchased in previous
months to bring down the average cost.





In November, the Gross Profit improved
to -3.67% reflecting the lower purchase price of raw materials bringing down the
weighted average cost of inventory.





By December, the Gross Profit returned
to positive. The high valued inventory had been consumed and the lower weighted
average cost inventory was reflected in our financial statements.





An inventory write-down of $1.8 million
was recorded at our Longmen Joint Venture in the fourth quarter of 2008. This
does not impact the individual monthly Gross Profit analysis described above.
The inventory write-down is only reflected in the total fourth quarter results.
Total inventory write-down was USD 2.2 million.





Selling,
General and Administrative Expenses


Selling, General and Administrative
Expenses (“SG&A”) in 2008 were $36.9 million, an increase of 129% over 2007.
This increase in SG&A expenses was attributed to professional fees relating
to our acquisitions and timing impact: notably the full year consolidation of
Longmen Joint Venture in 2008, versus 7 months consolidated results in 2007, and
Baotou Steel Pipe Joint Venture as a full year consolidation in 2008, versus 6
months consolidated results in 2007. Our Maoming subsidiary was acquired on June
25, 2008, and contributed 6 months consolidated results for 2008, versus nothing
in 2007.




29




Total
Other Income (Expense), Net


The table
below is a breakdown of Other (Income) and Expenses, net:





OTHER
      (EXPENSE) INCOME, NET
                          (USD
      in thousands)
                        
                        2008
                        
                        
                        2007
                        
                        
                        2006Interest
      income
                        
                        $
                        4,251
                        
                        
                        $
                        871
                        
                        
                        $
                        183Interest/finance
      (expense) 1
                        
                        $
                        -23,166
                        
                        
                        $
                        -9,297
                        
                        
                        $
                        -2,345Change
      in fair value of derivative liabilities2
                        
                        $
                        12,821
                        
                        
                        $
                        6,236
                        
                        
                        $
                        —Gain
      from debt extinguishment 3
                        
                        $
                        7,169
                        
                        
                        $
                        —
                        
                        
                        $
                        —Other
      non-operating (income) expense, net 4
                        
                        $
                        766
                        
                        
                        $
                        928
                        
                        
                        $
                        2,245Income
      from investment 5
                        
                        $
                        1,896
                        
                        
                        $
                        —
                        
                        
                        $
                        —Total
      other income (expense), net
                        
                        $
                        3,737
                        
                        
                        $
                        -1,262
                        
                        
                        $
                        83





1
                Interest/finance
      expense: interest paid on bank loans, early redemption of Notes
      Receivables, convertible debt and various bank
  fees


2
                Change
      in fair value of derivative liabilities: related to valuation of warrant
      liabilities of our convertible debt. This is a non-cash, non-operating
      item.


3
                Gain
      from debt extinguishment: debt waiver by Hengda Group - $7.2
      million


4
                Other
      non-operating (income) expense net - major
  items:


·
            Rental
      income for land at Daqiuzhuang Metal - $1.7
  million


·
            Recovery
      of bad debt - $3.2 million


·
            Other
      misc. expense - $0.5 million


5
                Income
      from investments: entities in which we have neither controlling interest
      nor consolidated results as part of our financial
    statements.





Net
Income


Net Loss in 2008 was $11.3 million,
compared to Net Income of $22.4 million in 2007. The primary factor for the Net
Loss was negative profit margins as discussed above.





Operating
Net Income


To gain insight in operations, it is
useful to look at Operating Net Income which is a non GAAP performance
measurement. We calculate Operating Net Income as GAAP Net Income plus the
change in fair value of derivative liability.





USD
      (thousands)2008
                        
                        
                        2007
                        
                        
                        2006GAAP
      Net Income
                        
                        $
                        -11,324
                        
                        
                        $
                        22,426
                        
                        
                        $
                        1,033Change
      in fair value of derivative instrument
                        
                        $
                        -12,821
                        
                        
                        $
                        -6,236
                        
                        
                        $
                        —Operating
      Net Income
                        
                        $
                        -24,145
                        
                        
                        $
                        16,190
                        
                        
                        $
                        1,033





The derivative gain or loss is related
to the fair value of the warrant liability which is part of our 2007 convertible
bond. As our share price rises and approaches the warrant strike price, the
warrant liability increases which causes a loss our on income statement. As our
share price falls and moves further below the warrant strike price, the warrant
liability decreases which causes a gain on our income statement. The change in
fair value of derivative instrument is a non cash, non operating
expense.





Fiscal
year ended December 31, 2007 compared with Fiscal year ended December 31,
2006





General





2007 was a transformational year for
us. We completed two joint ventures which changed us from a 400,000 metric ton
steel sheet processor to an integrated iron and steel company with an aggregate
capacity of 3 million  metric tons. Our product range expanded from only
steel sheets to include spiral-weld steel pipes and construction steel. We
migrated from the OTCBB exchange to the American Stock Exchange and most
importantly, our revenue increased 454% year-over-year and our Net Income
increased 2071%.





Revenue





Overall,
revenue for the year 2007 was approximately $772.4 million compared to $139.5
million in 2006, an increase of 454%. The sharp increase in net sales was a
result of our acquiring controlling interest position in the Longmen Joint
Venture in June, and to a lesser extent the starting of our Baotou Steel Pipe
Joint Venture which began sales in July 2007.





30





Gross
Profit





Gross
profit for the year 2007 was approximately $56.7 million, an increase of 1259%
or $52.5 million from $4.2 million for last year. Gross profit margin increased
to 7% for the year 2007 from 3% for 2006.





Selling,
General and Administrative Expenses





Selling,
general and administrative expenses were $16.2 million for the year 2007,
compared to $2.4 million for 2006. This increase is largely attributable to the
operations of the Longmen Joint Venture, which began in June, and alone
accounted for approximately $11.7 million in SG&A expense since June
2007.





Total
Other (Income) Expense, Net





Finance
and interest expenses were $9.3 million for the year 2007, a 296% increase from
$2.3 million for 2006. The increase is traced to an increase in short term
borrowings largely associated with the Longmen Joint Venture
operations.





Income
from derivative instrument was $6.2 million for the year 2007, there was no
derivative instrument for the year 2006.





Interest Income and Other Non Operating
income was $1.7 million for the year 2007 compared to $2.4 million.





Net
Income





Net
income was $22.4 million for the year 2007 compared to $1.0 million for the same
period of 2006, an increase of 2,071%. The sharp increase is largely
attributable to the contributions from the Longmen Joint Venture which began in
June 2007 and the income of $6.2 million recorded for the change in fair value
of the derivative instrument in connection with the issuance of the convertible
notes in 2007.





Impact
of inflation and changing prices




We are
subject to commodity price risks arising from price fluctuations in the market
prices of the raw materials. We have generally been able to pass on cost
increases through price adjustments. However, the ability to pass on these
increases depends on market conditions influenced by the overall economic
conditions in China. We try to manage our price risks through productivity
improvements and cost-containment measures.





Non
Financial Performance Measurements


2008
                                                                                    
                                                                                    
                                                                                    2007
                                                                                    
                                                                                    
                                                                                    2006Number of Subsidiaries
                                                                                    
                                                                                    4
                                                                                    
                                                                                    
                                                                                    3
                                                                                    
                                                                                    
                                                                                    1Capacity (million metric
    ton)
                                                                                    
                                                                                    6.3
                                                                                    
                                                                                    
                                                                                    3
                                                                                    
                                                                                    
                                                                                    0.4Main
      Product Categories
                                                                                    
                                                                                    4
                                                                                    
                                                                                    
                                                                                    3
                                                                                    
                                                                                    
                                                                                    1Hot-rolled
      sheets
                                                                                    
                                                                                    
                                                                                    Hot-rolled
      sheets
                                                                                    
                                                                                    
                                                                                    Hot-rolled
      sheetsSpiral-weld
      pipe
                                                                                    
                                                                                    
                                                                                    Spiral-weld
      pipeRebar
                                                                                    
                                                                                    
                                                                                    RebarHigh-speed wireNo. Sales Office
                                                                                    
                                                                                    7
                                                                                    
                                                                                    
                                                                                    6
                                                                                    
                                                                                    
                                                                                    3No.full-time Employees
                                                                                    
                                                                                    6,860
                                                                                    
                                                                                    
                                                                                    6,250
                                                                                    
                                                                                    
                                                                                    1,250Shipment Volume
                                                                                    
                                                                                    1,937,700
                                                                                    
                                                                                    
                                                                                    1,776,923
                                                                                    
                                                                                    
                                                                                    341,702





31





LIQUIDITY
AND CAPITAL RESOURCES





The Chinese commercial banks are
relatively unaffected by the U.S. banking crisis. As such, with our long and
favorable banking relationships, we are confident our bank loans will be renewed
at maturity. Chinese bank loans remain the cheapest form of capital for
business.





As of December 31, 2008, we had cash
and cash equivalents aggregating $145.6 million.





For the year ended December 31, 2008,
we used cash flow from continuing operations, borrowings, cash and cash
equivalents to fund working capital requirements, pay interest payments, capital
expenditures (including construction of two 1,280 m3 blast
furnaces at our Longmen Joint Venture) and the acquisition of Maoming Hengda
Steel Group Limited.





We believe our cash flows from
operations (which include customer prepayment and vendor financing), existing
cash balances, and credit facilities will be adequate to finance our working
capital requirements, fund capital expenditures, make required debt and interest
payments, pay taxes, and support our operating strategies.





Cash Flow from Operating
Activities





Due to our unique geographic location
and dominant market share we enjoy favorable terms from our customers and
vendors; customers pay in advance and vendors give us credit terms. As of
December 31, 2008, customer deposits totaled $148.3 million and accounts
payables totaled $164.6 million. Our primary source of funds continued to be
cash generated from operations (which includes customer prepayments and vendor
financing).





Cash Flow used by Investing
Activities





Acquisitions


On June 25, 2008, we acquired Maoming
Hengda Steel Group Limited in a cash transaction for a total consideration of
RMB50 million, or approximately $7.3 million.





Capital
Expenditures


As of December 31, 2008 plant and
equipment less depreciation is $491.7 million, an increase of $273.4 million
from 2007. This growth includes $180.5 million for the construction of two 1,280
m3
blast furnaces at our Longmen Joint Venture.





Cash Flow used by Financing
Activities





Bank
Debt


As of December 31, 2008, our short term
bank loans totaled $67.8 million, a reduction of $25.2 million from 2007.
Overall our bank borrowing increased utilizing short term notes payables. As of
December 31, 2008, short term notes payables were $206 million which is
collateralized by restricted cash of $130.7 million.





Short
term notes payable are lines of credit extended by the banks. When purchasing
raw materials, the Company often issues a short term note payable to the vendor
funded with draws on the lines of credit. This short term note payable is
guaranteed by the bank for its complete face value. The banks usually do not
charge interest on these notes but require the Company to deposit a certain
amount of cash at the bank as a guarantee deposit which is classified on the
balance sheet as restricted cash.




Non-Bank
Debt


As of December 31, 2008, our short term
loans from non bank sources were $95.2 million, an increase of 260% over 2007.
Of this amount, $29.4 million was assumed in the acquisition of Maoming Hengda
Steel Group, Ltd.





Some of
the loans from non bank sources are related parties. For a complete description
of related parties, see Item 13





32





Warrants





In September 2008, 140,000 shares of
warrants in connection with redeemable preferred stock were exercised at $5.00
per share for a total of $700,000.





OFF
BALANCE SHEET ARRANGEMENTS


None.





CONTRACTUAL
OBLIGATIONS AND COMMERCIAL COMMITMENTS


We have certain fixed contractual
obligations and commitments that include future estimated payments. Changes in
our business needs, cancellation provisions, changing interest rates, and other
factors may result in actual payments differing from the estimates. We cannot
provide certainty regarding the timing and amounts of payments. We have
presented below a summary of the most significant assumptions used in our
determination of amounts presented in the tables, in order to assist in the
review of this information within the context of our consolidated financial
position, results of operations, and cash flows.





The following table summarizes our
contractual obligations as of December 31, 2008, and the effect these
obligations are expected to have on our liquidity and cash flows in future
periods.




Payment due by periodLess thanContractual obligations
                                        
                                        Total
                                        
                                        
                                        1 year
                                        
                                        
                                        2-3 years
                                        
                                        
                                        4- 5 years(USD
      in thousands)Bank
      loans 1
                                        
                                        $
                                        67,840
                                        
                                        
                                        $
                                        67,840
                                        
                                        
                                        $
                                        —
                                        
                                        
                                        $
                                        —Other loans
                                        
                                        $
                                        87,834
                                        
                                        
                                        $
                                        87,834
                                        
                                        
                                        $
                                        —
                                        
                                        
                                        $
                                        —Related Party Loans
                                        
                                        $
                                        7,349
                                        
                                        
                                        $
                                        7,349
                                        
                                        
                                        $
                                        —
                                        
                                        
                                        $
                                        —Notes
      payable
                                        
                                        $
                                        206,040
                                        
                                        
                                        $
                                        206,040
                                        
                                        
                                        $
                                        —
                                        
                                        
                                        $
                                        —Deposits
      due to sales representatives
                                        
                                        $
                                        8,149
                                        
                                        
                                        $
                                        8,149
                                        
                                        
                                        $
                                        —
                                        
                                        
                                        $
                                        —Lease with Baotou Steel
                                        
                                        $
                                        924
                                        
                                        
                                        $
                                        264
                                        
                                        
                                        $
                                        528
                                        
                                        
                                        $
                                        132Convertible notes ( Principal plus Interest
      )
                                        
                                        $
                                        47,250
                                        
                                        
                                        $
                                        1,896
                                        
                                        
                                        $
                                        6,169
                                        
                                        
                                        $
                                        39,185Contingent payment for Longmen Blast
      Funace
                                        
                                        $
                                        11,911
                                        
                                        
                                        $
                                        11,911
                                        
                                        
                                        $
                                        —
                                        
                                        
                                        $
                                        —Total
                                        
                                        $
                                        437,297
                                        
                                        
                                        $
                                        391,283
                                        
                                        
                                        $
                                        6,697
                                        
                                        
                                        $
                                        39,317




1 Bank
loans in China are due on demand or normally within one year. These loans can be
renewed with the banks. This amount includes estimated interest payments as well
as debt maturities.





Critical
Accounting Policies





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




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





33





Revenue
recognition





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





Use of
estimates





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





Recent
Accounting Pronouncements





In
September 2008, the FASB issued for comment revisions to SFAS No. 140 and FASB
Interpretation No. 46, as revised (“FIN 46R”), “Consolidation of Variable
Interest Entities.” The changes proposed include a removal of the scope
exemption from FIN 46R for QSPEs, a revision of the current risks and
rewards-based FIN 46R consolidation model to a qualitative model based on
control and a requirement that consolidation of VIEs be re-evaluated on an
ongoing basis. Although the revised standards have not yet been finalized, these
changes may have a significant impact on the Company’s consolidated financial
statements as the Company may be required to deconsolidate certain assets and
liabilities due to the ongoing evaluation of its primary beneficiary status. In
addition, the Company may also be required to consolidate other VIEs that are
not currently consolidated based an analysis under the current FIN 46R
consolidation model. The proposed revisions would be effective for fiscal years
that begin after November 15, 2009.





In
December 2008, the FASB issued FSP FAS 140-4 and FIN 46(R)-8, “Disclosures by
Public Entities (Enterprises) about Transfers of Financial Assets and Interests
in Variable Interest Entities” (“FSP FAS 140-4 and FIN 46(R)-8”). FSP FAS 140-4
and FIN 46(R)-8 amends FAS 140 and FIN 46(R) to require additional disclosures
regarding transfers of financial assets and interest in variable interest
entities. FSP FAS 140-4 and FIN 46(R)-8 is effective for interim or annual
reporting periods ending after December 15, 2008.





In
January 2009, the FASB issued FSP EITF 99-20-1, “Amendments to the Impairment
Guidance of EITF Issue No. 99-20, and EITF Issue No. 99-20, Recognition of
Interest Income and Impairment on Purchased and Retained Beneficial Interests in
Securitized Financial Assets” (“FSP EITF 99-20-1”). FSP EITF 99-20-1 changes the
impairment model included within EITF 99-20 to be more consistent with the
impairment model of SFAS No. 115. FSP EITF 99-20-1 achieves this by amending the
impairment model in EITF 99-20 to remove its exclusive reliance on “market
participant” estimates of future cash flows used in determining fair value.
Changing the cash flows used to analyze other-than-temporary impairment from the
“market participant” view to a holder’s estimate of whether there has been a
“probable” adverse change in estimated cash flows allows companies to apply
reasonable judgment in assessing whether an other-than-temporary impairment has
occurred. The adoption of FSP EITF 99-20-1 did not have a material impact on our
consolidated financial statements because all of our investments in debt
securities are classified as trading securities.





34





ITEM
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK





Commodity
Price Risk and Related Risks





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





Interest
Rate Risk





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




Foreign
Currency Exchange Rate Risk





Our operating units, Daqiuzhuang Metal,
Longmen Joint Venture, Baotou Steel Pipe Joint Venture and Maoming are all
located in China. They produce and sell all of their products domestically
in China. They are subject to the foreign currency exchange rate risks due to
the effects of fluctuations in the Chinese Renminbi on revenues and operating
costs and existing assets or liabilities. We have not generally used derivative
instruments to manage this risk. A ten percent (10%) decrease in the 2008
average Renminbi exchange rate would result in a $1.4 million change to
income.





ITEM
8. FINANCIAL STATEMENTMENTS AND SUPPLEMENTARY DATA





The
response to this item is submitted as a separate section of this Form 10-K. See
Item 15.





ITEM
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURES.





None.





ITEM
9A. CONTROLS AND PROCEDURES.





a)
Evaluations of Disclosure Controls and Procedures





Under the
supervision and with the participation of our management, including our CEO and
CFO, we conducted an evaluation of the effectiveness of our disclosure controls
and procedures, as such terms are defined in Rules 13a-15(e) and 15d-15(e)
promulgated under the Securities Exchange Act of 1934, as amended(the “Exchange
Act”), as of December 31, 2008, the end of the period covered by this Annual
Report on Form 10-K. Disclosure controls and procedures are designed to ensure
that information required to be disclosed by us in the reports we file or submit
under the Exchange Act is recorded, processed, summarized and reported on a
timely basis and that such information is accumulated and communicated to
management, including our CEO and CFO. To the extent that components of our
internal controls over financial reporting are included within our disclosure
controls and procedures, they are included in the scope of management’s annual
assessment of our internal controls over financial reporting.





Based on
this evaluation, our management, including our CEO and CFO, has concluded that
our disclosure controls and procedures were not effective as of December 31,
2008 because of the material weakness in our internal control over financial
reporting discussed below. Notwithstanding the material weakness described
below, our management performed additional analysis, reconciliations and other
post-closing procedure and has concluded that the Company’s consolidated
financial statements for the periods covered by and included in this Annual
Report on Form 10-K are fairly stated in all material respects in accordance
with generally accepted accounting principles in the U.S. for each of the
periods presented herein.





35





b)
Management’s Annual Report on Internal Control Over Financial
Reporting





Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting as defined in rules 12a-15(f) under the
Exchange Act. Our management, including the CEO and CFO conducted an evaluation
of the effectiveness of our internal control over financial reporting as of
December 31, 2008, using the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (“COSO”) in Internal Control-Integrated
Framework.





Internal
control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally
accepted accounting principles. Internal control over financial reporting
includes those policies and procedures that (i) pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (ii) provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statement in accordance with GAAP, and that receipt and
expenditures of the company are being made only in accordance with
authorizations of management and directions of the company; and (iii) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of the company’s assets that could have a
material effect on its financial statements.





Because
of the inherent limitations, internal control over financial reporting may not
prevent or detect misstatement. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.





A
material weakness is a deficiency, or a combination of deficiencies, in internal
control over financial reporting, such that there is a reasonable possibility
that a material misstatement of the Company’s annual or interim financial
statement will not be prevented or detected on a timely basis. Management has
determined that we have the following material weaknesses in our internal
controls over financial reporting as of December 31, 2008.





Insufficient personnel with
appropriate accounting knowledge and training.We did
not maintain a sufficient complement of personnel with an appropriate level of
accounting knowledge, experience, and training in the application of generally
accepted accounting principles commensurate with financial reporting
requirements and did not implement adequate supervisory review to ensure the
financial statements at the subsidiary level were prepared in conformity with
generally accepted accounting principles in the United States of
America.  This material weakness resulted in audit adjustments that
corrected interest capitalization, raw material reserves and long term
investment in the consolidated financial statements for the year ended December
31, 2008.





Incomplete related party transaction
identification.We did
not design and maintain effective controls to identify related party and
intercompany transactions, which resulted in material adjustments for
intercompany transactions and disclosures of related party transactions in the
consolidated financial statements for the year ended December 31,
2008.




These
deficiencies could result in misstatements of the aforementioned accounts and
disclosures that would result in a material misstatement to the annual or
interim consolidated financial statements that would not be prevented or
detected. Accordingly, management has determined this control deficiency
constitutes a material weakness.





Based on
the above described material weaknesses, our management, including CEO and CFO
have concluded that we did not maintain effective internal control over
financial reporting as of December 31, 2008, based on the criteria in Internal
Control-Integrated Framework issued by the COSO.





The
effectiveness of our internal control over financial reporting as of December
31, 2008, has been audited by Moore Stephens Wurth Frazer and Torbet, LLP, an
independent registered public accounting firm, as stated in their report which
appears herein.




c)
Implemented or Planned Remedial Action of the Material Weaknesses
  In
response to the identification of the material weakness described above,
management plans to initiate the following corrective actions:
 ·
                We
      plan to hire one Assistant Corporate Controller with experience in public
      accounting to oversee financial systems on
  subsidiaries;
 ·
                We
      plan to provide training in various areas of US generally accepted
      accounting principles. In this regard, accountant of head office and
      subsidiaries are both included in this training program;
    and
 ·
                We
      will make efforts to review internal control over financial reporting with
      the intent to automate previously manual processes especially in the area
      of related party transaction
identification.
  Additionally,
management is investing in on-going efforts to continuously improve the control
environment and has committed considerable resources to the continuous
improvement of the design, implementation, documentation, testing and monitoring
of our internal controls.
  d)
Change in Internal Control Over Financial Reporting








36




REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
  To the
Board of Directors and Stockholders of
  General
Steel Holdings Inc.
   We have
audited General Steel Holdings Inc. and subsidiaries’ (the “Company”) internal
control over financial reporting as of December 31, 2008, based on criteria
established in Internal
Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). The Company’s management is
responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial
reporting, included in the accompanying “Management’s Report on Internal Control
Over Financial Reporting”. Our responsibility is to express an opinion on the
company’s internal control over financial reporting based on our audit.
 
 We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit of internal control over financial reporting included
obtaining an understanding of internal control over financial reporting,
assessing the risk that a material weakness exists, and testing and evaluating
the design and operating effectiveness of internal control based on the assessed
risk. Our audit also included performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.
 
 A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
 
 Because
of the inherent limitations of internal control over financial reporting,
including the possibility of collusion or improper management override of
controls, material misstatements due to error or fraud may not be prevented or
detected on a timely basis. Also, projections of any evaluation of effectiveness
of the internal control over financial reporting to future periods are subject
to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
 
 A
material weakness is a control deficiency, or combination of deficiencies, in
internal control over financial reporting, such that there is a reasonable
possibility that a material misstatement of the Company’s annual or interim
financial statements will not be prevented or detected on a timely basis. The
following material weaknesses have been identified and included in management’s
assessment:
 
 The
Company did not maintain a sufficient complement of personnel with an
appropriate level of accounting knowledge, experience, and training in the
application of generally accepted accounting principles commensurate with the
Company’s financial reporting requirements and did not implement adequate
supervisory review to ensure the financial statements at the subsidiary level
were prepared in conformity with generally accepted accounting principles in the
United States of America. This material weakness resulted in audit adjustments
that corrected interest capitalization, raw material reserves and long term
investment in the consolidated financial statements for the year ended December
31, 2008.
 
 The
Company did not design and maintain effective controls to identify related party
and intercompany transactions, which resulted in material adjustments for
intercompany transactions and disclosures of related party transactions in the
consolidated financial statements for the year ended December 31,
2008.
  37
  These
material weaknesses were considered in determining the nature, timing, and
extent of audit tests applied in our audit of the 2008 financial statements, and
this report does not affect our report dated March 10, 2009 on those financial
statements.
 
 In our
opinion, because of the effect of the material weakness described above on the
achievement of the objectives of the control criteria, the Company has not
maintained effective internal control over financial reporting as of December
31, 2008, based on criteria established in Internal
Control—Integrated Frameworkissued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).
 
 We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets and the related
consolidated statements of income and other comprehensive income, shareholders’
equity, and cash flows of the Company, and our report dated March 10, 2009
expressed an unqualified opinion.
  /s/ Moore
Stephens Wurth Frazer and Torbet, LLP
  Walnut,
California March 10, 2009
  38


ITEM
9B. OTHER INFORMATION





None





PART
III





ITEM
10. DIRECTORS AND EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE





MANAGEMENT




Directors
and executive officers




The
following table sets forth the names and ages of our current directors and
executive officers, their principal offices and positions and the date each such
person became our director or executive officer. Our executive officers are
elected annually by the board of directors. Our directors serve one-year terms
until they are re-elected or their successors are elected. The executive
officers serve by election of the board of directors for one year terms or until
their death, resignation, removal or renewal by the board of directors. Other
than described below, there are no family relationships between any of the
directors and executive officers. In addition, there was no arrangement or
understanding between any executive officer and any other person pursuant to
which any person was selected as an executive officer.




The
executive officers are all full-time employees of General Steel Holdings,
Inc.




The
directors and executive officers of General Steel Holdings, Inc. are as
follows:




Name
                    
                    Age
                    
                    Position
                    
                    Date of
                      appointmentZuosheng
      Yu
                    
                    44
                    
                    Chairman
      of the Board of Directors and Chief Executive Officer
                    
                    10/14/04John
      Chen
                    
                    37
                    
                    Director
      / Chief Financial Officer
                    
                    3/07/05Danli
      Zhang
                    
                    54
                    
                    Director,
      General Manager of Longmen Joint Venture
                    
                    8/28/07Ross
      Warner
                    
                    45
                    
                    Director
                    
                    8/24/05John
      Wong
                    
                    42
                    
                    Independent
      Director
                    
                    8/24/05Qinghai
      Du
                    
                    71
                    
                    Independent
      Director
                    
                    8/28/07Zhongkui
      Cao
                    
                    59
                    
                    Independent
      Director
                    
                    4/13/07Chris
      Wang
                    
                    38
                    
                    Independent
      Director
                    
                    11/13/07Fred
      Hsu
                    
                    45
                    
                    Independent
      Director
                    
                    8/28/07




39




Our
directors are generally elected until the next annual meeting of shareholders
and until their successors are elected and qualified, or until their earlier
resignation or removal. Each director’s term of office is one year.





On February 25, 2009, John Wong was
chosen to preside at the regularly scheduled executive sessions of the
independent directors to comply with Section 303A.03 of the corporate governance
rules of the New York Stock Exchange.  Any stockholder or interested
party who wishes to communicate with the board of directors or any specific
director, including the Presiding Director, any non-management director or the
non-management directors as a group, may do so by writing to such direct or
directors at: General Steel Holdings, Inc., Kuntai International Building, suite
2315, Yi No. 12 Chaoyangmenwai Avenue, Chaoyang District, Beijing 100020,
China.  This communication will be forwarded to the director or
directors to whom addressed.  This information regarding contacting
the board of directors is also posted on our website atwww.gshi-steel.com.




Audit
Committee




Our audit
committee consists of John Wong, Fred Hsu and Chris Wang. John Wong is the
chairman of the audit committee. The audit committee held four meetings
during fiscal year 2008.





The
primary responsibilities of the audit committee are to review the results of the
annual audit and to discuss the financial statements, including the independent
auditors’ judgment about the quality of accounting principles, the
reasonableness of significant judgments, and the clarity of the disclosures in
the financial statements. Additionally, the audit committee meets with our
independent auditors to review the interim financial statements prior to the
filing of our Quarterly Reports on Form 10-Q, recommends to our board of
directors the independent auditors to be retained by us, oversees the
independence of the independent auditors, evaluates the independent auditors’
performance, receives and considers the independent auditors’ comments as to
controls, adequacy of staff and management performance and procedures in
connection with audit and financial controls, including our system to monitor
and manage business risks and legal and ethical compliance programs audit and
non-audit services provided to us by our independent auditors, considers
conflicts of interest involving executive officers or board members. Our board
of directors has determined that Mr. Wong is an “audit committee financial
expert” as defined by the SEC, and that each member of the audit committee is
independent.





To the
best of our knowledge, none of the following ever occurred to any of our
directors and officers.





40





(1)
  Any bankruptcy petition filed by or against any business of which such
person was a general partner or executive officer either at the time of the
bankruptcy or within two years prior to that time;




(2)
  Any conviction in a criminal proceeding or being subject to a pending
criminal proceeding (excluding traffic violations and other minor
offenses);




(3)
  Being subject to any order, judgment, or decree, not subsequently
reversed, suspended or vacated, of any court of competent jurisdiction,
permanently or temporarily enjoining, barring, suspending or otherwise limiting
his involvement in any type of business, securities or banking activities;
or




(4)
  Being found by a court of competent jurisdiction (in a civil action), the
SEC or the Commodity Futures Trading Commission to have violated a federal or
state securities or commodities law, and the judgment has not been reversed,
suspended, or vacated.




Biographical
information




Mr. Zuosheng Yu, Chief Executive
Officer and Chairman, joined us in October 2004 and became a Chairman of
the Board at that time. From April 1986 to February 1992, he was President of
Daqiuzhuang Metal Sheet Factory, Tianjin, China. From February 1992 to December
1999, he was General Manager of Sheng Da Industrial Company, Tianjin, China.
From November 1999 to March 2001, he was President and Chairman of Board of
Directors of Sheng Da Machinery Factory, Tianjin, China. Since February 2001, he
is President and Chairman of Board of Directors of Beijing Wendlar Investment
Management Group, Beijing, China. Since March 2001, he is President and Chairman
of Board of Directors of Baotou Sheng Da Steel Pipe Limited, Inner Mongolia,
China and Chairman of Board of Directors of Sheng Da Steel and Iron Mill, Hebei
province, China. Since April 2001, he is President and Chairman of Sheng Da
Industrial Park Real Estate Development Limited. Since December 2001, Mr.
Yu has been President and Chairman of Beijing Shou Lun Real Estate
Development Company, Beijing, China.





Mr. Yu
graduated in 1985 graduated from Sciences and Engineering Institute, Tianjin,
China. In July 1994, he received Bachelor degree from Institute of Business
Management for Officers. Mr. Yu received the title of “Senior Economist” from
the Committee of Science and Technology of Tianjin City in 1994. In July 1997,
he received a MBA degree from the Graduate School of Tianjin Party University.
Since April 2003, Mr. Yu has held a position as a member of China’s APEC (Asia
Pacific Economic Co-operation) Development Council.




Mr. John Chen, Director and Chief
Financial Officer. Mr. John Chen joined us in May 2004. He is the Chief
Financial Officer and a Director. From August 1997 to July 2003, he was senior
accountant at Moore Stephens Wurth Frazer and Torbet, LLP, Los Angeles,
California, USA. He graduated from Norman Bethune University of Medical Science,
Changchun city, Jilin province, China in September 1992. He received B.S. degree
in accounting from California State Polytechnic University, Pomona, California,
USA in July 1997.





Mr. Ross Warner, Director.
Mr. Warner was elected as a director in March 2005. From July 2003 to October
2006, he was the Chief of Operations at OCDF. From July 2002 to June 2003, he
was the country manager for English First in charge of China and Vietnam. From
April 2001 to July 2002, he was the non-technical training manager at TTI-China.
From July 1998 to December 2000, he worked as the consultant at Info Technology
Group, Inc.-Beijing Office. Mr. Warner obtained an MBA from Thunderbird Graduate
School in 1988.





41





Mr. Danli Zhang, Director and
General Manager of Longmen Joint Venture. Mr. Zhang joined us in August
2007. He is currently the General Manager of Shaanxi Longmen Iron and Steel Co.,
Ltd. For more than 30 years, Mr. Zhang has been working at Shaanxi Longmen Iron
and Steel Group in various positions. Mr. Zhang received his bachelor’s degree
from the Xi’an University of Technology and Architecture in 1982.





Mr. Qinghai Du, Independent
Director. Mr. Du joined us in August 2007. Mr. Du is currently the
General Engineer for Beijing Industrial Design and Research Institute. During
the past forty years, he served as the Chief Engineer and Section Chief at both
Baotou Design and Research Institute of Iron and Steel, and the Design Institute
of Capital Iron and Steel. Mr. Du received his bachelor degree in Iron and Steel
Metallurgy from the Beijing University of Science and Technology, formerly known
as Beijing University of Iron and Steel Technology, in 1963.





Mr. Zhongkui Cao, Independent
Director. Mr. Cao joined us in April 2007. He is currently the Chairman
of Baogang United Steel, the Shanghai Stock Exchange publicly traded subsidiary
of Baotou Iron and Steel Group. Previously, Mr. Cao was President and Chairman
of the Board at Baotou Metallurgy Machinery State-owned Asset Management Co. Mr.
Cao graduated from Baotou Institute of Iron and Steel in 1974.




Mr. John Wong, Independent
Director. Mr. Wong was elected as the independent director in August
2005. From June 2003 to present, he is the managing partner of Vantage &
Associates. From January 2000 to March 2003, he was the director at Deloitte
Touche Corporate Finance, Shanghai. From July 1998 to December 1999, he was
director of Amrex Capitals. From July 1996 to June 1998, he worked as senior
audit manager at Ernest & Young, Hong Kong. Mr. Wong received his bachelor’s
degree from Melbourne University in 1989. He obtained Independent Directorship
Certificate in 2002.





Mr. Chris Wang, Independent
Director.Mr. Wang was elected as the independent director in November
2007. He is currently the President and Chief Financial Officer of Fushi
Copperweld, Inc., a NASDAQ listed company. From November 2004 to March 2005, Mr.
Wang was Executive Vice President at Redwood Capital. From September 2002
through November 2004, Mr. Wang was an assistant Vice President in the portfolio
management department at Century Investment Corporation and before that, in
2001, was a summer associate with the Credit Suisse First Boston investment
banking team in Hong Kong. Mr. Wang received a degree in English from Beijing
University of Science and Technology in 1994 and a MBA in Finance and Corporate
Accounting from the University of Rochester in New York in 2002.





Mr. Fred Hsu, Independent
Director. Mr. Hsu joined us in August 2007. He is currently the Managing
Director of Sagem Communications China, a division of Safran Inc., a global 500
company based in Paris, France. From 1998 to 2003 he was General Manager for
Philips Electronics Wired Telecommunications Business Unit. From 1993 to 1998,
he was the Chief Financial Officer for Wella Cosmetics, China. Mr. Hsu received
a BBA degree in International Trade and Finance from Louisiana State University
in 1987. Mr. Hsu obtained an MBA from Thunderbird Graduate School in
1988.




Indemnification




Our
articles of incorporation limit the liability of directors to the maximum extent
permitted by Nevada law. This limitation of liability is subject to exceptions
including intentional misconduct, obtaining an improper personal benefit and
abdication or reckless disregard of director duties. Our articles of
incorporation and bylaws provide that we may indemnify our directors, officer,
employees and other agents to the fullest extent permitted by law. Our bylaws
also permit us to secure insurance on behalf of any officer, director, employee
or other agent for any liability arising out of his or her actions in such
capacity, regardless of whether the bylaws would permit indemnification. We
currently do not have such an insurance policy.





42





Code of
Ethics and Business Conduct





Our Code of Ethics and Corporate
Governance Guidelines is available on our website at the following address:
http://www.gshi-steel.com/gshi2/NewsCenter.php?ID=33&nID=112 . Our Code of
Ethics and Corporate Governance Guidelines provides information:





·
            To
      guide employees so that their business conduct is consistent with our
      ethical standards;·
            To
      improve the understanding of our ethical standards among customers,
      suppliers and others outside the
Company.





Our Code of Ethics and Corporate
Governance Guidelines may also be obtained free of charge by contacting Investor
Relations at investor_relations@gshi-steel.com or by phone:
86-10-5879-7346





ITEM
11. EXECUTIVE COMPENSATION





Compensation
Discussion and Analysis





Compensation
Philosophy





At this
point in our growth, we compensate our CEO, CFO and senior management through
salary and fully-vested unregistered shares of our common stock. We do not
currently provide a bonus program, severance benefit program, retirement plan or
change in control benefits program.





The competition for senior management
among Chinese companies listed on a U.S. stock exchange is fierce. We compete
against companies that are much larger and have greater financial resources with
which to attract and retain managers. We do not try to compete for senior
management with other companies on the basis of compensation. Instead, we seek
to attract and retain qualified candidates who embrace our vision, realize our
long-term potential and are motivated by being pioneers in the field of State
Owned Enterprise (SOE) privatization.





We spend a great deal of effort and
time communicating our vision to those considering working for us. It is vitally
important that everyone working for us be committed to our vision and
understands our commitment to growing the company. Our CEO plays an integral
role in instilling this vision on an on-going basis with all our staff. Our work
culture is very much like that of an entrepreneurial company characterized by
high trust, high loyalty and a high personal sacrifice to current financial
reward ratio.





We have been successful in recruiting
and retaining senior management using our compensation philosophy. Since 2004,
when the Company became listed on the OTCBB, we have not had any staff
resignations among our senior management team. We view this as a validation that
we have followed the correct compensation philosophy for this stage in our
company’s development.





Current
Status





We understand the salary and stock
award amounts may be generally less than those earned by senior managers at
other Chinese companies listed on U.S. stock exchanges, and are also likely
significantly less than the amounts paid to senior managers of other publicly
traded U.S. companies. In determining ranges for these salaries and stock award
amounts, we followed the principal that we are a developing company pursuing a
goal to rapidly become a significantly larger company. As such, at this stage of
development, we believe it is in our stockholders’ best interest to reinvest as
much profit as possible back into the company. However, we also feel that
notwithstanding these lower salaries and stock awards, our CEO and CFO remain
properly incentivized, through a combination of their non-compensatory stock
holdings and the possibility of higher compensation in the future, to grow the
Company and build stockholder value.





43





Compensation
Elements and Procedure





The salary amounts for our CEO and the
CFO are determined through individual negotiations: our CFO negotiates his
salary with our CEO, and our CEO negotiates his salary with our Compensation
Committee. The CEO and CFO salaries are paid in full, in Renminbi in monthly
installments and receive the standard salary tax recording treatment. The stock
award amounts are determined by our Compensation Committee. We believe the
amounts of these salaries and stock awards adequately reward our CEO and CFO for
their yearly total contributions to the company. We are not currently party to
employment agreements with our CEO and CFO and as such we do not have any
obligations relating to the termination of these employees or changes in control
provisions.





The CEO annually reviews the work
performance of the CFO and lower level managers. In general, the CEO
subjectively evaluates the work performance of our CFO and other senior
management based on the job function the executive is expected to fulfill in the
management of the company. During 2008, our CEO had final authority on decisions
relating to salary amounts and adjustments, except his own, which the Board of
Directors must approve. Going forward, the Compensation Committee will have the
final authority on decisions relating to compensation for all of our management
including our CEO.





In 2008, we granted fully-vested
unregistered shares of our common stock to our CEO and CFO on a quarterly basis
in an effort to further align their interests with those of our shareholders.
During 2008, we also granted fully-vested unregistered shares to our directors
and senior management on a quarterly basis. The grants were made as part of our
2008 equity Incentive plan.





Compensation
Committee Report





The Compensation Committee of the Board
of Directors has reviewed the Compensation Discussion and Analysis and based on
this review recommends that it be included in the annual report on Form-10K for
the fiscal year ended December 31, 2008.





Respectfully
submitted


General
Steel Holdings, Inc. Board of Directors Compensation Committee


Fred
Hsu


John
Wong


Chris
Wang





Summary
Compensation Table





The table below sets forth all
compensation awarded to, earned by or paid to our Chief Executive Officer, Chief
Financial Officer for the indicated fiscal year.





44





NameandPrincipalPosition
                                                                                (in
      USD)
                                                                              
                                                                              Year
                                                                              
                                                                              Salary
                                                                              
                                                                              
                                                                              StockAwards
                                                                              
                                                                              OptionAwards
                                                                              
                                                                              AllOtherCompensation
                                                                              
                                                                              TotalZuosheng Yu
                                                                              
                                                                              2008
                                                                              
                                                                              $
                                                                              86,490
                                                                              
                                                                              
                                                                              $
                                                                              276,100
                                                                              
                                                                              
                                                                              
                                                                              
                                                                              
                                                                              $
                                                                              362,590Chief Executive
                                                                              
                                                                              2007
                                                                              
                                                                              $
                                                                              79,002
                                                                              
                                                                              
                                                                              $
                                                                              81,600
                                                                              
                                                                              
                                                                              
                                                                              
                                                                              
                                                                              $
                                                                              160,602Officer
                                                                              
                                                                              2006
                                                                              
                                                                              $
                                                                              75,342
                                                                              
                                                                              
                                                                              $
                                                                              —
                                                                              
                                                                              
                                                                              
                                                                              
                                                                              
                                                                              $
                                                                              75,342John Chen
                                                                              
                                                                              2008
                                                                              
                                                                              $
                                                                              41,515
                                                                              
                                                                              
                                                                              $
                                                                              138,050
                                                                              
                                                                              
                                                                              
                                                                              
                                                                              
                                                                              $
                                                                              179,565Chief Financial
                                                                              
                                                                              2007
                                                                              
                                                                              $
                                                                              23,701
                                                                              
                                                                              
                                                                              $
                                                                              81,600
                                                                              
                                                                              
                                                                              
                                                                              
                                                                              
                                                                              $
                                                                              105,301Officer
                                                                              
                                                                              2006
                                                                              
                                                                              $
                                                                              22,603
                                                                              
                                                                              
                                                                              $
                                                                              —
                                                                              
                                                                              
                                                                              
                                                                              
                                                                              
                                                                              $
                                                                              22,603




Director
Compensation





The table set forth below sets forth
information regarding compensation earned by directors, other than our CEO and
CFO, as compensation for their service to our company during the year ended
December 31, 2008.





DirectorCompensation
                                                                                  
                                                                                  
                                                                                  
                                                                                  
                                                                                  GrantDate
                                                                                  
                                                                                  
                                                                                  31-Dec-08Name
                                                                                    (in USD,
      except number of shares)
                                                                                  
                                                                                  GrantedShare
                                                                                  
                                                                                  
                                                                                  FairValue
                                                                                  
                                                                                  
                                                                                  ClosingValueRoss Warner
                                                                                  
                                                                                  
                                                                                  20,000
                                                                                  
                                                                                  
                                                                                  $
                                                                                  138,050
                                                                                  
                                                                                  
                                                                                  $
                                                                                  78,800John Wong
                                                                                  
                                                                                  
                                                                                  10,000
                                                                                  
                                                                                  
                                                                                  $
                                                                                  69,025
                                                                                  
                                                                                  
                                                                                  $
                                                                                  39,400Qinghai Du
                                                                                  
                                                                                  
                                                                                  2,000
                                                                                  
                                                                                  
                                                                                  $
                                                                                  13,805
                                                                                  
                                                                                  
                                                                                  $
                                                                                  7,880Zhongkui Cao
                                                                                  
                                                                                  
                                                                                  2,000
                                                                                  
                                                                                  
                                                                                  $
                                                                                  13,805
                                                                                  
                                                                                  
                                                                                  $
                                                                                  7,880Chris Wang
                                                                                  
                                                                                  
                                                                                  10,000
                                                                                  
                                                                                  
                                                                                  $
                                                                                  69,025
                                                                                  
                                                                                  
                                                                                  $
                                                                                  39,400Danli Zhang
                                                                                  
                                                                                  
                                                                                  20,000
                                                                                  
                                                                                  
                                                                                  $
                                                                                  138,050
                                                                                  
                                                                                  
                                                                                  $
                                                                                  78,800Fred Hsu
                                                                                  
                                                                                  
                                                                                  10,000
                                                                                  
                                                                                  
                                                                                  $
                                                                                  69,025
                                                                                  
                                                                                  
                                                                                  $
                                                                                  39,400





Currently, we do not pay annual fees to
our directors. During 2008, we granted fully-vested unregistered shares to our
directors on a quarterly basis. We determined these amounts based on level of
involvement, responsibility and length of service.





Grant Date Fair Value is the value of the
shares using the share price on the day the shares were granted 31-Dec-08 Closing Value is the
value of the shares using the December 31, 2008, closing price of
$3.94.





Compensation
Committee Interlocks And Insider Participation




During
the fiscal year ended December 31, 2008, the members of the Compensation
Committee were: its Chairman, Fred Hsu, John Wong and Chris Wang. In fiscal
2008, none of the members of the Compensation Committee was an officer or
employee of ours or any of our subsidiaries.





ITEM
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS




The
following table sets forth certain information regarding beneficial ownership of
common stock as of March 9, 2009, by:




·
            Each person known to us to own
      beneficially more than 5%, in the aggregate, of the outstanding shares of
      our common stock;





45





·
            Each of our
      directors;




·
            Each of our Chairman and Chief
      Executive Officer and our other four most highly compensated executive
      officers; and




·
            All of our executive officers and
      directors as a group.




The
number of shares beneficially owned and the percent of shares outstanding are
based on 36,281,074 shares outstanding as of March 9, 2009. Beneficial ownership
is determined in accordance with the rules of the SEC and generally includes
voting or investment power with respect to securities.





Name and address
                      
                      Principal Position
      Held
                      
                      Shares
    Owned
                      
                      
                      PercentageZuosheng
      Yu
                        C/o
      General Steel Holdings, Inc.
                        Kuntai International Mansion Building, Suite 2315
                        Yi
      No. 12 Chaoyangmenwai Avenue
                        Chaoyang
      District, Beijing 100020
                      
                      Chief Executive Officer and
      Chairman
                      
                      
                      20,958,900
                      
                      
                      
                      57.8
                      %Qiang
      Chen
                        C/o
      General Steel Holdings, Inc.
                        Kuntai International Mansion Building, Suite 2315
                        Yi
      No. 12 Chaoyangmenwai Avenue
                        Chaoyang
      District, Beijing 100020
                      
                      Chief Financial Officer and
      Director
                      
                      
                      150,000
                      
                      
                      
                      *Ross
      Warner
                        C/o
      General Steel Holdings, Inc.
                        Kuntai International Mansion Building, Suite 2315
                        Yi
      No. 12 Chaoyangmenwai Avenue
                        Chaoyang
      District, Beijing 100020
                      
                      Director
                      
                      
                      39,800
                      
                      
                      
                      *Danli
      Zhang
                        C/o
      General Steel Holdings, Inc.
                        Kuntai International Mansion Building, Suite 2315
                        Yi
      No. 12 Chaoyangmenwai Avenue
                        Chaoyang
      District, Beijing 100020
                      
                      Director
                      
                      
                      625,000
                      
                      
                      
                      1.72
                      %John
      Wong
                        C/o
      General Steel Holdings, Inc.
                        Kuntai International Mansion Building, Suite 2315
                        Yi
      No. 12 Chaoyangmenwai Avenue
                        Chaoyang
      District, Beijing 100020
                      
                      Director
                      
                      
                      12,500
                      
                      
                      
                      *Fred
      Hsu
                        C/o
      General Steel Holdings, Inc.
                        Kuntai International Mansion Building, Suite 2315
                        Yi
      No. 12 Chaoyangmenwai Avenue
                        Chaoyang
      District, Beijing 100020
                      
                      Director
                      
                      
                      12,500
                      
                      
                      
                      *Wenbing
      Wang
                        C/o
      General Steel Holdings, Inc.
                        Kuntai International Mansion Building, Suite 2315
                        Yi
      No. 12 Chaoyangmenwai Avenue
                        Chaoyang
      District, Beijing 100020
                      
                      Director
                      
                      
                      10,000
                      
                      
                      
                      *Qinghai
      Du
                        C/o
      General Steel Holdings, Inc.
                        Kuntai International Mansion Building, Suite 2315
                        Yi
      No. 12 Chaoyangmenwai Avenue
                        Chaoyang
      District, Beijing 100020
                      
                      Director
                      
                      
                      2,500
                      
                      
                      
                      *Zhongkui
      Cao
                        C/o
      General Steel Holdings, Inc.
                        Kuntai International Mansion Building, Suite 2315
                        Yi
      No. 12 Chaoyangmenwai Avenue
                        Chaoyang
      District, Beijing 100020
                      
                      Director
                      
                      
                      2,500
                      
                      
                      
                      *Directors
      & Executive Officers as Group
                      
                      
                      
                      
                      21,813,700
                      
                      
                      
                      60.1
                      %




46





(1)
  Beneficial ownership is determined in accordance with Rule 13d-3 under
the Exchange Act securities and includes securities that are convertible into
common stock at the owner’s option within 60 days.





*
indicates percentages that are below 1%.





ITEM
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS





The Company subleased a portion of its
land use rights to Tianjin Jing Qiu Steel Market Company, a related party under
common control. The Company’s Chairman, CEO and majority shareholder, Zuosheng
Yu (aka Henry Yu), is the chairman and the largest shareholder of Jing Qiu Steel
Market Company.





2008
                                  
                                  
                                  2007
                                  
                                  
                                  2006(in
      USD)Rental
      Income
                                  
                                  $
                                  1,737,007
                                  
                                  
                                  $
                                  1,587,995
                                  
                                  
                                  $
                                  1,439,121





The
Company’s short term loan of $2,934,000 from Shenzhen Development Bank is
personally guaranteed by the Company’s Chairman, CEO, and majority shareholder
Zuosheng Yu (aka Henry Yu).





Tianjin
Dazhan Industry Co., Ltd. (“Dazhan”) and Tianjin Hengying Trading Co., Ltd.
(“Hengying”) are steel trading companies controlled by the Company’s Chairman,
CEO and majority shareholder, Zuosheng Yu. Dazhan and Hengying acted as trading
agents of the Company to make purchases and sales for the Company.






Through
      Hengying & Dazhan
                        
                        2008
                        
                        
                        2007
                        
                        
                        2006Purchase
      from Hengying and Dazhan
                        
                        $
                        76,434,479
                        
                        
                        $
                        92,584,791
                        
                        
                        $
                        81,888,671Sales
      to Hengying and Dazhan
                        
                        $
                        33,413,598
                        
                        
                        $
                        32,743,626
                        
                        
                        $
                        78,849,439




47







The
Longmen Joint Venture did not obtain the VAT invoices from the local tax bureau
until late July 2007. Before obtaining VAT invoices, all the sales and purchases
made by the joint venture were carried out through the Company’s joint venture
partner, Longmen Group. In addition to the VAT status issue, the Longmen Joint
Venture also made sales through Longmen Group for outstanding sales contracts
signed before June 2007. Also some sales through Longmen Group were made due to
the established market share and its long term relationship with the customers.
All the sales proceeds and purchase payments were recorded as receivables from
or payables to Longmen Group.





All
transactions with related parties are for normal business activities and are
short term in nature. Settlements for the balances are usually in cash. The
following charts summarize the related party transactions as of the year ended
December 31, 2008 and 2007.






a.
            Accounts
      receivable –related parties





Name of related parties
                
                December 31, 2008
                
                
                December 31, 2007Tianjin
      Jing Qiu Steel Market
                
                $
                —
                
                
                $
                565,631





b.
            Other
      receivables - related parties





Name of related parties
                                      
                                      December 31, 2008
                                      
                                      
                                      December 31, 2007Beijing
      Wendlar
                                      
                                      $
                                      376,324
                                      
                                      
                                      $
                                      1,033,713Yang
      Pu Capital Automobile
                                      
                                      $
                                      —
                                      
                                      
                                      $
                                      616,950De
      Long Fen Ti
                                      
                                      $
                                      —
                                      
                                      
                                      $
                                      137,100Tianjin
      Jin Qiu Steel Market
                                      
                                      $
                                      146,700
                                      
                                      
                                      $
                                      48,830Yang
      Pu Sheng Xin
                                      
                                      $
                                      —
                                      
                                      
                                      $
                                      74,113Yang
      Pu Sheng Hua
                                      
                                      $
                                      —
                                      
                                      
                                      $
                                      2,742Total
                                      
                                      $
                                      523,024
                                      
                                      
                                      $
                                      1,913,448





c.
            Advances
      on inventory purchases – related
parties




Name of related parties
                  
                  December 31, 2008
                  
                  
                  December 31, 2007Hengying
                  
                  $
                  —
                  
                  
                  $
                  8,014,211Dazhan
                  
                  $
                  —
                  
                  
                  $
                  1,929,801Liyuan
      Ximei
                  
                  $
                  502,336
                  
                  
                  $
                  —Daishang
      trading Co., Ltd.
                  
                  $
                  1,872,301
                  
                  
                  $
                  —Total
                  
                  $
                  2,374,637
                  
                  
                  $
                  9,944,012
 
 d.
              Accounts
      payable due to related parties
 
 Name of related parties
                  
                  December 31, 2008
                  
                  
                  December 31, 2007Longmen
      Group
                  
                  $
                  10,630,309
                  
                  
                  $
                  7,954,189Dazhan
                  
                  $
                  —
                  
                  
                  $
                  4,249,395Henan
      Xinmi Kanghua
                  
                  $
                  1,500,987
                  
                  
                  $
                  356,567Zhengzhou
      Shenglong
                  
                  $
                  —
                  
                  
                  $
                  269,917Baotou
      Shengda Steel Pipe
                  
                  $
                  1,558,228
                  
                  
                  $
                  1,472,670ShanXi  Fangxin
                  
                  $
                  1,451,336
                  
                  
                  $
                  —Baogang
      Jianan Group
                  
                  $
                  185,664
                  
                  
                  $
                  —Total
                  
                  $
                  15,326,524
                  
                  
                  $
                  14,302,738


48





e.
            Short
      term loan due to related parties





Name
      of related parties
                
                December
      31, 2008
                
                
                December
      31, 2007Dazhan
                
                $
                3,946,230
                
                
                $
                —Hengying
                
                $
                3,403,440
                
                
                $
                —Total
                
                $
                7,349,670
                
                
                $
                —





f.
            Other
      payables due to related parties





Name
      of related parties
                
                December
      31, 2008
                
                
                December
      31, 2007Beijing
      Wendlar
                
                $
                —
                
                
                $
                34,275Golden
      Glister
                
                $
                600,000
                
                
                $
                —Tianjin
      Jin Qiu Steel Market
                
                $
                —
                
                
                $
                1,487,600Hengying
                
                $
                —
                
                
                $
                563,816Baotou
      Shengda Steel Pipe
                
                $
                77,013
                
                
                $
                31,095Baogang
      Jian An
                
                $
                —
                
                
                $
                9,597Total
                
                $
                677,013
                
                
                $
                2,126,383





g.
            Customer
      deposits – related parties





Name
      of related parties
                    
                    December
      31, 2008
                    
                    
                    December
      31, 2007Hengying
                    
                    $
                    —
                    
                    
                    $
                    6,855,000Dazhan
                    
                    $
                    2,759,964
                    
                    
                    $
                    —Haiyan
                    
                    $
                    1,522,355
                    
                    
                    $
                    2,356,736Maoming
      Heng Da Materials
                    
                    $
                    2,934,000
                    
                    
                    $
                    —Total
                    
                    $
                    7,216,319
                    
                    
                    $
                    9,211,736





ITEM
14. Principal Accounting Fees and Services.





Public
Accountants' Fees


Moore
Stephens Wurth Frazer and Torbet LLP was approved and ratified as the company’s
independent auditors for the year 2008 during our Annual General Meeting held
July 25, 2008.





The audit
committee reviewed and approved the engagement letter from our
auditors.




2008
                  
                  
                  2007Audit
      fees
                  
                  $
                  1,006,400
                  
                  
                  $
                  805,000Tax
      fees
                  
                  $
                  14,000
                  
                  
                  $
                  5,000





Audit fees were for professional
services rendered by Moore Stephens Wurth Frazer and Torbet, LLP during 2008
and 2007 for the audit of our annual financial statements and the review of
our financial statements included in our quarterly reports form 10—Q and
services that are normally provided by Moore Stephens Wurth Frazer and Torbet,
LLP in the connection with the statutory and regulatory filings. Tax fees
involved the preparation of our consolidated tax returns in the
U.S.





49




PART
IV





ITEM
15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES




(A)
Financial Statements




REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM




To the
Board of Directors and Stockholders of


General
Steel Holdings Inc.





We have
audited the accompanying consolidated balance sheets of General Steel Holdings
Inc. and subsidiaries as of December 31, 2008 and 2007 and the related
consolidated statements of operations and other comprehensive income,
shareholders’ equity, and cash flows for each of the years in the three-year
period ended December 31, 2008. General Steel Holdings, Inc.’s management is
responsible for these consolidated financial statements. Our responsibility is
to express an opinion on these financial statements based on our
audits.





We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit also includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.





In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of General Steel Holdings Inc.
and subsidiaries as of December 31, 2008 and 2007, and the results of its
operations and its cash flows for each of the years in the three-year period
ended December 31, 2008 in conformity with accounting principles generally
accepted in the United States of America.




We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the Company’s internal control over financial
reporting as of December 31, 2008, based on criteria established in Internal
Control—Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO), and our report dated March 10, 2009 expressed
an adverse opinion on the Company’s internal control over financial reporting
because of material weaknesses.






/s/  Moore
Stephens Wurth Frazer and Torbet, LLP




Walnut,
California


March 10,
2009




50




GENERAL
STEEL HOLDINGS INC. AND SUBSIDIARIES


CONSOLIDATED
BALANCE SHEETS
 AS OF
DECEMBER 31, 2008 AND  2007
 
 December
      31,
                            
                            
                            December
      31,2008
                            
                            
                            2007ASSETSCURRENT
      ASSETS:Cash
                            
                            $
                            14,895,442
                            
                            
                            $
                            43,713,346Restricted
      cash
                            
                            
                            130,700,335
                            
                            
                            
                            8,391,873Notes
      receivable
                            
                            
                            38,207,312
                            
                            
                            
                            4,216,678Notes
      receivable - restricted
                            
                            
                            —
                            
                            
                            
                            12,514,659Accounts
      receivable, net of allowance for doubtful accounts of $401,109 and
      $148,224 as of December 31, 2008 and December 31, 2007,
      respectively
                            
                            
                            8,329,040
                            
                            
                            
                            11,225,678Accounts
      receivable - related parties
                            
                            
                            —
                            
                            
                            
                            565,631Short
      term loan receivable - related parties
                            
                            
                            —
                            
                            
                            
                            1,233,900Other
      receivables, net of allowance for doubtful accounts of $684,767 and $0 as
      of December 31, 2008 and December 31, 2007, respectively
                            
                            
                            5,099,469
                            
                            
                            
                            1,280,853Other
      receivables - related parties
                            
                            
                            523,024
                            
                            
                            
                            1,913,448Dividend
      receivable
                            
                            
                            630,481
                            
                            
                            
                            —Inventories
                            
                            
                            59,548,915
                            
                            
                            
                            77,928,925Advances
      on inventory purchases
                            
                            
                            47,153,869
                            
                            
                            
                            58,170,474Advances
      on inventory purchases - related parties
                            
                            
                            2,374,637
                            
                            
                            
                            9,944,012Prepaid
      expenses - current
                            
                            
                            441,558
                            
                            
                            
                            1,059,866Prepaid
      expenses related party - current
                            
                            
                            52,812
                            
                            
                            
                            49,356Deferred
      tax assets
                            
                            
                            7,487,380
                            
                            
                            
                            399,751Plant
      and equipment to be disposed
                            
                            
                            586,508
                            
                            
                            
                            —316,030,782
                            
                            
                            
                            232,608,450PLANT
      AND EQUIPMENT, net
                            
                            
                            491,705,028
                            
                            
                            
                            218,263,367OTHER
      ASSETS:Advances
      on equipment purchases
                            
                            
                            8,965,382
                            
                            
                            
                            742,061Investment
      in unconsolidated subsidiaries
                            
                            
                            13,959,432
                            
                            
                            
                            822,600Prepaid
      expenses - non current
                            
                            
                            1,195,073
                            
                            
                            
                            506,880Prepaid
      expenses related party - non current
                            
                            
                            211,248
                            
                            
                            
                            142,467Long
      term other receivable
                            
                            
                            4,872,584
                            
                            
                            
                            —Intangible
      assets, net of accumulated amortization
                            
                            
                            24,555,655
                            
                            
                            
                            21,756,709Note
      issuance cost
                            
                            
                            4,217,974
                            
                            
                            
                            3,564,546Total
      other assets
                            
                            
                            57,977,348
                            
                            
                            
                            27,535,263Total
      assets
                            
                            $
                            865,713,158
                            
                            
                            $
                            478,407,080LIABILITIES
      AND SHAREHOLDERS' EQUITYCURRENT
      LIABILITIES:Short
      term notes payable
                            
                            $
                            206,040,150
                            
                            
                            $
                            15,163,260Accounts
      payable
                            
                            
                            149,239,317
                            
                            
                            
                            102,241,708Accounts
      payable - related parties
                            
                            
                            15,326,524
                            
                            
                            
                            14,302,738Short
      term loans - bank
                            
                            
                            67,840,256
                            
                            
                            
                            93,019,608Short
      term loans - others
                            
                            
                            87,833,706
                            
                            
                            
                            26,473,097Short
      term loans - related parties
                            
                            
                            7,349,670
                            
                            
                            
                            —Other
      payables
                            
                            
                            3,182,661
                            
                            
                            
                            3,343,684Other
      payable - related parties
                            
                            
                            677,013
                            
                            
                            
                            2,126,383Accrued
      liabilities
                            
                            
                            7,779,488
                            
                            
                            
                            5,248,863Customer
      deposits
                            
                            
                            141,101,584
                            
                            
                            
                            37,872,698Customer
      deposits - related parties
                            
                            
                            7,216,319
                            
                            
                            
                            9,211,736Deposits
      due to sales representatives
                            
                            
                            8,149,279
                            
                            
                            
                            3,068,298Taxes
      payable
                            
                            
                            13,916,636
                            
                            
                            
                            27,576,240Distribution
      payable to former shareholders
                            
                            
                            18,765,209
                            
                            
                            
                            9,401,603Total
      current liabilities
                            
                            
                            734,417,812
                            
                            
                            
                            349,049,916NOTES
      PAYABLE, net of debt discount of $26,094,942 and $34,559,584 as of
      December 31, 2008 and December 31, 2007, respectively
                            
                            
                            7,155,058
                            
                            
                            
                            5,440,416DERIVATIVE
      LIABILITIES
                            
                            
                            9,903,010
                            
                            
                            
                            28,483,308Total
      liabilities
                            
                            
                            751,475,880
                            
                            
                            
                            382,973,640MINORITY
      INTEREST
                            
                            
                            49,397,915
                            
                            
                            
                            42,044,266SHAREHOLDERS'
      EQUITY:Preferred
      stock, $0.001 par value, 50,000,000 shares authorized, 3,092,899 shares
      issued and outstanding
                            
                            
                            3,093
                            
                            
                            
                            3,093Common
      Stock, $0.001 par value, 200,000,000 shares authorized, 36,128,833
      and  34,634,765 shares issued and outstanding as of December 31,
      2008 and 2007, respectively
                            
                            
                            36,129
                            
                            
                            
                            34,635Paid-in-capital
                            
                            
                            37,128,641
                            
                            
                            
                            23,429,153Retained
      earnings
                            
                            
                            10,091,829
                            
                            
                            
                            22,686,590Statutory
      reserves
                            
                            
                            4,902,641
                            
                            
                            
                            3,632,325Contribution
      receivable
                            
                            
                            (959,700
                            )
                            
                            
                            (959,700
                            )Accumulated
      other comprehensive income
                            
                            
                            13,636,730
                            
                            
                            
                            4,563,078Total
      shareholders' equity
                            
                            
                            64,839,364
                            
                            
                            
                            53,389,174Total
      liabilities and shareholders' equity
                            
                            $
                            865,713,158
                            
                            
                            $
                            478,407,080
  The
accompanying notes are an integral part of these statements.
  51
 
 GENERAL
STEEL HOLDINGS INC. AND SUBSIDIARIES
 
 CONSOLIDATED
STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE INCOME
 FOR THE
YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006
 
 2008
                                
                                
                                2007
                                
                                
                                2006REVENUES
                                
                                $
                                1,004,847,767
                                
                                
                                $
                                416,900,597
                                
                                
                                $
                                139,494,624REVENUES
      - RELATED PARTIES
                                
                                
                                346,355,382
                                
                                
                                
                                355,538,568
                                
                                
                                
                                —TOTAL
      REVENUES
                                
                                
                                1,351,203,149
                                
                                
                                
                                772,439,165
                                
                                
                                
                                139,494,624COST
      OF SALES
                                
                                
                                999,318,491
                                
                                
                                
                                389,614,876
                                
                                
                                
                                135,324,190COST
      OF SALES - RELATED PARTIES
                                
                                
                                343,956,867
                                
                                
                                
                                326,135,528
                                
                                
                                
                                —TOTAL
      COST OF SALES
                                
                                
                                1,343,275,358
                                
                                
                                
                                715,750,404
                                
                                
                                
                                135,324,190GROSS
      PROFIT
                                
                                
                                7,927,791
                                
                                
                                
                                56,688,761
                                
                                
                                
                                4,170,434SELLING,
      GENERAL AND  ADMINISTRATIVE EXPENSES
                                
                                
                                36,941,996
                                
                                
                                
                                16,163,956
                                
                                
                                
                                2,421,285(LOSS)
      INCOME FROM OPERATIONS
                                
                                
                                (29,014,205
                                )
                                
                                
                                40,524,805
                                
                                
                                
                                1,749,149OTHER
      INCOME (EXPENSE), NETInterest
      income
                                
                                
                                4,251,287
                                
                                
                                
                                871,221
                                
                                
                                
                                182,780Interest/finance
      (expense)
                                
                                
                                (23,166,055
                                )
                                
                                
                                (9,296,601
                                )
                                
                                
                                (2,345,031
                                )Change
      in fair value of derivative liabilities
                                
                                
                                12,820,578
                                
                                
                                
                                6,235,754
                                
                                
                                
                                —Gain
      from debt extinguishment
                                
                                
                                7,168,500
                                
                                
                                
                                —
                                
                                
                                
                                —Income
      from equity investments
                                
                                
                                1,895,941
                                
                                
                                
                                —
                                
                                
                                
                                —Other
      nonoperating income (expense), net
                                
                                
                                766,560
                                
                                
                                
                                927,809
                                
                                
                                
                                2,245,081Total
      other income (expense), net
                                
                                
                                3,736,811
                                
                                
                                
                                (1,261,817
                                )
                                
                                
                                82,830(LOSS)
      INCOME BEFORE PROVISION FOR INCOME TAXES AND MINORITY
      INTEREST
                                
                                
                                (25,277,394
                                )
                                
                                
                                39,262,988
                                
                                
                                
                                1,831,979PROVISION
      (BENEFIT) FOR INCOME TAXESCurrent
                                
                                
                                1,423,737
                                
                                
                                
                                5,224,722
                                
                                
                                
                                —Deferred
                                
                                
                                (6,834,849
                                )
                                
                                
                                (388,525
                                )
                                
                                
                                —Total
      provision for income taxes
                                
                                
                                (5,411,112
                                )
                                
                                
                                4,836,197
                                
                                
                                
                                —(LOSS)
      INCOME BEFORE MINORITY INTEREST
                                
                                
                                (19,866,282
                                )
                                
                                
                                34,426,791
                                
                                
                                
                                1,831,979LESS
      MINORITY INTEREST
                                
                                
                                (8,541,837
                                )
                                
                                
                                12,000,870
                                
                                
                                
                                798,771NET
      (LOSS) INCOME
                                
                                
                                (11,324,445
                                )
                                
                                
                                22,425,921
                                
                                
                                
                                1,033,208FOREIGN
      CURRENCY TRANSLATION GAIN
                                
                                
                                9,073,652
                                
                                
                                
                                3,486,390
                                
                                
                                
                                677,500COMPREHENSIVE
      (LOSS) INCOME
                                
                                $
                                (2,250,793
                                )
                                
                                $
                                25,912,311
                                
                                
                                $
                                1,710,708WEIGHTED
      AVERAGE NUMBER OF SHARESBasic
                                
                                
                                35,381,210
                                
                                
                                
                                32,424,652
                                
                                
                                
                                31,250,000Diluted
                                
                                
                                35,381,210
                                
                                
                                
                                32,558,350
                                
                                
                                
                                31,250,000EARNINGS
      PER SHAREBasic
                                
                                $
                                (0.32
                                )
                                
                                $
                                0.69
                                
                                
                                $
                                0.03Diluted
                                
                                $
                                (0.32
                                )
                                
                                $
                                0.69
                                
                                
                                $
                                0.03
  52
 
 GENERAL
STEEL HOLDINGS INC. AND SUBSIDIARIES
 
 CONSOLIDATED
STATEMENTS OF SHAREHOLDERS' EQUITY
 
 Preferred
      stock
                                                      
                                                      Common
      stock
                                                      
                                                      
                                                      
                                                      Retained
      earnings
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      otherPaid-in
                                                      
                                                      Statutory
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      Subscriptions
                                                      
                                                      
                                                      comprehensiveShares
                                                      
                                                      
                                                      Par
      value
                                                      
                                                      Shares
                                                      
                                                      
                                                      Par
      value
                                                      
                                                      capital
                                                      
                                                      reserves
                                                      
                                                      
                                                      Unrestricted
                                                      
                                                      
                                                      receivable
                                                      
                                                      
                                                      income
                                                      
                                                      
                                                      TotalBALANCE,
      January 1, 2006
                                                      
                                                      
                                                      —
                                                      
                                                      
                                                      $
                                                      —
                                                      
                                                      
                                                      31,250,000
                                                      
                                                      
                                                      $
                                                      31,250
                                                      
                                                      $
                                                      6,871,358
                                                      
                                                      $
                                                      840,753
                                                      
                                                      
                                                      $
                                                      4,207,236
                                                      
                                                      
                                                      $
                                                      —
                                                      
                                                      
                                                      $
                                                      399,188
                                                      
                                                      
                                                      $
                                                      12,349,785Net
      income
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      1,033,208
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      1,033,208Adjustment
      to statutory reserve
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      266,257
                                                      
                                                      
                                                      
                                                      (266,257
                                                      )
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      —Foreign
      currency translation gain
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      677,500
                                                      
                                                      
                                                      
                                                      677,500BALANCE,
      December 31, 2006
                                                      
                                                      
                                                      —
                                                      
                                                      
                                                      $
                                                      —
                                                      
                                                      
                                                      31,250,000
                                                      
                                                      
                                                      $
                                                      31,250
                                                      
                                                      $
                                                      6,871,358
                                                      
                                                      $
                                                      1,107,010
                                                      
                                                      
                                                      $
                                                      4,974,187
                                                      
                                                      
                                                      $
                                                      —
                                                      
                                                      
                                                      $
                                                      1,076,688
                                                      
                                                      
                                                      $
                                                      14,060,493Net
      income
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      22,425,921
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      22,425,921Adjustment
      to statutory reserve
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      2,525,315
                                                      
                                                      
                                                      
                                                      (2,525,315
                                                      )
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      —Registered
      Capital to be received fromBaotou Steel by
      05/21/09
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      (959,700
                                                      )
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      (959,700
                                                      )Common
      stock issued for service, $1.32/share
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      18,000
                                                      
                                                      
                                                      
                                                      18
                                                      
                                                      
                                                      23,742
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      23,760Preferred
      stock issued for acquistion of minority interest , net of dividend
      distribution to Victory New
                                                      
                                                      
                                                      3,092,899
                                                      
                                                      
                                                      
                                                      3,093
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      8,370,907
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      (2,188,203
                                                      )
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      6,185,797Common
      stock issued for conversion ofredeemable stock,
      $1.95/share
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      1,176,665
                                                      
                                                      
                                                      
                                                      1,177
                                                      
                                                      
                                                      2,293,320
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      2,294,497Conversion
      of warrants, $2.50
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      2,120,000
                                                      
                                                      
                                                      
                                                      2,120
                                                      
                                                      
                                                      5,297,880
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      5,300,000Common
      stock issued for compensation, $8.16
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      70,100
                                                      
                                                      
                                                      
                                                      70
                                                      
                                                      
                                                      571,946
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      572,016Foreign
      currency translation gain
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      3,486,390
                                                      
                                                      
                                                      
                                                      3,486,390BALANCE,
      December 31, 2007
                                                      
                                                      
                                                      3,092,899
                                                      
                                                      
                                                      $
                                                      3,093
                                                      
                                                      
                                                      34,634,765
                                                      
                                                      
                                                      $
                                                      34,635
                                                      
                                                      $
                                                      23,429,153
                                                      
                                                      $
                                                      3,632,325
                                                      
                                                      
                                                      $
                                                      22,686,590
                                                      
                                                      
                                                      $
                                                      (959,700
                                                      )
                                                      
                                                      $
                                                      4,563,078
                                                      
                                                      
                                                      $
                                                      53,389,174Net
      loss
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      (11,324,445
                                                      )
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      (11,324,445
                                                      )Adjustment
      to statutory reserve
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      1,270,316
                                                      
                                                      
                                                      
                                                      (1,270,316
                                                      )
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      —Common
      stock issued for compensation, $7.16
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      76,600
                                                      
                                                      
                                                      
                                                      77
                                                      
                                                      
                                                      548,379
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      548,456Common
      stock issued for compensation, $10.43
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      150,000
                                                      
                                                      
                                                      
                                                      150
                                                      
                                                      
                                                      1,564,350
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      1,564,500Common
      stock issued for compensation, $6.66
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      87,400
                                                      
                                                      
                                                      
                                                      87
                                                      
                                                      
                                                      581,997
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      582,084Common
      stock issued for compensation, $10.29
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      90,254
                                                      
                                                      
                                                      
                                                      90
                                                      
                                                      
                                                      928,582
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      928,672Common
      stock issued for consulting fee, $3.6
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      100,000
                                                      
                                                      
                                                      
                                                      100
                                                      
                                                      
                                                      359,900
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      360,000Common
      stock issued for public relations, $3.6
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      25,000
                                                      
                                                      
                                                      
                                                      25
                                                      
                                                      
                                                      89,975
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      90,000Common
      stock issued for compensation, $3.5
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      87,550
                                                      
                                                      
                                                      
                                                      88
                                                      
                                                      
                                                      306,337
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      306,425Common
      stock transferred by CEO for compensation, $6.91
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      —
                                                      
                                                      
                                                      
                                                      —
                                                      
                                                      
                                                      207,300
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      207,300Common
      stock issued at $5/share
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      140,000
                                                      
                                                      
                                                      
                                                      140
                                                      
                                                      
                                                      699,860
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      700,000Notes
      converted to common stock
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      541,299
                                                      
                                                      
                                                      
                                                      541
                                                      
                                                      
                                                      6,102,691
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      6,103,232Make
      whole shares issued on notes conversion
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      195,965
                                                      
                                                      
                                                      
                                                      196
                                                      
                                                      
                                                      2,310,117
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      2,310,313Foreign
      currency translation adjustments
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      9,073,652
                                                      
                                                      
                                                      
                                                      9,073,652BALANCE,
      December 31, 2008
                                                      
                                                      
                                                      3,092,899
                                                      
                                                      
                                                      $
                                                      3,093
                                                      
                                                      
                                                      36,128,833
                                                      
                                                      
                                                      $
                                                      36,129
                                                      
                                                      $
                                                      37,128,641
                                                      
                                                      $
                                                      4,902,641
                                                      
                                                      
                                                      $
                                                      10,091,829
                                                      
                                                      
                                                      $
                                                      (959,700
                                                      )
                                                      
                                                      $
                                                      13,636,730
                                                      
                                                      
                                                      $
                                                      64,839,363
  The
accompanying notes are an integral part of these statements.
  53
 
 GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 FOR THE
YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006
 
 2008
                                
                                
                                2007
                                
                                
                                2006CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      (loss) income
                                
                                $
                                (11,324,445
                                )
                                
                                $
                                22,425,921
                                
                                
                                $
                                1,033,208Adjustments
      to reconcile net income (loss) to cash  provided by (used in)
      operating activities:Minority
      interest
                                
                                
                                (8,541,837
                                )
                                
                                
                                12,000,870
                                
                                
                                
                                798,771Depreciation
                                
                                
                                21,505,614
                                
                                
                                
                                9,740,317
                                
                                
                                
                                1,619,267Amortization
                                
                                
                                908,183
                                
                                
                                
                                596,538
                                
                                
                                
                                297,933Bad
      debt allowance
                                
                                
                                704,261
                                
                                
                                
                                1,510
                                
                                
                                
                                132,895Gain
      from debt extinguishment
                                
                                
                                (7,168,500
                                )
                                
                                
                                —
                                
                                
                                
                                —(Gain)
      Loss on disposal of equipment
                                
                                
                                (598,137
                                )
                                
                                
                                10,404
                                
                                
                                
                                28,137Inventory
      Allowance
                                
                                
                                2,204,239
                                
                                
                                
                                —
                                
                                
                                
                                —Stock
      issued for services and compensation
                                
                                
                                2,722,937
                                
                                
                                
                                595,776
                                
                                
                                
                                —Income
      from investment
                                
                                
                                (1,895,942
                                )
                                
                                
                                —
                                
                                
                                
                                —Interest
      expense accrued on mandatory redeemable stock
                                
                                
                                —
                                
                                
                                
                                114,135
                                
                                
                                
                                458,904Amortization
      of deferred note issuance cost
                                
                                
                                49,762
                                
                                
                                
                                29,954
                                
                                
                                
                                —Amortization
      of discount on convertible notes
                                
                                
                                782,987
                                
                                
                                
                                159,478
                                
                                
                                
                                —Change
      in fair value of derivative instrument
                                
                                
                                (12,820,578
                                )
                                
                                
                                (6,235,754
                                )
                                
                                
                                —Make
      whole shares interest expense on notes conversion
                                
                                
                                2,310,312
                                
                                
                                
                                —
                                
                                
                                
                                —Deferred
      tax assets
                                
                                
                                (6,936,924
                                )
                                
                                
                                (383,918
                                )
                                
                                
                                —Changes
      in operating assets and liabilitiesAccounts
      receivable
                                
                                
                                2,090,784
                                
                                
                                
                                16,247,520
                                
                                
                                
                                (15,871,902
                                )Accounts
      receivable - related parties
                                
                                
                                (18,274,799
                                )
                                
                                
                                (543,228
                                )
                                
                                
                                —Notes
      receivable
                                
                                
                                (33,063,540
                                )
                                
                                
                                (9,491,608
                                )
                                
                                
                                (521,888
                                )Other
      receivables
                                
                                
                                (4,124,334
                                )
                                
                                
                                (453,072
                                )
                                
                                
                                (152,111
                                )Other
      receivables - related parties
                                
                                
                                2,422,837
                                
                                
                                
                                (990,037
                                )
                                
                                
                                (850,400
                                )Loan
      receivable
                                
                                
                                1,297,350
                                
                                
                                
                                (1,185,030
                                )
                                
                                
                                —Inventories
                                
                                
                                29,219,660
                                
                                
                                
                                (8,853,823
                                )
                                
                                
                                (1,366,266
                                )Advances
      on inventory purchases
                                
                                
                                19,916,130
                                
                                
                                
                                (45,012,751
                                )
                                
                                
                                8,581,191Advances
      on inventory purchases - related parties
                                
                                
                                7,814,408
                                
                                
                                
                                (9,550,168
                                )
                                
                                
                                —Prepaid
      expense - current
                                
                                
                                1,075,336
                                
                                
                                
                                (949,243
                                )
                                
                                
                                —Prepaid
      expense - current- related parties
                                
                                
                                —
                                
                                
                                
                                (47,401
                                )
                                
                                
                                —Prepaid
      expense - non current
                                
                                
                                (616,490
                                )
                                
                                
                                252,872
                                
                                
                                
                                44,559Prepaid
      expense - non current - related parties
                                
                                
                                (57,783
                                )
                                
                                
                                (136,825
                                )
                                
                                
                                —Accounts
      payable
                                
                                
                                11,974,753
                                
                                
                                
                                88,355,643
                                
                                
                                
                                2,106,005Accounts
      payable - related parties
                                
                                
                                44,724,582
                                
                                
                                
                                13,736,262
                                
                                
                                
                                —Other
      payables
                                
                                
                                (1,752,319
                                )
                                
                                
                                823,345
                                
                                
                                
                                135,275Other
      payable — related parties
                                
                                
                                (1,482,156
                                )
                                
                                
                                (76,863,715
                                )
                                
                                
                                (980,000
                                )Accrued
      liabilities
                                
                                
                                214,305
                                
                                
                                
                                2,440,134
                                
                                
                                
                                259,000Dividends
      payable
                                
                                
                                (815,412
                                )
                                
                                
                                —
                                
                                
                                
                                —Customer
      deposits
                                
                                
                                95,131,910
                                
                                
                                
                                2,559,598
                                
                                
                                
                                (221,532
                                )Customer
      deposits - related parties
                                
                                
                                (2,286,955
                                )
                                
                                
                                8,846,895
                                
                                
                                
                                —Taxes
      payable
                                
                                
                                (22,443,176
                                )
                                
                                
                                20,799,845
                                
                                
                                
                                3,577,364Net
      cash provided by (used in) operating activities
                                
                                
                                112,867,023
                                
                                
                                
                                39,040,444
                                
                                
                                
                                (891,590
                                )CASH
      FLOWS FROM INVESTING ACTIVITIES:Cash
      acquired from subsidiary
                                
                                
                                2,782,058
                                
                                
                                
                                508,906
                                
                                
                                
                                —Notes
      receivable - related party
                                
                                
                                —
                                
                                
                                
                                —
                                
                                
                                
                                3,013,680Proceeds
      from short term investment
                                
                                
                                —
                                
                                
                                
                                —
                                
                                
                                
                                37,671Increase
      in investment payable
                                
                                
                                —
                                
                                
                                
                                6,320,160
                                
                                
                                
                                —Acquire
      long term investment
                                
                                
                                —
                                
                                
                                
                                (790,020
                                )
                                
                                
                                —Advance
      on equipment purchases
                                
                                
                                (8,029,323
                                )
                                
                                
                                (712,671
                                )
                                
                                
                                1,066,504Advance
      on land use right purchases
                                
                                
                                —
                                
                                
                                
                                —
                                
                                
                                
                                (72,031
                                )Deposits
      due to sales representatives
                                
                                
                                4,781,548
                                
                                
                                
                                840,055
                                
                                
                                
                                732,073Long
      term other receivable
                                
                                
                                (4,787,887
                                )
                                
                                
                                —
                                
                                
                                
                                —Cash
      proceeds from sale of equipment
                                
                                
                                598,137
                                
                                
                                
                                63,422
                                
                                
                                
                                —Equipment
      purchases
                                
                                
                                (194,398,982
                                )
                                
                                
                                (21,523,962
                                )
                                
                                
                                (9,267,419
                                )Intangible
      assets purchases
                                
                                
                                (245,081
                                )
                                
                                
                                —
                                
                                
                                
                                —Payment
      to original shareholders
                                
                                
                                (7,290,000
                                )
                                
                                
                                —
                                
                                
                                
                                —Net
      cash used in provided by investing activities
                                
                                
                                (206,589,530
                                )
                                
                                
                                (15,294,110
                                )
                                
                                
                                (4,489,522
                                )CASH
      FLOWS FINANCING ACTIVITIES:Restricted
      cash
                                
                                
                                (87,120,615
                                )
                                
                                
                                236,655
                                
                                
                                
                                (1,374,495
                                )Notes
      receivable- restricted
                                
                                
                                13,158,192
                                
                                
                                
                                —
                                
                                
                                
                                —Borrowings
      on short term loans - bank
                                
                                
                                71,057,301
                                
                                
                                
                                56,812,972
                                
                                
                                
                                29,663,401Payments
      on short term loans - bank
                                
                                
                                (103,640,664
                                )
                                
                                
                                (53,111,728
                                )
                                
                                
                                (27,462,159
                                )Borrowings
      on short term loan - others
                                
                                
                                87,207,494
                                
                                
                                
                                5,230,372
                                
                                
                                
                                —Payments
      on short term loans - others
                                
                                
                                (53,031,087
                                )
                                
                                
                                (12,640,320
                                )
                                
                                
                                —Borrowings
      on short term loans - related parties
                                
                                
                                7,221,915
                                
                                
                                
                                —
                                
                                
                                
                                —Payments
      on short term loans - related parties
                                
                                
                                (7,693,286
                                )
                                
                                
                                (17,117
                                )
                                
                                
                                —Borrowings
      on short term notes payable
                                
                                
                                335,869,500
                                
                                
                                
                                14,562,702
                                
                                
                                
                                7,986,252Payments
      on short term notes payable
                                
                                
                                (200,415,606
                                )
                                
                                
                                (38,210,634
                                )
                                
                                
                                (5,474,852
                                )Cash
      received on stock issuance
                                
                                
                                700,000
                                
                                
                                
                                —
                                
                                
                                
                                —Cash
      received from issuance of convertible note
                                
                                
                                —
                                
                                
                                
                                36,855,500
                                
                                
                                
                                —Cash
      contribution received from minority shareholders
                                
                                
                                —
                                
                                
                                
                                790,020
                                
                                
                                
                                —Cash
      received from warrants conversion
                                
                                
                                —
                                
                                
                                
                                5,300,000
                                
                                
                                
                                —Payment
      to minority shareholders
                                
                                
                                —
                                
                                
                                
                                (2,813,644
                                )
                                
                                
                                —Net
      cash provided by financing activities
                                
                                
                                63,313,144
                                
                                
                                
                                12,994,778
                                
                                
                                
                                3,338,147EFFECTS
      OF EXCHANGE RATE CHANGE IN CASH
                                
                                
                                1,591,459
                                
                                
                                
                                140,685
                                
                                
                                
                                226,142INCREASE
      (DECREASE) IN CASH
                                
                                
                                (28,817,904
                                )
                                
                                
                                36,881,797
                                
                                
                                
                                (1,816,824
                                )CASH,
      beginning of period
                                
                                
                                43,713,346
                                
                                
                                
                                6,831,549
                                
                                
                                
                                8,648,373CASH, end
      of period
                                
                                $
                                14,895,442
                                
                                
                                $
                                43,713,346
                                
                                
                                $
                                6,831,549
  The
accompanying notes are an integral part of these statements.
  54




GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


December
31, 2008





Note
1 – Background





General
Steel Holdings, Inc. (the “Company”) was incorporated on August 5, 2002 in the
state of Nevada. The Company through its 100% owned subsidiary, General Steel
Investment operates a portfolio of Chinese steel companies serving various
industries. The Company presently has four production subsidiaries: Daqiuzhuang
Metal, Baotou Steel – General Steel Special Steel Pipe Joint Venture Co., Ltd.,
(“Baotou Steel Pipe Joint Venture”), Shaanxi Longmen Iron and Steel Co., Ltd.
(“Longmen Joint Venture”), and Maoming Hengda Steel Group Co., Ltd. The
Company’s main products include rebar, hot-rolled carbon and silicon sheets and
spiral-weld pipes.





The
following table reflects the Company’s current organization
structure:











On April
27, 2007, Daqiuzhuang Metal and Baotou Iron and Steel Group Co., Ltd. ("Baotou
Steel") entered into an Amended and Restated Joint Venture Agreement (the
"Agreement"), amending the September 28, 2005 Joint Venture Agreement ("Original
Joint Venture Agreement") which established Baotou Steel Pipe Joint Venture, a
PRC limited liability company. The Agreement increased Daqiuzhuang Metal's
ownership interest in the Joint Venture to 80%. Baotou Steel Pipe Joint Venture
obtained its business license from the PRC on May 25, 2007 and started its
normal operation in July 2007. See more discussion in Note 18 – Business
combinations.




55





GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


December
31, 2008





Baotou
Steel Pipe Joint Venture is located in Kundulun District, Baotou city, Inner
Mongolia, China. It produces and sells spiral welded steel pipes and primarily
serves customers in the oil, gas and petrochemical markets.





On May
18, 2007, General Steel entered into a Purchase Agreement with Victory New
Holdings Limited (“Victory New”), a British Virgin Islands registered company
under the control of the Company’s Chairman, CEO and majority shareholder,
Zuosheng Yu to acquire Victory New’s 30% interest in Tianjin Daqiuzhuang Metal
Sheet Co. Ltd. (“Daqiuzhuang Metal”). General Steel agreed to issue to Victory
New an aggregate of 3,092,899 shares of Series A preferred stock with a fair
value of $8,374,000, and voting power of 30% of the combined voting power of
General Steel’s common and preferred stock while outstanding. As a result of the
acquisition, Daqiuzhuang Metal is a wholly owned subsidiary of the Company. See
details in Note 18 – Business combinations.





On May
18, 2007, Daqiuzhuang Metal established Yangpu Shengtong Investment Co., Ltd.
(“Yangpu Investment”) and injected registered capital totaling $13,030,000 (RMB
110 million), into the investment. The total registered capital of Yangpu
Investment is $14,333,000 (RMB 111 million), and Daqiuzhuang Metal has a 99.1%
ownership interest in Yangpu Investment. The rest of Yangpu Investment is
indirectly owned by Zuosheng Yu, our Chairman and CEO.




Qiu Steel
Investment Co., Ltd. (“Qiu Steel Investment”) was founded on June 1, 2006. In
June 2007, Yangpu Investment agreed to invest approximately $19,284,400 (RMB 148
million) through a capital injection and equity transfer with former
shareholders. The total registered capital of Qiu Steel Investment is
$19,545,000 (RMB150,000,000). As a result of the above mentioned equity
transaction, Yangpu Investment acquired 98.7% equity of Qiu Steel Investment
making Qiu Steel Investment a subsidiary of Yangpu Investment and Daqiuzhuang
Metal. The rest of Qiu Steel Investment is indirectly owned by, Zuosheng Yu, our
Chairman and CEO.





Yangpu
Investment and Qiu Steel Investment are Chinese registered limited liability
companies formed to acquire other businesses.





On June
15, 2007, General Steel and Shaanxi Longmen Iron and Steel (Group) Co., Ltd., a
PRC limited liability company (“Longmen Group”), formed Longmen Joint Venture
effective June 1, 2007. General Steel contributed $39,450,000 (RMB 300 million)
through its subsidiaries, Daqiuzhuang Metal and Qiu Steel Investment, to the
Longmen Joint Venture. General Steel and Longmen Group own a 60% and 40%
ownership interest, respectively, in Longmen Joint Venture. The Longmen Joint
Venture obtained its business license from the PRC on June 22, 2007. See more
discussion in Note 18 – Business combinations.





Longmen
Joint Venture is located in Hancheng city, Shaanxi province, China. Longmen
Joint Venture is the largest integrated steel producer in Shaanxi province that
uses iron ore and coke as primary raw materials for steel production. Longmen
Joint Venture produces pig iron, crude steel, reinforced bars and high-speed
wire. Longmen Joint Venture is also engaged in several other business
activities, most of which are related to steel manufacturing. These include the
production of coke and the production of iron ore pellets from taconite,
transportation services and real estate and hotel operations. These operations
primarily serve regional customers in the construction industry.




56





GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


December
31, 2008





On
September 24, 2007, Longmen Joint Venture acquired 74.92% ownership interest in
Environmental Protection Industry Development Co., Ltd., a PRC limited liability
company (“EPID”) engaging in recycling steel production waste, for $2.4 million
(RMB 18 million), and a 36% equity interest in Hualong Fire Retardant Materials
Co., Ltd., a PRC limited liability company (“Hualong”) engaging in producing
fire retardant material for steel production, for $430,000 (RMB 3 million). The
parties agreed to make the effective date of the transaction July 1,
2007.





On
January 14, 2008, the Company, through Longmen Joint Venture, completed its
acquisition of a controlling interest in Hancheng Tongxing Metallurgy Co., Ltd.
(“Tongxing”). The joint venture contributed its land use right of 217,487 square
meters (approximately 53 acres) with appraised value of approximately $4.1
million (RMB 30 million). Pursuant to the agreement, the land will be converted
into shares valued at approximately $3.1 million (RMB 23 million), providing the
Joint Venture stake of 22.76% ownership in Tongxing and making it Tongxing’s
largest and controlling shareholder. The parties agreed to make the effective
date of the transaction January 1, 2008. The acquisition is accounted for as
acquisition under common control. See more detail in Note 18 – Business
combinations.





On June
25, 2008, the Company and Tianjin Qiu Steel Investment (“Qiu Steel Investment”)
entered into an equity purchase agreement (the “Purchase Agreement”) with
Maoming Hengda Steel Group Limited (the “Henggang”), in which the Company
contributed $7.1 million (RMB 50 million) through its subsidiary, Qiu Steel, to
Henggang original shareholders in exchange for 99% of the equity of Henggang.
The acquisition was completed and became effective June 30, 2008. See Note 18 –
Business combinations.  Henggang is a steel products processor located
in Maoming city, Guangdong province, in China’s southern coastal region.
Production capacity at the facility is 1.8 million tons annually, with the
majority of production focused on high-speed wire, an industrial steel product
used in construction.





On August
11, 2008, the Company through its subsidiary, Longmen Joint Venture, completed
its acquisition of a controlling interest in Beijing Hua Tian Yu Long
International Steel Trade Co., Ltd. The Longmen Joint Venture paid $128,265 (RMB
876,731.71) for 50% equity based on the appraisal value on June 30,
2008.




57





GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


December
31, 2008





Note
2 – Summary of significant accounting policies





Basis of
presentation





The
consolidated financial statements of the Company reflect the activities of the
following directly and indirectly owned subsidiaries:





PercentageSubsidiary
                
                Of OwnershipGeneral
      Steel Investment Co., Ltd.
                British
      Virgin Islands
                
                
                100.0
                %Tianjin
      Daqiuzhuang Metal Sheet Co., Ltd.
                P.R.C.
                
                
                100.0
                %Baotou
      Steel – General Steel Special Steel Pipe Joint Venture Co.,
      Ltd.
                P.R.C.
                
                
                80.0
                %Yangpu
      Shengtong Investment Co., Ltd.
                P.R.C.
                
                
                99.1
                %Qiu
      Steel Investment Co., Ltd.
                P.R.C.
                
                
                98.7
                %Shaanxi
      Longmen Iron and Steel Co. Ltd.
                P.R.C.
                
                
                60.0
                %Maoming
      Hengda Steel Group Co., Ltd.
                P.R.C.
                
                
                99.0
                %





The
accompanying financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America and
include the accounts of all directly and indirectly owned subsidiaries listed
above. All material intercompany transactions and balances have been eliminated
in the consolidation.





Use of
estimates





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





Concentration of
risks





The
Company's operations are carried out in the PRC. Accordingly, the Company's
business, financial condition and results of operations may be influenced by the
political, economic and legal environment in the PRC, and by the general state
of the PRC's economy. The Company's operations in the PRC are subject to
specific considerations and significant risks not typically associated with
companies in North America and Western Europe. The Company's results may be
adversely affected by changes in governmental policies with respect to laws and
regulations, anti-inflationary measures, currency conversion and remittance
abroad, and rates and methods of taxation, among other things.





Cash
includes cash on hand and demand deposits in accounts maintained with state
owned banks within the People’s Republic of China, Hong Kong and the United
States. Total cash (including restricted cash balances) in these banks on
December 31, 2008 and December 31, 2007 amounted to $145,595,777 and
$53,817,485, respectively, none of which are covered by insurance. The Company
has not experienced any losses in such accounts and believes it is not exposed
to any risks on its cash in bank accounts.




58





GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


December
31, 2008





The
Company had five major customers, all distributors, which represented
approximately 34%, 59% and 30% of the Company’s total sales for the years ended
December 31, 2008, 2007 and 2006, respectively. Five customers accounted for 1%,
0% and 62% of total accounts receivable as of December 31, 2008, 2007 and 2006,
respectively.





For the
years ended December 31, 2008, 2007 and 2006, the Company purchased
approximately 30%, 40% and  82% , respectively, of their raw materials
from five major suppliers. Five vendors accounted for 7%, 11%, and 0% of total
accounts payable as of December 31, 2008, 2007 and 2006,
respectively.





Revenue
recognition





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





Foreign currency translation
and other comprehensive income





The
reporting currency of the Company is the US dollar. The Company uses the local
currency, Renminbi (RMB), as its functional currency. Assets and liabilities are
translated at the unified exchange rate as quoted by the People’s Bank of China
at the end of the period. Translation adjustments resulting from this process
are included in accumulated other comprehensive income in the statement of
shareholders’ equity. Transaction gains and losses that arise from exchange rate
fluctuations on transactions denominated in a currency other than the functional
currency are included in the results of operations as incurred.





Translation
adjustments resulting included in accumulated other comprehensive income
amounted to $13,636,730, $4,563,078 and $1,076,688 as of December 31, 2008, 2007
and 2006, respectively. The balance sheet amounts, with the exception of equity
at December 31, 2008 and 2007 were translated at 6.82 RMB and 7.30 RMB to $1.00,
respectively. The equity accounts were stated at their historical rate. The
average translation rates applied to income statement accounts for the years
ended December 31, 2008, 2007 and 2006 were 7.07 RMB, 7.59 RMB and 7.96 RMB,
respectively. Cash flows are also translated at average translation rates for
the period, therefore, amounts reported on the statement of cash flows will not
necessarily agree with changes in the corresponding balances on the balance
sheet.





59





GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


December
31, 2008





Financial
instruments





SFAS 107,
“Disclosures about Fair Value of Financial Instruments” requires disclosure of
the fair value of financial instruments held by the Company. SFAS 107 defines
the fair value of financial instruments as the amount at which the instrument
could be exchanged in a current transaction between willing
parties.





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





The
Company also analyzes all financial instruments with features of both
liabilities and equity under SFAS 150, “Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity,” SFAS No 133,
“Accounting for Derivative Instruments and Hedging Activities” and EITF 00-19,
“Accounting for Derivative Financial Instruments Indexed to, and Potentially
Settled in, a Company’s Own Stock.” Additionally, the Company analyzes
registration rights agreements associated with any equity instruments issued to
determine if penalties triggered for late filing should be accrued under FSP
EITF 00-19-2, “Accounting for Registration Payment Arrangements.”





In
December 2007, the Company issued convertible notes totaling $40,000,000
(“Notes”) and 1,154,958 warrants. Both the warrants and the conversion option
embedded in the Notes meet the definition of a derivative instrument in SFAS
133. Therefore these instruments are accounted for as derivative liabilities and
marked-to-market each reporting period. The change in the value of the
derivative liabilities is charged against or credited to income.





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





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





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





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





The
Company’s investment in unconsolidated subsidiaries amounted to
$13,959,432 as of December 31, 2008. Since there is no quoted or observable
market price for the fair value of similar long term investment, the Company
then used the level 3 inputs for its valuation methodology. The determination of
the fair value was based on the capital investment that the Company contributed
and income from investment. The carrying value of the long term investments
approximated the fair value as of December 31, 2008.





60





GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


December
31, 2008





In 2007,
the conversion option on the $40 million Notes, as well as the 1,154,958
warrants issued in conjunction with the Notes are carried at fair
value.  The fair value was determined using the Cox Rubenstein
Binomial Model, defined in SFAS 157 as level 3 inputs, and recorded the change
in earnings. As a result, the derivative liability is carried on the balance
sheet at its fair value.





As of
December 31, 2008, the outstanding principal amounted to $33,250,000, and the
carrying value of the convertible note amounted to $7,155,058. The Company used
Level 3 inputs for its valuation methodology for the convertible note, and their
fair values are determined using cash flows discounted at relevant market
interest rates in effect at the period close since there is no observable market
price. The embedded warrants and conversion feature are valued  by
using level three inputs to the Binomial Model and determined that the fair
value amounted to approximately $9.9 million due to the decrease in the
Company’s common stock price.





Carrying Value
                      as of
                      December 31,
                      2008
                    
                    Fair Value Measurements at
      December
                      31, 2008 Using Fair Value
      HierarchyLevel 1
                    
                    Level 2
                    
                    Level 3Long
      term investments
                    
                    $
                    13,959,432
                    
                    
                    
                    
                    
                    $
                    13,959,432Derivative
      liabilities
                    
                    $
                    9,903,010
                    
                    
                    
                    
                    
                    $
                    9,903,010Convertible
      notes payable
                    
                    $
                    7,155,058
                    
                    
                    
                    
                    
                    $
                    7,155,058





Except
for the investments and derivative liabilities, the Company did not identify any
other assets or liabilities that are required to be presented on the balance
sheet at fair value in accordance with SFAS 157.





Cash and cash
equivalents





Cash and
cash equivalents include cash on hand and demand deposits in banks with original
maturities of less than three months.





Restricted
cash





The
Company has notes payable outstanding with various banks and is required to keep
certain amounts on deposit that are subject to withdrawal
restrictions.





61





GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


December
31, 2008





Accounts receivable and
allowance for doubtful accounts





Accounts
receivable include trade accounts due from the customers. An allowance for
doubtful account is established and recorded based on managements’ assessment of
potential losses based on the credit history and relationship with the
customers. Management reviews its accounts receivable on a regular basis to
determine if the bad debt allowance is adequate, and adjusts the allowance when
necessary. Delinquent account balances are written-off after management has
determined that the likelihood of collection is not probable, known bad debts
are written off against allowance for doubtful accounts when
identified.





Notes
receivable





Notes
receivable represent trade accounts receivable due from various customers where
the customers’ banks have guaranteed the payment of the receivables. The notes
are non-interest bearing and normally paid within three to six months. The
Company has the ability to submit request for payment to the customer’s bank
earlier than the scheduled payment date, but will incur an interest charge and a
processing fee. The Company had $38,207,312 and $4,216,678 of notes receivable
outstanding as of December 31, 2008 and December 31, 2007,
respectively.





Restricted
notes receivable represents notes pledged as collateral for short term loans
from banks. As of December 31, 2008 and December 31, 2007, restricted notes
receivable amounted to $0 and $12,514,659, respectively.





Inventories





Inventories
are stated at the lower of cost or market using weighted average method.
Management reviews inventories for obsolescence or cost in excess of net
realizable value periodically and records a reserve against the inventory and
additional cost of goods sold when the carrying value exceeds net realizable
value.





Shipping and
handling





Shipping
and handling for raw materials purchased are included in cost of goods sold.
Shipping and handling cost incurred to ship finished products to customers are
included in selling expenses. Shipping and handling expenses for purchases of
material and sales of finished goods for the years ended December 31, 2008,
2007, and 2006 amounted to $4,919,985, $2,806,599, and $165,666,
respectively.





Intangible
assets





All land
in the People’s Republic of China is owned by the government. However, the
government grants “land use rights”.  Daqiuzhuang Metal acquired land
use rights during the years ended 2000 and 2003 for a total of $3,167,483. These
land use rights are for 50 years and expire in 2050 and 2053. However,
Daqiuzhuang Metal's initial business license had a ten-year term. Therefore,
management elected to amortize the land use rights over the ten-year business
term. Daqiuzhuang Metal became a Sino-Foreign Joint Venture in 2004, and
obtained a new business license for twenty years; however, the Company decided
to continue amortizing the land use rights over the original ten-year business
term.





62





GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


December
31, 2008





Longmen
Group contributed land use rights for a total amount of $19,823,885 to the
Longmen Joint Venture. The land use rights are for 50 years and expire in 2048
to 2052.





Henggang
has land use rights amounted to $2,037,560 for 50 years and expire in
2054.





Entity
                    
                    Original Cost
                    
                    Years of ExpirationDaqiuzhuang
      Metal
                    
                    $
                    3,167,483
                    
                    2050
      & 2053Longmen
      Joint Venture
                    
                    $
                    19,823,885
                    
                    2048
      & 2052Maoming
      Hengda Steel Group Co., Ltd
                    
                    $
                    2,037,560
                    
                    2054





Intangible
assets of the Company are reviewed at least annually, more often when
circumstances require, to determine whether their carrying value has become
impaired.  The Company considers assets to be impaired if the carrying
value exceeds the future projected cash flows from related
operations.  The Company also re-evaluates the periods of amortization
to determine whether subsequent events and circumstances warrant revised
estimates of useful lives.  As of December 31, 2008, the Company
expects these assets to be fully recoverable.





Plant and equipment,
net





Plant and
equipment are stated at cost less accumulated depreciation. Depreciation is
computed using the straight-line method over the estimated useful lives of the
assets with 3%-5% residual value.





The
estimated useful lives are as follows:




Property
      and plant
            10-40
      YearsMachinery
      & Equipment
            10-30
      YearsOffice
      equipment and furniture
            5
      YearsMotor
      vehicles
            5
      Years




Construction
in progress represents the costs incurred in connection with the construction of
buildings or new additions to the Company’s plant facilities. No depreciation is
provided for construction in progress until such time as the assets are
completed and are placed into service. Maintenance, repairs and minor renewals
are charged directly to expense as incurred. Major additions and betterment to
buildings and equipment are capitalized. Interest incurred during construction
is capitalized into construction in progress. All other interest is expensed as
incurred.





Long
lived assets, including plant, equipment and intangible assets are reviewed
annually or more often if necessary, to determine whether their carrying value
has become impaired. The Company considers assets to be impaired if the carrying
value exceeds the future projected cash flows from related operations. The
Company also re-evaluates the periods of depreciation and amortization to
determine whether subsequent events and circumstances warrant revised estimates
of useful lives. As of December 31, 2008, the Company expects these assets to be
fully recoverable.





63





GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


December
31, 2008





Investments in
unconsolidated subsidiaries





Subsidiaries
in which the Company has the ability to exercise significant influence, but does
not have a controlling interest is accounted for using the equity method.
Significant influence is generally considered to exist when the Company has an
ownership interest in the voting stock between 20% and 50%, and other factors,
such as representation on the Board of Directors, voting rights and the impact
of commercial arrangements, are considered in determining whether the equity
method of accounting is appropriate. The Company accounts for investments with
ownership less than 20% using cost method





In
December 2007, the Company acquired 27% of ownership interest in Xi’an Delong
Powder Engineering Materials Co., Ltd., through its subsidiary EPID. This
investment is accounted for $923,210 as of December 31, 2008.





The
Company’s newly acquired subsidiary, Hancheng Tongxing Metallurgy Co., Ltd.
invested in several companies from 2004 to 2007, investments in these
unconsolidated subsidiaries totaled $13,036,222 as of December 31,
2008.





Unconsolidated
      subsidiary
                          
                          Year acquired
                          
                          
                          Amount invested
                          
                          
                          % ownedShaanxi
      Daxigou Mining Co.,Ltd
                          
                          2004
                          
                          
                          
                          733,500
                          
                          
                          
                          11Shaanxi
      Xinglong Thermoelectric Co.,Ltd
                          
                          
                          2004-2007
                          
                          
                          
                          8,409,873
                          
                          
                          
                          37.6Shaanxi
      Longgang Group Xian steel Co.,Ltd
                          
                          2005
                          
                          
                          
                          60,533
                          
                          
                          
                          10Shaanxi
      Longgang Group Co.,Ltd
                          
                          
                          2003-2004
                          
                          
                          
                          3,476,790
                          
                          
                          
                          3.8Huashan
      Metallurgical Equipment Co., Ltd.
                          
                          2003
                          
                          
                          
                          135,476
                          
                          
                          
                          25Hejin
      Liyuan Washing Coal Co.,Ltd.
                          
                          2006
                          
                          
                          
                          220,050
                          
                          
                          
                          38Xian Delong Powder Engineering
      Materials Co., Ltd.
                          
                          2006
                          
                          
                          
                          923,210
                          
                          
                          
                          27Total
                          
                          
                          $
                          13,959,432





Total
investment in unconsolidated subsidiaries amounted to $13,959,432 and $822,600
as of December 31, 2008 and December 31, 2007, respectively.





Short-term notes
payable





Short-term
notes payable are lines of credit extended by banks. When purchasing raw
materials, the Company often issues a short-term note payable to the vendor.
This short-term note payable bears no interest and is guaranteed by the bank for
its complete face value and usually mature within three to six months period.
The banks usually require the Company to deposit a certain amount of cash at the
bank as a guarantee deposit, which is classified on the balance sheet as
restricted cash.





64





GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


December
31, 2008





Earnings per
share





The
Company reports earnings per share in accordance with the provisions of SFAS
128, "Earnings Per Share." SFAS 128 requires presentation of basic and diluted
earnings per share in conjunction with the disclosure of the methodology used in
computing such earnings per share.





Basic
earnings per share are computed by dividing income available to common
stockholders by the weighted average common shares outstanding during the
period. Diluted earnings per share takes into account the potential dilution
that could occur if securities or other contracts to issue common stock were
exercised and converted into common stock.





Income
taxes





The
Company reports income taxes pursuant to SFAS 109, “Accounting for Income
Taxes”. SFAS 109 requires the recognition of deferred income tax liabilities and
assets for the expected future tax consequences of temporary differences between
income tax basis and financial reporting basis of assets and liabilities.
Provision for income taxes consists of taxes currently due plus deferred taxes.
The Company adopted FASB Interpretation 48, “Accounting for Uncertainty in
Income Taxes” (“FIN 48”), as of January 1, 2007. A tax position is recognized as
a benefit only if it is “more likely than not” that the tax position would be
sustained in a tax examination, with a tax examination being presumed to occur.
The amount recognized is the largest amount of tax benefit that is greater than
50% likely of being realized on examination. For tax positions not meeting the
“more likely than not” test, no tax benefit is recorded. The adoption had no
effect on the Company’s financial statements.





The
charge for taxation is based on the results for the year as adjusted for items,
which are non-assessable or disallowed. It is calculated using tax rates that
have been enacted or substantively enacted by the balance sheet
date.





Deferred
tax is accounted for using the balance sheet liability method in respect of
temporary differences arising from differences between the carrying amount of
assets and liabilities in the financial statements and the corresponding tax
basis used in the computation of assessable tax profit. In principle, deferred
tax liabilities are recognized for all taxable temporary differences. Deferred
tax assets are recognized to the extent that it is probable that taxable profit
will be available against which deductible temporary differences can be
utilized. Deferred tax is calculated using tax rates that are expected to apply
to the period when the asset is realized or the liability is settled. Deferred
tax is charged or credited in the income statement, except when it is related to
items credited or charged directly to equity, in which case the deferred tax is
also dealt with in equity. Deferred tax assets and liabilities are offset when
they relate to income taxes levied by the same taxation authority and the
Company intends to settle its current tax assets and liabilities on a net
basis.





65





GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


December
31, 2008





Deferred
income taxes are recognized for temporary differences between the tax bases of
assets and liabilities and their reported amounts in the financial statements,
net operating loss carry forwards and credits, by applying enacted statutory tax
rates applicable to future years. Deferred tax assets are reduced by a valuation
allowance when, in the opinion of management, it is more likely than not that
some portion or all of the deferred tax assets will not be realized. Current
income taxes are provided for in accordance with the laws of the relevant taxing
authorities.





Share-based
compensation





The
Company accounts for equity instruments issued in exchange for the receipt of
goods or services from other than employees in accordance with SFAS 123R,
“Accounting for Stock-Based Compensation,” and the conclusions reached by EITF
96-18, “Accounting for Equity Instruments That Are Issued to Other Than
Employees for Acquiring or in Conjunction with Selling Goods or Services.” Costs
are measured at the estimated fair market value of the consideration received or
the estimated fair value of the equity instruments issued, whichever is more
reliably determinable. The value of equity instruments issued for consideration
other than employee services is determined on the earlier of a performance
commitment or completion of performance by the provider of goods or services as
defined by EITF 96-18. In the case of equity instruments issued to consultants,
the fair value of the equity instrument is recognized over the term of the
consulting agreement.





Minority
interest





Minority
interest consists of the interest of minority shareholders in the consolidated
subsidiaries of the Company. As of December 31, 2008 and December 31, 2007,
minority interest amounted to $49,397,915 and $42,044,266,
respectively.





Reclassifications





Investment
payable balance had been reclassed to Distribution payable to minority
shareholders during current period. There is no other reclassification for the
current period.





Recently issued accounting
pronouncements





In March 2008,the
FASB issued SFAS 161, “Disclosures about Derivative Instruments and Hedging
Activities – an amendment of FASB Statement No. 133”, which changes the
disclosure requirements for derivative instruments and hedging activities.
Entities are required to provide enhanced disclosures about (a) how and why an
entity uses derivative instruments, (b) how derivative instruments and related
hedged items are accounted for under Statement 133 and its related
interpretations, and (c) how derivative instruments and related hedged items
affect an entity’s financial position, financial performance and cash flows.
SFAS 161 is effective for financial statements issued for fiscal years and
interim periods beginning after November 15, 2008. The Company is currently
evaluating the impact that adopting SFAS No. 161 will have on its financial
statements.





66





GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


December
31, 2008





In April
2008, the FASB issued FSP 142-3 “Determination of the useful life of Intangible
Assets”, which amends the factors a company should consider when developing
renewal assumptions used to determine the useful life of an intangible asset
under SFAS 142. This Issue is effective for financial statements issued for
fiscal years beginning after December 15, 2008, and interim periods within those
fiscal years. SFAS 142 requires companies to consider whether renewal can be
completed without substantial cost or material modification of the existing
terms and conditions associated with the asset. FSP 142-3 replaces the previous
useful life criteria with a new requirement—that an entity consider its own
historical experience in renewing similar arrangements. If historical experience
does not exist then the Company would consider market participant assumptions
regarding renewal including 1) highest and best use of the asset by a market
participant, and 2) adjustments for other entity-specific factors included in
SFAS 142. The Company is currently evaluating the impact that adopting SFAS
142-3 will have on its financial statements.





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





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





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





67





GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


December
31, 2008





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





In
September 2008, the FASB issued for comment revisions to SFAS No. 140 and FASB
Interpretation No. 46, as revised (“FIN 46R”), “Consolidation of Variable
Interest Entities.” The changes proposed include a removal of the scope
exemption from FIN 46R for QSPEs, a revision of the current risks and
rewards-based FIN 46R consolidation model to a qualitative model based on
control and a requirement that consolidation of VIEs be re-evaluated on an
ongoing basis. Although the revised standards have not yet been finalized, these
changes may have a significant impact on the Company’s consolidated financial
statements as the Company may be required to deconsolidate certain assets and
liabilities due to the ongoing evaluation of its primary beneficiary status. In
addition, the Company may also be required to consolidate other VIEs that are
not currently consolidated based an analysis under the current FIN 46R
consolidation model. The proposed revisions would be effective for fiscal years
that begin after November 15, 2009.





On
October 10, 2008, the FASB issued FSP 157-3, “Determining the Fair Value of a
Financial Asset When the Market for That Asset Is Not Active,” which clarifies
the application of SFAS 157 in a market that is not active and provides an
example to illustrate key considerations in determining the fair value of a
financial asset when the market for that financial asset is not active. FSP
157-3 became effective on October 10, 2008, and its adoption did not have a
material impact on our financial position or results for the year ended December
31, 2008.





In
December 2008, the FASB issued FSP FAS 140-4 and FIN 46(R)-8, “Disclosures by
Public Entities (Enterprises) about Transfers of Financial Assets and Interests
in Variable Interest Entities” (“FSP FAS 140-4 and FIN 46(R)-8”). FSP FAS 140-4
and FIN 46(R)-8 amends FAS 140 and FIN 46(R) to require additional disclosures
regarding transfers of financial assets and interest in variable interest
entities. FSP FAS 140-4 and FIN 46(R)-8 is effective for interim or annual
reporting periods ending after December 15, 2008. FSP FAS 140-4 and FIN 46(R)-8,
will not have a material impact on our consolidated financial statements because
we do not have any variable interest entities.





68





GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


December
31, 2008





In
January 2009, the FASB issued FSP EITF 99-20-1, “Amendments to the Impairment
Guidance of EITF Issue No. 99-20, and EITF Issue No. 99-20, Recognition of
Interest Income and Impairment on Purchased and Retained Beneficial Interests in
Securitized Financial Assets” (“FSP EITF 99-20-1”). FSP EITF 99-20-1 changes the
impairment model included within EITF 99-20 to be more consistent with the
impairment model of SFAS No. 115. FSP EITF 99-20-1 achieves this by amending the
impairment model in EITF 99-20 to remove its exclusive reliance on “market
participant” estimates of future cash flows used in determining fair value.
Changing the cash flows used to analyze other-than-temporary impairment from the
“market participant” view to a holder’s estimate of whether there has been a
“probable” adverse change in estimated cash flows allows companies to apply
reasonable judgment in assessing whether an other-than-temporary impairment has
occurred. The adoption of FSP EITF 99-20-1 did not have a material impact on our
consolidated financial statements because all of our investments in debt
securities are classified as trading securities.





Note
3 – Accounts receivable and allowance for doubtful accounts





Accounts
receivable, including related party receivables, net of allowance for doubtful
accounts consists of the following:





December 31, 2008
                    
                    
                    December 31, 2007Accounts
      receivable
                    
                    $
                    8,730,149
                    
                    
                    $
                    11,373,902Less:
      allowance for doubtful accounts
                    
                    
                    401,109
                    
                    
                    
                    148,224Net
      accounts receivable
                    
                    $
                    8,329,040
                    
                    
                    $
                    11,225,678





Movement
of allowance for doubtful accounts is as follows:





December 31 ,2008
                
                
                December 31, 2007Beginning
      balance
                
                $
                148,224
                
                
                $
                137,132Charge
      to expense
                
                
                124,727
                
                
                
                751Addition
      from acquisition
                
                
                238,259
                
                
                
                —Less
      Written-off
                
                
                119,022
                
                
                
                —Exchange
      rate effect
                
                
                8,921
                
                
                
                10,341Ending
      balance
                
                $
                401,109
                
                
                $
                148,224




69





GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


December
31, 2008





Note
4 – Inventory





Inventory
consists of the following:





December 31, 2008
                
                
                December 31, 2007Supplies
                
                $
                1,884,387
                
                
                $
                1,829,551Raw
      materials
                
                
                43,326,975
                
                
                
                42,919,783Work
      in process
                
                
                333,611
                
                
                
                82,439Finished
      goods
                
                
                16,247,174
                
                
                
                33,097,152Totals
                
                
                61,792,147
                
                
                
                77,928,925Less:
      allowance
                
                
                (2,243,232
                )
                
                
                —Totals
                
                $
                59,548,915
                
                
                $
                77,928,925





Raw
materials consist primarily of iron ore and coke at Longmen Joint Venture, steel
strip at Daqiuzhuang Metal and billet at Henggang. Work in process primarily
consists of pig iron and other semi-finished products. The cost of finished
goods includes direct costs of raw materials as well as direct labor used in
production. Indirect production costs such as utilities and indirect labor
related to production such as assembling, shipping and handling costs are also
included in the cost of inventory.





As of
December 31, 2008, management determined the carrying amount of raw materials
exceeded prices currently available; therefore, $2,243,232 was reserved as
inventory allowance, and the amount had been included in cost of goods sold for
2008.





Note
5 – Advances on inventory purchases





Advances
on inventory purchases are monies deposited or advanced to outside vendors or
related parties on future inventory purchases. Due to the high shortage of steel
in China, most of the Company’s vendors require a certain amount of money to be
deposited with them as a guarantee that the Company will complete its purchases
on a timely basis.





This
amount is refundable and bears no interest. The Company has legally binding
contracts with its vendors, which required the deposit to be returned to the
Company when the contract ends. The inventory is normally delivered within one
month after the monies have been advanced. The total outstanding amount,
including advances to related parties, was $49,528,506 and $68,114,486 as of
December 31, 2008 and December 31, 2007, respectively.





Note
6 – Plant and equipment, net





Plant and
equipment consist of the following:





December 31, 2008
                  
                  
                  December 31, 2007Buildings
      and improvements
                  
                  $
                  246,811,854
                  
                  
                  $
                  71,265,004Machinery
                  
                  
                  101,688,803
                  
                  
                  
                  134,716,437Transportation
      equipment
                  
                  
                  2,739,111
                  
                  
                  
                  4,232,556Other
      equipment
                  
                  
                  3,552,789
                  
                  
                  
                  1,310,489Construction
      in process
                  
                  
                  199,818,052
                  
                  
                  
                  24,574,027Totals
                  
                  
                  554,610,609
                  
                  
                  
                  236,098,513Less
      accumulated depreciation
                  
                  
                  (62,905,581
                  )
                  
                  
                  (17,835,146
                  )Totals
                  
                  $
                  491,705,028
                  
                  
                  $
                  218,263,367




70





GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


December
31, 2008





Longmen
Joint Venture constructed two blast furnaces and a sintering
system.  All costs related to construction have been capitalized as
construction in progress and amounted to $180,471,238 as of December 31,
2008.  Interest expense of $10,626,736 has been capitalized into the
above constructions.





Depreciation,
including amounts in cost of sales, for the years ended December 31, 2008, 2007
and 2006 amounted to $21,505,614, $9,740,317 and $1,619,267,
respectively.





Note
7 – Intangible assets





Intangible
assets consist of the following:





December 31, 2008
                
                
                December 31, 2007Land
      use right
                
                $
                27,467,031
                
                
                $
                23,629,059Software
                
                
                292,693
                
                
                
                71,978Accumulated
      Amortization
                
                
                (3,204,069
                )
                
                
                (1,944,328
                )Total
                
                
                24,555,655
                
                
                $
                21,756,709





Total
amortization expense for the years ended December 31, 2008, 2007, and 2006,
amounted to $908,183 and $596,538, and $297,933, respectively.





Note
8 – Debt





Short term
loans





Short
term loans represent amounts due to various banks, other companies and
individuals, and related parties normally due within one year. The principles of
loans are due at maturity. However, the loans can be renewed with the banks,
related parties and other parties.





71





GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


December
31, 2008





Short
term loans due banks, related parties and other parties consisted of the
following:





December 31,
                                      2008
                                    
                                    
                                    December 31,
                                      2007Daqiuzhuang:
      Loan from banks in China, due various dates from January 2009 to September
      2009. Weighted average interest rate 8.40% per annum, either guaranteed by
      another company or secured by equipment/inventory.
                                    
                                    $
                                    27,383,022
                                    
                                    
                                    $
                                    31,955,268Longmen
      Joint Venture: Loan from banks in China, due various dates from
      February  2009 to October  2009. Weighted average
      interest rate 8.22% per annum, either guaranteed by another company or
      secured by equipment/buildings/land use right.
                                    
                                    
                                    38,875,500
                                    
                                    
                                    
                                    61,064,340Baotou:
      Loan from banks in China, due March 2009. Annual interest rate of 12%,
      Guaranteed by another company and secured by equipment.
                                    
                                    
                                    114,734
                                    
                                    
                                    
                                    —Hengda:
      Loan from banks in China, due January 2009. Annual interest rate of 7.47%,
      guaranteed by another company.
                                    
                                    $
                                    1,467,000
                                    
                                    
                                    $
                                    —Total
      – bank loans
                                    
                                    $
                                    67,840,256
                                    
                                    
                                    $
                                    93,019,608





December
      31,
                              2008
                            
                            
                            December 31,
                              2007Loan
      from various unrelated companies and individuals
                            
                            $
                            87,833,706
                            
                            
                            $
                            26,473,097Total
      – other loans
                            
                            $
                            87,833,706
                            
                            
                            $
                            26,473,097





December
      31,
                            2008
                          
                          
                          December 31,
                            2007Qiu
      Steel: Related party loan from Tianjin Heng Ying and Tianjin Da Zhan, due
      June 2009. Annual interest rate of 10%, and interest starts accrual on
      July, 2008.
                          
                          $
                          7,349,670
                          
                          
                          $
                          —Total
      – related parties loans
                          
                          $
                          7,349,670
                          
                          
                          $
                          —





The
Company had various loans from unrelated companies and individuals. The balances
amounted to $87,833,706 and $26,473,097 as of December 31, 2008 and December 31,
2007, respectively. Out of the $87,833,706 current period balance, $29,394,068
new additions carries no interest, and the remaining $58,439,638 carries annual
interest rates ranging from7.2% to 12%. All prior
year balancesof
$26,473,097 are subject to interest rates ranging from 8% to 12%. All short term
loans from unrelated companies and individuals are due on demand and
unsecured.





72





GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


December
31, 2008





Short term notes
payable





Short
term notes payable are lines of credit extended by the banks. When purchasing
raw materials, the Company often issues a short term note payable to the vendor
funded with draws on the lines of credit. This short term note payable is
guaranteed by the bank for its complete face value. The banks usually do not
charge interest on these notes but require the Company to deposit a certain
amount of cash at the bank as a guarantee deposit which is classified on the
balance sheet as restricted cash.





The
Company had the following short term notes payable:





December
      31,
                                    2008
                                  
                                  
                                  December
      31,
                                    2007Daqiuzhuang:
      Notes payable from banks in China, due various dates from March 2009 to
      June 2009. Restricted cash required of $15,727,914  and
      $4,278,873 for December 31, 2008 and 2007, respectively and either
      guaranteed by another company or secured by buildings.
                                  
                                  $
                                  18,630,900
                                  
                                  
                                  $
                                  8,308,260Longmen
      Joint Venture: Notes payable from banks in China, due various dates from
      January 2009 to June 2009. Restricted cash of $98,073,410  and
      $4,113,000 for December 31, 2008 and 2007, respectively and either
      guaranteed by another company or secured by equipment, or no
      guarantee.
                                  
                                  
                                  159,536,250
                                  
                                  
                                  
                                  6,855,000Bao
      Tou: Notes payable from banks in China, due January 2009. Restricted cash
      of $5,134,500  and $0 for December 31, 2008 and 2007,
      respectively and guaranteed by buildings.
                                  
                                  
                                  7,335,000
                                  
                                  
                                  
                                  —Hengda:
      Notes payable from banks in China, due various dates from March 2009 to
      June 2009. Restricted cash of $11,764,512  and $0 for December
      31, 2008 and 2007 and guaranteed by buildings.
                                  
                                  
                                  20,538,000
                                  
                                  
                                  
                                  —Grand
      totals
                                  
                                  $
                                  206,040,150
                                  
                                  
                                  $
                                  15,163,260





Total
interest incurred for the years ended December 31, 2008, 2007 and 2006 on the
debt listed above amounted to $12,263,029, $6,589,382 and $2,065,237,
respectively. Capitalized interest amounted to $10,626,736, $1,037,793 and
$186,432 for the years ended December 31, 2008, 2007 and 2006,
respectively.





73





GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


December
31, 2008





Note
9 – Customer deposits





Customer
deposits represent amounts advanced by customers on product orders. The product
normally is shipped within six months after receipt of the advance payment, and
the related sale is recognized in accordance with the Company’s revenue
recognition policy. As of December 31, 2008 and December 31, 2007, customer
deposits amounted to $148,317,903 and $47,084,434, including related parties
deposits $7,216,319 and $9,211,736, respectively.





Note
10 – Deposits due to sales representatives





Daqiuzhuang
Metal and two of Longmen Joint Venture’s subsidiaries, Yuxin Trading and Yuteng
Trading, entered into agreements with various entities to act as the Company’s
exclusive sales agent in a specified area.  These exclusive sales
agents must meet certain criteria and are required to deposit a certain amount
of money with the Company. In return the sales agents receive exclusive sales
rights to a specified area and discounted prices on products they order. These
deposits bear no interest and are required to be returned to the sales agent
once the agreement has been terminated. The Company had $8,149,279 and
$3,068,298 in deposits due to sales representatives outstanding as of December
31, 2008 and December 31, 2007, respectively.





Note
11 – Convertible notes





On
December 13, 2007, the Company entered into a Securities Purchase Agreement (the
“Agreement”) with certain institutional investors (the “Buyers”) issuing
$40,000,000 (“Notes”) and 1,154,958 warrants (the “Warrants”). The warrants can
be converted to common stock through May 13, 2013 at $13.51 per
share.





The Notes
bear initial interest at 3% per annum, which will be increased each year as
specified in the Notes, payable semi-annually in cash or shares of the Company’s
common stock. The Notes have a five year term through December 12, 2012. They
are convertible into shares of the common stock, subject to customary
anti-dilution adjustments. The initial conversion price is $12.47. The Company
may redeem the Notes at 100% of the principal amount, plus any accrued and
unpaid interest, beginning December 13, 2008, provided the market price of the
common stock is at least 150% of the then applicable conversion price for 30
consecutive trading days prior to the redemption.





The Notes
are secured by a first priority, perfected security interest in certain shares
of common stock of Zuosheng Yu, as evidenced by the pledge agreement. The Notes
are subject to events of default customary for convertible securities and for a
secured financing.





The
Warrants grant the Buyers the right to acquire shares of common stock at $13.51
per share, subject to customary anti-dilution adjustments.  The
Warrants may be exercised at any time on or after May 13, 2008, but not after
May 13, 2013, the expiration date of the Warrants.





74





GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


December
31, 2008





In
connection with this transaction, the Company and the Buyers entered into a
registration rights agreement. The Company agreed to register within 60 calendar
days common stock issuable to the Buyers for resale on a registration statement
to be effective by 90 calendar days or 120 days if the registration statement is
subject to a full review by the U.S. Securities and Exchange Commission. The
Company is required to register at least 120% of the sum of shares issuable upon
conversion of the Notes, the exercise of the Warrants and the payment of
interest accrued on the Notes. The registration rights are subject to customary
exceptions and qualifications and compliance with certain registration
procedures. The Company was required to file the registration statement on
February 11, 2008. The Company filed the registration statement on February 13,
2008, which was two days after the required filing date. The Company reached an
agreement with all note holders to waive the related penalty of
$427,000.





In
addition, certain management members of the Company also entered into a lock-up
agreement with the Company pursuant to which each person agreed not to sell any
personally owned shares one year after the initial effective date of the resale
registration statement described above.





Pursuant
to APB 14, “Accounting for Convertible Debt and Debt Issued with Stock Purchase
Warrants,” the Company discounted the Notes equal to the fair value of the
warrants. The Notes were further discounted for the fair value of the conversion
option. The combined discount is being amortized to interest expense over the
life of the Notes using the effective interest method.





The fair
value of conversion option and the warrants were calculated using the Cox
Rubenstein Binomial model based on the following variables:





·
            Expected
      volatility of 125%


·
            Expected
      dividend yield of 0%


·
            Risk-free
      interest rate of 1.27%


·
            Expected
      lives of five years


·
            Market
      price at issuance date of $10.43


·
            Strike
      price of $12.47 and $13.51, for the conversion option and the warrants,
      respectively





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





On
December 13, 2007, the Company recorded $34,719,062 as derivative liability,
including $9,298,044 for the fair value of the warrants and $25,421,018 for fair
value of the conversion option. The initial carrying value of the Notes was
$5,280,938. The financing cost of $5,159,000 was recorded as note issuance cost
and is being amortized to interest expense over the term of the Notes using the
effective interest method.





75





GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


December
31, 2008





In July
2008, $6,750,000 of notes was converted to 541,299 shares of common stock at a
conversion price of $12.47. Pursuant to EITF 00-19, the Company valued the
conversion option on note conversion date, and recorded $21,090,722 gain from
changes in fair value of derivative. A total of $6,103,232 of carrying value and
derivative liability had been reclassified into equity. In addition, 195,965
shares of common stock were issued as make whole interest expense of
$2,310,313.





On
December 31, 2008, in accordance with SFAS 133, the fair value of derivative
liabilities was recalculated and decreased by $18,580,298 during the period,
including $4,559,556 for the decrease in fair value of the warrants and
$14,020,742 for the decrease in fair value of the conversion
option.





As of
December 31, 2008, the balance of derivative liabilities was $9,903,010, which
consisted of $3,078,905 for the warrants and $6,824,105 for the conversion
option, and the carrying value of the notes was $7,155,058. The effective
interest charges on notes totaled $3,569,880 and $159,478 for the year ended
December 31, 2008 and 2007, respectively. As of December 31, 2008, the
unamortized note issuance cost was $4,217,974, including $1,564,500 for
additional issuance of 150,000 shares of the common stock to the placement agent
in January 2008. Note issuance cost was amortized to interest expense at $49,762
and $29,954 for the year ended December 31, 2008 and 2007,
respectively.





Note
12 – Private offering of redeemable stock





On
September 18, 2005, the Company entered into a subscription agreement with
certain investors to sell a total of 1,176,665 shares of common stock at $1.50
per share for gross proceeds of $1,765,000, commissions totaled $158,849,
leaving net proceeds of $1,606,151. In addition, two warrants are attached to
each share of common stock giving the warrant holders the right to purchase
2,353,330 shares of common stock. The warrants can be exercised on the second
anniversary of the subscription date at $2.50 per share and through the third
anniversary date at $5.00 per share. At the option of the holder, the Company
may be required to repurchase the 1,176,665 shares of common stock 18 months
after the closing date at a per share price of $1.95.





In
accordance with SFAS 150, The Company recorded the stock as a liability due to
the mandatory redemption provision. The shares were recorded at fair value on
the date of issuance, which was the net cash proceeds, plus any accrued interest
up to March 31, 2007. The difference between the net proceeds, $1,606,151, and
the redemption amount, $2,294,497, totaling $688,346, was accrued and amortized
as interest expense.





As of
December 31, 2007, the put option on all the redeemable shares expired and all
the shares were reclassified into equity.





Note
13 – Supplemental disclosure of cash flow information





Interest
paid amounted to $12,033,101, $8,409,982 and $2,065,237 for the years ended
December 31, 2008, 2007 and 2006, respectively.





76





GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


December
31, 2008





Income
tax payments amounted to $6,620,026, $183,984, and $0 for the years ended
December 31, 2008, 2007 and 2006, respectively.





On March
1, 2007, 176,665 shares of redeemable stock were converted at $1.95 resulting in
a reclassification of the shares from liabilities to equity.





In May
2007, the Company issued 3,092,899 shares of preferred stock with a fair value
of $8,374,000 to the shareholders of Victory New Holdings Inc. to purchase the
30% the minority ownership of Daqiuzhuang Metal.





On
January 14, 2008 the Company issued 150,000 shares of common stock at $10.43 per
share as additional note issuance cost totaled $1,564,500.





On
February 5, 2008, the Company issued senior management and directors 76,600
shares of common stock at $7.16 per share, as compensation. The shares were
valued at the quoted market price on the date granted. The Company recorded
compensation expense of $548,456 for the year ended December 31,
2008.





On April
14, 2008, the Company, Mr, Zuosheng Yu, (CEO of the Company) and Mr. Zhang Dan
Li (BOD member of Long Men Joint Venture) entered into a compensation agreement
in which Mr. ZuoSheng Yu agreed to transfer his own 600,000 shares to Mr. Zhang
Dan Li in exchange for 15 years of service in the Company. Pursuant to SFAS 123R
(Share-Based Payment) share-based payments awarded to an employee of the
reporting entity by a related party or other holder of an economic interest in
the entity is treated as compensation as if the shareholder has made a capital
contribution. The shares are valued at $6.91 on grant date for a total of
$4,146,000 and will be amortized over the life agreement. A total of $207,300 of
compensation expense and additional paid in capital has been recorded in
2008.





On April
15, 2008, the Company granted senior management and directors 87,400 shares of
common stock at $6.66 per share, as compensation. The shares were valued at the
quoted market price on the date granted. The Company recorded compensation
expense of $582,084 for the year ended December 31, 2008.





On July
3, 2008, the Company granted senior management and directors 90,254 shares of
common stock at $10.29 per share, as compensation. The shares were valued at the
market price on the date granted. The Company recorded compensation expense of
$928,672 for the year ended December 31, 2008.





In July
2008, $6,750,000 of notes was converted to 541,299 shares of common stock at a
conversion price of $12.47. In addition 195,965 shares of common stock were
issued as make whole interest expense of $2,310,313.





In
September 2008, 140,000 shares of warrants in connection with the redeemable
preferred stock were exercised at $5.00 per share.





77





GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


December
31, 2008





On
October 28, 2008, the Company granted Teamlink Investment Limited, 100,000
shares of commons stock at $3.6 per share as consulting service expense
amounting  to $360,000. According to the period of service provided,
$60,000 was recorded as expense in 2008 and $300,000 will be amortized within 10
months.





On
October 28, 2008, the Company granted Hayden Communication International, Inc.,
the public relations company, 25,000 shares of commons stock at $3.6 per share
as public relationship expense of $90,000.





On
November 24, 2008, the Company granted senior management and directors 87,550
shares of common stock at $3.5 per share, as compensation. The shares were
valued at the quoted market price on the date granted. The Company recorded
compensation expense of $306,425 for the year ended December 31,
2008.





Note
14 - Gain from debt extinguishment





For the
year ended December 31, 2008, the Company recorded gain from debt extinguishment
totaling $7,207,500. On September 27, 2008, Maoming Hengda, a subsidiary entered
into a Debt Waive Agreement with Guangzhou Hengda, pursuant to which Guangzhou
Hengda agreed to waive $7,168,500 (RMB 50,000,000) of the total $32,296,716 (RMB
220,756,777) debt that Maoming Hengda owes to Guangzhou Hengda. The Company
determined that the subsequent debt settlement does not constitute a contingency
at date of purchase as defined in SFAS 141 “Business Combinations” and thus
should not result in a reallocation of the purchase price. The waiver is
irrevocable.





Note
15 – Taxes





Income
tax





Beginning
January 1, 2008, the new Enterprise Income Tax (“EIT”) law has replaced the
existing laws for Domestic Enterprises (“DES”) and Foreign Invested Enterprises
(“FIEs”). The new standard EIT rate of 25% has replaced the 33% rate currently
applicable to both DES and FIEs. The two-year tax exemption and three-year 50%
tax reduction tax holiday for production-oriented FIEs will not be eliminated
for certain entities incorporated on or before March 16, 2007.





Significant
components of the provision for income taxes on earnings and deferred taxes on
net operating losses from operation for the years ended December 31, 2008, 2007
and 2006 are as follows:





December 31,
                    2008
                  
                  
                  December
      31,2007
                  
                  
                  December
      31,2006Current
                  
                  $
                  1,423,737
                  
                  
                  $
                  5,224,722
                  
                  
                  $
                  —Deferred
                  
                  
                  (6,834,849
                  )
                  
                  
                  (388,525
                  )
                  
                  
                  —Total
      income taxes
                  
                  $
                  (5,411,112
                  )
                  
                  $
                  4,836,197
                  
                  
                  $
                  —




78





GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


December
31, 2008





Four of
the Company’s Chinese operating entities suffered the operating
loss.   According to Chinese tax regulations, the net operating
loss can be carried forward to offset with operating income for the next five
years. Management believes the deferred tax asset is fully
realizable.





The
principal component of the deferred income tax assets is as
follows:





December 31,
                                2008
                              
                              
                              December 31,
                                2007Beginning
      balance
                              
                              $
                              399,751
                              
                              
                              $
                              —Xi’an
      Rolling Mill’s ,YuXin,  YuTeng and HuaLongNet
      operating loss carry-forward
                              
                              
                              4,945,752
                              
                              
                              
                              1,599,004Effective
      tax rate
                              
                              
                              24.76
                              %
                              
                              
                              25.00
                              %Deferred
      tax asset
                              
                              $
                              1,224,626
                              
                              
                              $
                              399,751Long
      Gang Headquarter’sNet
      operating loss carry-forward
                              
                              
                              36,809,350
                              
                              
                              
                              —Effective
      tax rate
                              
                              
                              15.24
                              %
                              
                              
                              —Deferred
      tax asset
                              
                              $
                              5,610,223
                              
                              
                              $
                              —Exchange
      difference
                              
                              
                              252,780
                              
                              
                              
                              —Totals
                              
                              $
                              7,487,380
                              
                              
                              $
                              399,751





The
following table reconciles the U.S. statutory rates to the Company’s effective
tax rate for the years ended December 21, 2008, 2007 and 2006 as
follows:





December 31,
                  2008
                
                
                December
      31,
                  2008
                
                
                December 31,
                  2008U.S.
      Statutory rates
                
                
                34.00
                %
                
                
                34.00
                %
                
                
                34.00
                %Foreign
      income not recognized in USA
                
                
                (34.00
                %)
                
                
                -34.00
                %
                
                
                (34.00
                %)China
      income taxes
                
                
                25
                %
                
                
                33.00
                %
                
                
                —Tax
      effect of income not taxable for tax purpose
                
                
                (1.93
                %)
                
                
                (3.39
                %)
                
                
                —Effect
      of different tax rate of subsidiaries operating in other
      jurisdictions
                
                
                (10
                %)
                
                
                (17.29
                %)
                
                
                —Total
      provision for income taxes
                
                
                13.07
                %
                
                
                12.32
                %
                
                
                —




79





GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


December
31, 2008





Under the
Income Tax Laws of PRC, the Company’s subsidiary, Daqiuzhuang Metal, is
generally subject to an income tax at an effective rate of 25% on income
reported in the statutory financial statements after appropriate tax
adjustments, unless the enterprise is located in a specially designated region
where it allows foreign enterprises a two-year income tax exemption and a 50%
income tax reduction for the following three years. Daqiuzhuang Metal, became a
Chinese Sino-foreign joint venture at the time of the merger on October 14, 2004
and it became eligible for the tax benefit. Daqiuzhuang Metal is located in
Tianjin Costal Economic Development Zone and under the Income Tax Laws of
Tianjin City of PRC, it is eligible for an income tax rate of 24%. Therefore,
Daqiuzhuang Metal is exempt from income taxes for the years ended December 31,
2005 and 2006 and is entitled to 50% income tax reduction of the special income
tax rate of 24%, which is a rate of 12% for the years ended December 31, 2007,
2008 and 2009.





The
Company’s subsidiary, Longmen Joint Venture, is located in the mid-west region
of China. It qualifies for the “Go-West” tax rebate of 15% tax rate promulgated
by the government; therefore, income tax is accrued at 15%.





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





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





Value
added Tax





Enterprises
or individuals who sell commodities, engage in repair and maintenance or import
and export goods in the PRC are subject to a value added tax in accordance with
Chinese laws. The value added tax standard rate is 17% of the gross sales price.
A credit is available whereby VAT paid on the purchases of semi-finished
products or raw materials used in the production of the Company’s finished
products can be used to offset the VAT due on sales of the finished
product.





VAT on
sales and VAT on purchases amounted to $341,508,186and $308,483,755 for the year ended
December 31, 2008,
$189,739,668 and $159,078,937 for the year ended December 31, 2007, $19,698,345
and $18,560,573 for the year ended 2006, respectively. Sales and purchases are
recorded net of VAT collected and paid as the Company acts as an agent for the
government. VAT taxes are not impacted by the income tax holiday.




Taxes
payable consisted of the following:





December 31,
                    2008
                  
                  
                  December 31,
                    2007VAT
      taxes payable
                  
                  $
                  8,985,278
                  
                  
                  $
                  20,320,241Income
      taxes payable
                  
                  
                  2,509,520
                  
                  
                  
                  5,112,876Misc.
      taxes
                  
                  
                  2,421,838
                  
                  
                  
                  2,143,123Totals
                  
                  $
                  13,916,636
                  
                  
                  $
                  27,576,240




80





GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


December
31, 2008





Note 16
–Earnings per share





The
calculation of earnings per share is as follows:





2008
                
                
                2007
                
                
                2006Income
      (Loss) attributable to holders of common shares
                
                $
                (11,324,445
                )
                
                $
                22,425,921
                
                
                $
                1,033,208Basic
      weighted average number of common shares outstanding
                
                
                35,381,210
                
                
                
                32,424,652
                
                
                
                31,250,000Diluted
      weighted average number of common shares outstanding
                
                
                35,381,210
                
                
                
                32,558,350
                
                
                
                31,250,000Net
      income (Loss) per shareBasic
                
                $
                (0.32
                )
                
                $
                0.69
                
                
                $
                0.03Diluted
                
                $
                (0.32
                )
                
                $
                0.69
                
                
                $
                0.03





As
described in Note 1, the Company issuedVictory New an aggregate
of 3,092,899 shares of the Company’s Series Apreferredstock to purchase
30% minority ownership of Daqiuzhuang Metal. The preferred stock can not be
converted to common stock. Thus, the 3,092,899 shares of Series A preferred
stock have been excluded from the earnings per share calculation.





For the
year ended December 31, 2008, warrants and convertible notes were excluded from
the diluted loss per share due to anti-diluted effect.





For the
year ended December 31, 2007, the Company has 1,176,665 shares of mandatory
redeemable shares which are excluded from the calculation of basic and diluted
EPS pursuant to SFAS 128. All outstanding warrants issued in connection
with the redeemable shares were excluded from the diluted earnings per share
calculation as they are anti-dilutive.





Note
17 – Related party balances and transactions





The
Company subleased a portion of its land use rights to Tianjin Jing Qiu Steel
Market Company, a related party under common control. The Company’s Chairman,
CEO and majority shareholder, Zuosheng Yu (aka Henry Yu), is the chairman and
the largest shareholder of Jing Qiu Steel Market Company.





81





GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


December
31, 2008





2008
                      
                      
                      2007
                      
                      
                      2006Rental
      Income
                      
                      $
                      1,737,007
                      
                      
                      $
                      1,587,995
                      
                      
                      $
                      1,439,121





The
Company’s short term loan of $2,934,000 from Shenzhen Development Bank is
personally guaranteed by the Company’s Chairman, CEO, and majority shareholder
Zuosheng Yu (aka Henry Yu).





Tianjin
Dazhan Industry Co., Ltd. (“Dazhan”) and Tianjin Hengying Trading Co., Ltd.
(“Hengying”) are steel trading companies controlled by the Company’s Chairman,
CEO and majority shareholder, Zuosheng Yu. Dazhan and Hengying acted as trading
agents of the Company to make purchases and sales for the
Company.





Through
      Hengying & Dazhan
                  
                  2008
                  
                  
                  2007
                  
                  
                  2006Purchase
      from Hengying and Dazhan
                  
                  $
                  76,434,479
                  
                  
                  $
                  92,584,791
                  
                  
                  $
                  81,888,671Sales
      to Hengying and Dazhan
                  
                  $
                  33,413,598
                  
                  
                  $
                  32,743,626
                  
                  
                  $
                  78,849,439





The
Longmen Joint Venture did not obtain the VAT invoices from the local tax bureau
until late July 2007. Before obtaining VAT invoices, all the sales and purchases
made by the joint venture were carried out through the Company’s joint venture
partner, Long Men Group. In addition to the VAT status issue, the Longmen Joint
Venture also made sales through Long Men Group for outstanding sales contracts
signed before June 2007. Also some sales through Long Men Group were made due to
the established market share and its long term relationship with the customers.
All the sales proceeds and purchase payments were recorded as receivables from
or payables to Long Men Group.





All
transactions with related parties are for normal business activities and are
short term in nature. Settlements for the balances are usually in cash. The
following charts summarize the related party transactions as of the year ended
December 31, 2008 and 2007.





a.
            Accounts
      receivable –related parties





Name
      of related parties
                
                December 31, 2008
                
                
                December 31, 2007Tianjin
      Jing Qiu Steel Market
                
                $
                —
                
                
                $
                565,631





b.
            Other
      receivables - related parties





Name
      of related parties
                      
                      
                      December
      31, 2008
                      
                      
                      December
      31, 2007Beijing
      Wendlar
                      
                      
                      $
                      376,324
                      
                      
                      $
                      1,033,713Yang
      Pu Capital Automobile
                      
                      
                      
                      —
                      
                      
                      
                      616,950De
      Long Fen Ti
                      
                      
                      
                      —
                      
                      
                      
                      137,100Tianjin
      Jin Qiu Steel Market
                      
                      
                      
                      146,700
                      
                      
                      
                      48,830Yang
      Pu Sheng Xin
                      
                      
                      
                      —
                      
                      
                      
                      74,113Yang
      Pu Sheng Hua
                      
                      
                      
                      —
                      
                      
                      
                      2,742Total
                      
                      
                      $
                      523,024
                      
                      
                      $
                      1,913,448




82





GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


December
31, 2008





c.
            Advances
      on inventory purchases – related
parties





Name
      of related parties
                      
                      December
      31, 2008
                      
                      
                      December
      31, 2007Hengying
                      
                      $
                      —
                      
                      
                      $
                      8,014,211Dazhan
                      
                      
                      —
                      
                      
                      
                      1,929,801Liyuan
      Ximei
                      
                      
                      502,336
                      
                      
                      
                      —Daishang
      trading Co., Ltd.
                      
                      
                      1,872,301
                      
                      
                      
                      —Total
                      
                      $
                      2,374,637
                      
                      
                      $
                      9,944,012





d.
            Accounts
      payable due to related parties





Name
      of related parties
                      
                      December
      31, 2008
                      
                      
                      December
      31, 2007Longmen
      Group
                      
                      $
                      10,630,309
                      
                      
                      $
                      7,954,189Dazhan
                      
                      
                      —
                      
                      
                      
                      4,249,395Henan
      Xinmi Kanghua
                      
                      
                      1,500,987
                      
                      
                      
                      356,567Zhengzhou
      Shenglong
                      
                      
                      —
                      
                      
                      
                      269,917Baotou
      Shengda Steel Pipe
                      
                      
                      1,558,228
                      
                      
                      
                      1,472,670ShanXi  Fangxin
                      
                      
                      1,451,336
                      
                      
                      
                      —Baogang
      Jianan Group
                      
                      
                      185,664
                      
                      
                      
                      —Total
                      
                      $
                      15,326,524
                      
                      
                      $
                      14,302,738





e.
            Short
      term loan due to related parties





Name
      of related parties
                    
                    December
      31, 2008
                    
                    
                    December
      31, 2007Dazhan
                    
                    $
                    3,946,230
                    
                    
                    $
                    —Hengying
                    
                    
                    3,403,440
                    
                    
                    
                    —Total
                    
                    $
                    7,349,670
                    
                    
                    $
                    —





f.
            Other
      payables due to related parties





Name
      of related parties
                      
                      December
      31, 2008
                      
                      
                      December
      31, 2007Beijing
      Wendlar
                      
                      $
                      —
                      
                      
                      $
                      34,275Golden
      Glister
                      
                      
                      600,000
                      
                      
                      
                      —Tianjin
      Jin Qiu Steel Market
                      
                      
                      —
                      
                      
                      
                      1,487,600Hengying
                      
                      
                      —
                      
                      
                      
                      563,816Baotou
      Shengda Steel Pipe
                      
                      
                      77,013
                      
                      
                      
                      31,095Baogang
      Jian An
                      
                      
                      —
                      
                      
                      
                      9,597Total
                      
                      $
                      677,013
                      
                      
                      $
                      2,126,383




83





GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


December
31, 2008





g.
            Customer
      deposits – related parties





Name
      of related parties
                
                December
      31, 2008
                
                
                December
      31, 2007Hengying
                
                
                —
                
                
                
                6,855,000Dazhan
                
                
                2,759,964
                
                
                
                —Haiyan
                
                1,522,355
                
                
                
                2,356,736Maoming
      HengDa
      Materials
                
                
                2,934,000
                
                
                
                —Total
                
                $
                7,216,319
                
                
                $
                9,211,736





Note
18 –Business combinations





a.
Acquisition of 30% minority interest of Daqiuzhuang Metal





On May
18, 2007, General Steel entered into a Purchase Agreement with Victory New
Holdings to acquire the remaining 30% interest in Daqiuzhuang Metal. General
Steel agreed to issue Victory New 3,092,899 shares of Series A Preferred Stock
which have a voting power of 30% of the combined voting power of the Company’s
common and preferred stock for the life of the Company. As a result of the
acquisition, the Company increased its equity interest in Daqiuzhuang Metal from
70% to 100%. On May 23, 2007, the Company transferred its 30% interest in
Daqiuzhuang Metal to General Steel Investment (BVI). As a result of this
transfer, General Steel Investment (BVI) holds 100% of equity interest of
Daqiuzhuang Metal.





Victory
New Holdings Ltd. was a newly formed entity under the control of the Company’s
Chairman, CEO and majority shareholder Zuosheng Yu. Victory New was legally
owned by Mrs. Yang Baoyin, Mr. Yu’s mother. Therefore, General Steel and Victory
New were under common control. According to SFAS 141, acquisition of minority
interests from entities under common control should be accounted for using the
purchase method. The Company engaged a third party to determine the fair value
of transaction, which was $8,374,000. The premium over book value of $2,188,203
was accounted for as dividend distribution to the shareholder of Victory
New.





b.
Acquisition of 98.7% ownership of Qiu Steel Investment




Qiu Steel
Investment Co., Ltd. (“Qiu Steel Investment”) was founded on June 1, 2006. In
June 2007, Yangpu Investment agreed to invest approximately $19,284,400 (RMB 148
million) through a capital injection and equity transfer with former
shareholders. The total registered capital of Qiu Steel Investment is
$19,545,000 (RMB150,000,000). As a result of the above mentioned equity
transaction, Yangpu Investment acquired 98.7% equity of Qiu Steel Investment
making Qiu Steel Investment a subsidiary of Yangpu Investment and Daqiuzhuang
Metal. The rest of Qiu Steel Investment is indirectly owned by, Zuosheng Yu, our
Chairman and CEO.





84





GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


December
31, 2008





c.
Joint venture agreement with Baotou Steel





On April
27, 2007, Daqiuzhuang Metal, a wholly owned subsidiary of the Company, and
Baotou Steel entered into an Amended and Restated Joint Venture Agreement (the
“Amended agreement”), amending the Joint Venture Agreement entered into on
September 28,. The Amended agreement increased Daqiuzhuang Metal's ownership
interest in the Joint Venture from 20% to 80%.





The
Amended agreement states that the initial capital of the joint venture company
will be approximately $6,400,000, equal to the registered capital. Baotou Steel
will contribute approximately $1,270,000 (RMB 10 million), and Daqiuzhuang Metal
will contribute approximately $5,130,000 (RMB 40 million). Daqiuzhuang Metal and
Baotou Steel each contributed 30% of their portion of the registered capital to
commence the business. This joint venture obtained its business license
on May 25, 2007. Operations began in the third quarter of
2007.





The joint
venture’s name is Baotou Steel — General Steel Special Steel Pipe Joint Venture
Company Limited, a limited liability company formed under the laws of the PRC.
Baotou Steel Pipe Joint Venture is located at Kundulun District, Baotou city,
Inner Mongolia, China. It produces and sells spiral-weld steel
pipes.





The
ownership is as follows:


%
      OwnershipBaotou
      Iron and Steel (Group) Co., Ltd.
                    
                    
                    20
                    %Daqiuzhuang
      Metal Sheet Co., Ltd
                    
                    
                    80
                    %





d.
Shaanxi Longmen Iron and Steel Co., Ltd Joint Venture





On June
15, 2007, General Steel Holdings Inc. and Shaanxi Longmen Iron and Steel (Group)
Co., Ltd. (”Longmen Group”) signed an agreement to form Shaanxi Longmen Iron and
Steel Co., Ltd. (“Longmen Joint Venture”). Longmen Group contributed the
operating facility and corresponding debt with an appraised net asset value of
RMB 200 million. General Steel Holdings, Inc. contributed RMB 300 million to the
Longmen Joint Venture through its subsidiaries Daqiuzhuang Metal and Qiu Steel
Investment. Daqiuzhuang Metal and Qiu Steel Investment contributed RMB 160
million and RMB 140 million in cash, and hold 32% and 28% ownership,
respectively, or 60% collectively. Longmen Group owns 40% of the Longmen Joint
Venture. The Longmen Joint Venture obtained the business license on June 22,
2007.





Assets
acquired and debts assumed in the transaction are listed as below:





Assumed
      byItem
                
                Fair
      Value
                
                
                Longmen
      Joint
                  VentureCurrent
      assets
                
                $
                317,744,960
                
                
                $
                98,530,222Property,
      plant, and equipment
                
                
                186,915,879
                
                
                
                164,811,374Intangible
      assets
                
                
                20,128,972
                
                
                
                19,543,875Other
      assets
                
                
                99,604,841
                
                
                
                —Total
      assets
                
                
                624,394,652
                
                
                
                282,885,471Current
      liability
                
                
                473,168,746
                
                
                
                223,776,221Long
      term liability
                
                
                38,246,111
                
                
                
                32,809,250Total
      liabilities
                
                
                511,414,857
                
                
                
                256,585,471Net
      assets
                
                $
                112,979,795
                
                
                $
                26,300,000




85





GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


December
31, 2008





On
September 24, 2007, Longmen Joint Venture acquired 74.92% ownership interest in
Environmental Protection Industry Development Co., Ltd. (“EPID)” for $2.4
million (RMB 18 million) and a 36% equity interest in Hualong Fire Retardant
Materials Co., Ltd., (“Hualong”) for $0.4 million (RMB 3 million). The parties
agreed to make the effective date of the transaction July 1, 2007. Due to EPID,
Hualong, and Longmen Joint Venture being under common management control, this
transaction was recorded at the book value as of the effective
date.





Assets
acquired and debts assumed in the transaction are listed as below:





Assumed
      byEPID
                    
                    Fair
      Value
                    
                    
                    Longmen
      Joint
                      Venture
      (74.92%)Current
      assets
                    
                    $
                    2,609,601
                    
                    
                    $
                    1,955,113Property,
      plant, and equipment
                    
                    
                    5,619,646
                    
                    
                    
                    4,210,239Total
      assets
                    
                    
                    8,229,247
                    
                    
                    
                    6,165,352Total
      liabilities
                    
                    
                    5,055,550
                    
                    
                    
                    3,787,618Net
      assets
                    
                    $
                    3,173,697
                    
                    
                    $
                    2,377,734





Assumed
      byHualong
                    
                    Fair
      Value
                    
                    
                    Longmen
      Joint
                      Venture
      (36%)Current
      assets
                    
                    $
                    3,905,068
                    
                    
                    $
                    1,405,824Property,
      plant, and equipment
                    
                    
                    1,653,693
                    
                    
                    
                    595,330Total
      assets
                    
                    
                    5,558,761
                    
                    
                    
                    2,001,154Total
      liabilities
                    
                    
                    4,357,736
                    
                    
                    
                    1,568,785Net
      assets
                    
                    $
                    1,201,025
                    
                    
                    $
                    432,369





On
January 14, 2008, the Company through Longmen Joint Venture, completed its
acquisition of a controlling interest in Hancheng Tongxing Metallurgy Co., Ltd.
(“Tongxing”). Tongxing contributed its land use right of 217,487 square meters
(approximately 53 acres) with an appraised value of approximately $4.1 million
(RMB 30 million). Pursuant to the agreement, the land will be converted into
shares valued at approximately $3.1 million (RMB 23 million), providing the
Joint Venture stake of 22.76% ownership in Tongxing and making it Tongxing’s
largest and controlling shareholder. The parties agreed to make the effective
date of the transaction January 1, 2008. The acquisition is accounted for as
acquisition under common control.





86





GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


December
31, 2008





Assumed
      byTongxing
                  
                  Fair
      Value
                  
                  
                  Longmen
      Joint
                    Venture
      (22.76%)Current
      assets
                  
                  $
                  55,504,572
                  
                  
                  $
                  12,632,840Non
      current assets
                  
                  
                  8,088,884
                  
                  
                  
                  1,841,030Total
      assets
                  
                  
                  63,593,456
                  
                  
                  
                  14,473,870Total
      liabilities
                  
                  
                  50,782,229
                  
                  
                  
                  11,558,035Net
      assets
                  
                  $
                  12,811,227
                  
                  
                  $
                  2,915,835





On August
11, 2008, the Company through its subsidiary, Longmen Joint Venture, completed
its acquisition of a controlling interest in Beijing Hua Tian Yu Long
International Steel Trade Co., Ltd. The Longmen Joint Venture paid $128,265 (RMB
876,731.71) for 50% equity based on the appraisal value on June 30,
2008.





e.
Acquisition of Hengda Steel Group





On June
25, 2008, The Company through Qiu Steel Investment entered into equity purchase
agreement with the shareholders of Henggang to acquire 99% equity of Henggang.
The total purchase price for the acquisition is $7.3 million (RMB 50 million).
The fair value of Henggang was $10.1 million (RMB 69 million) as of June 30,
2008.  Pursuant to SFAS 141, the excess of total fair value acquired
over purchase price should be allocated as a pro rata reduction of non-current
assets. Subsequently, the Company recorded the difference as a reduction of
fixed assets acquired.





The joint
venture’s name is Maoming Heng Da Steel Group Co. Ltd., a company formed under
the laws of the PRC. It is located in Maoming city, Guangdong province in China.
It produces and sells high speed wire.





Assumed
      byHenggang
                  
                  Fair
      Value
                  
                  
                  The
      CompanyCurrent
      assets
                  
                  $
                  45,314,444
                  
                  
                  $
                  44,861,300Non
      current assets
                  
                  
                  81,780,107
                  
                  
                  
                  78,290,811Total
      assets
                  
                  
                  127,094,551
                  
                  
                  
                  123,152,111Total
      liabilities
                  
                  
                  117,027,385
                  
                  
                  
                  115,857,111Net
      assets
                  
                  $
                  10,067,166
                  
                  
                  $
                  7,295,000




87





GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


December
31, 2008





The
financial data of Henggang as of December 31, 2008 is included in the Company’s
consolidated financial statements.





Distribution
payable to former shareholders for the above acquisitions amount to $18,765,209
and $9,401,603 as of December 31, 2008 and December 31, 2007,
respectively.





Note
19 - Shareholder’s equity





On
February 12, 2007, the Company issued to Aurelius Consulting Group, Inc. (also
known as RedChip Companies, Inc.) 18,000 shares of common stock in the amount of
$23,742 as a portion of its compensation for investor relations services
rendered. Those shares were valued at the quoted market price at the date of the
agreement.





In 2007,
1,176,665 shares of redeemable stock were converted at $1.95 resulting
reclassification from liabilities to equity.





2,120,000
warrants were converted to common stock at $2.50 per share in September, 2007
for $5,300,000 in cash.





On
October 1, 2007, the Company issued senior management and directors 70,100
shares of common stock at $8.16 per share, as compensation. The shares were
valued at the quoted market price on the date granted. The Company recorded
compensation expense of $572,016 for the year ended December 31,
2007.





On
January 14, 2008 the Company issued 150,000 shares of common stock at $10.43 per
share as additional note issuance cost totaled $1,564,500. The shares price is
determined as the quoted market price on the date granted.





On
February 5, 2008, the Company issued senior management and directors 76,600
shares of common stock at $7.16 per share, as compensation. The shares were
valued at the quoted market price on the date granted. The Company recorded
compensation expense of $548,456 for the year ended December 31,
2008.





On April
14, 2008, the Company, Mr, Zuosheng Yu, (CEO of the Company) and Mr. Zhang Dan
Li (BOD member of Long Men Joint Venture) entered into a compensation agreement
in which Mr. ZuoSheng Yu agreed to transfer his own 600,000 shares to Mr. Zhang
Dan Li in exchange for 15 years of service in the Company. Pursuant to SFAS 123R
(Share-Based Payment) share-based payments awarded to an employee of the
reporting entity by a related party or other holder of an economic interest in
the entity is treated as compensation as if the shareholder has made a capital
contribution. The shares are valued at $6.91 on grant date for a total of
$4,146,000 and will be amortized over the life agreement. A total of $207,300 of
compensation expense and additional paid in capital has been recorded in
2008.





On April
15, 2008, the Company granted senior management and directors 87,400 shares of
common stock at $6.66 per share, as compensation. The shares were valued at the
quoted market price on the date granted. The Company recorded compensation
expense of $582,084 for the year ended December 31, 2008.





88





GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


December
31, 2008





On July
3, 2008, the Company granted senior management and directors 90,254 shares of
common stock at $10.29 per share, as compensation. The shares were valued at the
market price on the date granted. The Company recorded compensation expense of
$928,672 for the nine months ended September 30, 2008.





541,299
shares of common stock were issued upon conversion of notes with a carrying
value of $6,750,000 at a conversion price of $12.48. In addition 195,965 shares
of common stock were issued as make whole interest expense of $2,310,313. See
note 11 for details.





In
September 2008, 140,000 shares of warrants in connection with the redeemable
preferred stock were exercised at $5.00 per share.





On
October 28, 2008, the company granted Teamlink Investment Limited, 100,000
shares of commons stock at $3.6 per share as consulting service expense
$360,000. According to the period of service provided, $60,000 was recorded as
expense in 2008 and $300,000 will be amortized within 10 months.





On
October 28, 2008, the company granted Hayden Communication International Inc.,
the public relations company, 25,000 shares of commons stock at $3.6 per share
as public relationship expense of $90,000.





On
November 24, 2008, the Company granted senior management and directors 87,550
shares of common stock at $3.50 per share, as compensation. The shares were
valued at the market price on the date granted. The Company recorded
compensation expense of $306,425 for the year ended December 31,
2008.





The
Company has the following warrants outstanding:





Outstanding
      as of January 1, 2007
                                  
                                  
                                  2,353,334Granted
                                  
                                  
                                  —Forfeited
                                  
                                  
                                  —Exercised
                                  
                                  
                                  —Outstanding
      as of December 31, 2007
                                  
                                  
                                  2,353,334Granted
                                  
                                  
                                  1,154,958Forfeited
                                  
                                  
                                  —Exercised
                                  
                                  
                                  (2,120,000
                                  )Outstanding
      as of December 31, 2007
                                  
                                  
                                  1,388,292Granted
                                  
                                  
                                  —Forfeited
                                  
                                  
                                  (93,334
                                  )Exercised
                                  
                                  
                                  (140,000
                                  )Outstanding
      As of December 31, 2008
                                  
                                  
                                  1,154,958




89





GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


December
31, 2008





Outstanding
      Warrants
                  
                  
                  Exercisable
      WarrantsExercise
      Price
                  
                  Number
                  
                  
                  Average
                    Remaining
                    Contractual
      Life
                  
                  
                  Average
                    Exercise
                    Price
                  
                  
                  Number
                  
                  
                  Average
                    Remaining
                    Contractual
      Life$13.51
                  
                  
                  1,154,958
                  
                  
                  
                  4.36
                  
                  
                  $
                  13.51
                  
                  
                  
                  1,154,958
                  
                  
                  
                  4.36





Note
20 – Retirement plan





Regulations
in the People’s Republic of China require the Company to contribute to a defined
contribution retirement plan for all employees. All Joint Venture employees are
entitled to a retirement pension amount calculated based upon their salary at
their date of retirement and their length of service in accordance with a
government managed pension plan. The PRC government is responsible for the
pension liability to the retired staff. The Company is required to contribute
20% of the employees’ monthly base salary. Employees are required to contribute
8% of their base salary to the plan. Total pension expense incurred by the
Company amounted to $3,022,626, $1,624,935 and
$346,385 for the years ended December 31, 2008, 2007 and 2006,
respectively.





Note21–Statutory reserves





The laws
and regulations of the People’s Republic of China require that before an
enterprise distributes profits to its partners, it must first satisfy all tax
liabilities, provide for losses in previous years, and make allocations, in
proportions determined at the discretion of the board of directors, to the
statutory reserves. The statutory reserves include the surplus reserve funds and
the enterprise fund and these statutory reserves represent restricted retained
earnings.





Surplus reserve
fund





The
Company is required to transfer 10% of its net income, as determined in
accordance with the PRC accounting rules and regulations, to a statutory surplus
reserve fund until such reserve balance reaches 50% of the Company’s registered
capital.





The
transfer to this reserve must be made before distribution of any dividend to
shareholders. At the end of 2008 and 2007, the Company transferred $609,910
and $2,525,315 to this reserve. The surplus reserve fund is non-distributable
other than during liquidation and can be used to fund previous years’ losses, if
any, and may be utilized for business expansion or converted into share capital
by issuing new shares to existing shareholders in proportion to their
shareholding or by increasing the par value of the shares currently held by
them, provided that the remaining reserve balance after such issue is not less
than 25% of the registered capital.





90





GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


December
31, 2008





Note
22 – Commitment and contingencies





The
Company is obligated to contribute $5,130,000 (RMB 40 million), as registered
capital to Baotou Steel Pipe Joint Venture. The Company contributed
approximately $1,734,200 through December 31, 2007, and the balance will be
contributed in the first half of 2009, from Daqiuzhuang Metal.





Daqiuzhuang Metal provides dormitory
facilities for its employees under a 10 year rental contract. The agreement
began January 2006 and required full prepayment for the 10 year period totaling
$466,200. Total rental expense for the years ended December 31, 2008, 2007 and
2006 amounted to $51,894, $47,639 and $45,343, respectively.





Daqiuzhuang
Metal rented land for 50 years starting September 2005. Total amount of the rent
over the 50 years period is approximately $1,044,728 (or RMB
8,067,400).





As of
December 31, 2008, total future minimum lease payments for the unpaid portion
under an operating lease were as follows:





Year
      ended December 31,
                      
                      Amount2009
                      
                      
                      724,923Thereafter
                      
                      $
                      —





Total
rental expense of the land use right for the years ended December 31, 2008, 2007
and 2006 amounted to $23,258, $21,351 and $20,260, respectively.





Long Men
Joint Ventureis constructingtwo blast furnaces in 2008, the total
contractcostwas$192,381,793l,of which $180,471,238 was paid, and$11,910,556 will be paid within one
year.





Note 23 – Subsequent Events





In
January 2009 we tore down a 150 cubic meter blast furnace and a 179 cubic meter
blast furnace. The net book value of the blast furnaces
is $586,508 (RMB 4 million).




(B)
Quarterly Data (Unaudited)
 
 Year
      Ended December 31,
                                    
                                    First
                                    
                                    
                                    Second
                                    
                                    
                                    Third
                                    
                                    
                                    Fourth
                                    
                                    
                                    Full
      Year(In
      thousands except per share data)
                                    
                                    Quarter
                                    
                                    
                                    Quarter
                                    
                                    
                                    Quarter
                                    
                                    
                                    Quarter
                                    
                                    
                                    Quarter2008Net
      operating revenues
                                    
                                    $
                                    291,566
                                    
                                    
                                    $
                                    387,029
                                    
                                    
                                    $
                                    411,521
                                    
                                    
                                    $
                                    261,087
                                    
                                    
                                    $
                                    1,351,203Gross
      profit
                                    
                                    $
                                    12,982
                                    
                                    
                                    $
                                    22,869
                                    
                                    
                                    $
                                    -6,348
                                    
                                    
                                    $
                                    -21,576
                                    
                                    
                                    $
                                    7,927Net
      income
                                    
                                    $
                                    2,188
                                    
                                    
                                    $
                                    -24,271
                                    
                                    
                                    $
                                    20,464
                                    
                                    
                                    $
                                    -9,706
                                    
                                    
                                    $
                                    -11,325Basic
      net income per share
                                    
                                    $
                                    0.063
                                    
                                    
                                    $
                                    -0.695
                                    
                                    
                                    $
                                    0.573
                                    
                                    
                                    $
                                    -0.261
                                    
                                    
                                    $
                                    -0.320Diluted
      net income per share
                                    
                                    $
                                    0.063
                                    
                                    
                                    $
                                    -0.695
                                    
                                    
                                    $
                                    0.573
                                    
                                    
                                    $
                                    -0.261
                                    
                                    
                                    $
                                    -0.3202007Net
      operating revenues
                                    
                                    $
                                    37,608
                                    
                                    
                                    $
                                    121,255
                                    
                                    
                                    $
                                    345,384
                                    
                                    
                                    $
                                    268,192
                                    
                                    
                                    $
                                    772,439Gross
      profit
                                    
                                    $
                                    1,733
                                    
                                    
                                    $
                                    8,113
                                    
                                    
                                    $
                                    25,890
                                    
                                    
                                    $
                                    20,953
                                    
                                    
                                    $
                                    56,689Net
      income
                                    
                                    $
                                    475
                                    
                                    
                                    $
                                    1,893
                                    
                                    
                                    $
                                    8,000
                                    
                                    
                                    $
                                    12,057
                                    
                                    
                                    $
                                    22,425Basic
      net income per share
                                    
                                    $
                                    0.015
                                    
                                    
                                    $
                                    0.06
                                    
                                    
                                    $
                                    0.247
                                    
                                    
                                    $
                                    0.368
                                    
                                    
                                    $
                                    0.69Diluted
      net income per share
                                    
                                    $
                                    0.015
                                    
                                    
                                    $
                                    0.06
                                    
                                    
                                    $
                                    0.247
                                    
                                    
                                    $
                                    0.368
                                    
                                    
                                    $
                                    0.69
  Net
Operating Revenue
 First and
second quarter increase 2008 over 2007 is attributed to timing of our
acquisitions, notably the full year consolidation of Shaanxi Longmen Iron and
Steel Co., Ltd. in 2008, versus 7 months consolidated results in 2007. Baotou
Steel Pipe Joint Venture is a full-year consolidation in 2008 versus 6 months
consolidated results in 2007. Our Maoming subsidiary was acquired June 25, 2008
and contributed 6 months consolidated results for 2008 versus nothing in
2007.
 
 Third
quarter 2008 over 2007 increase is due primarily to higher average selling
prices. Fourth
quarter 2008 over 2007 decrease is due to lower production volumes.
 
 Gross
Profit
 First and
second quarter increase 2008 over 2007 is attributed to timing of our
acquisitions. Third and
fourth quarter decrease 2008 over 2007 is due primarily to price imbalance
between selling price and cost of goods (See MD&A Results of Operations for
discussion about pricing environment and cost of goods).
 
 Net
Income
 First
quarter increase 2008 over 2007 is attributed primarily due to gain in fair
value of derivative instrument of $2.7 million. Second
quarter decrease 2008 over 2007 is primarily due to a loss in fair value of
derivative instrument of $27.8 million. Third
quarter increase 2008 over 2007 is primarily due to a gain in fair value of
derivative instrument of $29.9 million offset by negative gross profit. Fourth
quarter decrease 2008 over 2007 is primarily due to a gain in fair value of
derivative instrument of $8.1 million offset by negative gross profit. The
derivative instrument is a non cash, non operating item.
 
 See
MD&A Results of Operations for discussion about pricing environment and
negative gross profit.





91




(C)
Exhibits





1.1 Baotou
Steel - GSHI Special Steel Joint Venture Agreement dated as of September 28,
2005 by and between Baotou Iron & Steel (Group) Co., Ltd., General Steel
Investment Co., Ltd. and Daqiuzhuang Metal Sheet Co., Ltd. (Incorporated by
reference to the current report on Form 8-K, filed with the Commission on
October 31, 2005)




2.1 Agreement
and Plan of Merger dated as of October 14, 2004 by and among American
Construction Company, General Steel Investment Co., Ltd. and Northwest Steel
Company, a Nevada corporation (Incorporated by reference to the current report
on Form 8-K/A, filed with the Commission on October 19, 2004)




3.1 Articles
of Incorporation of General Steel Holdings, Inc. (Incorporated by reference to
the registration statement on Form SB-2, filed with the Commission on June 6,
2003)




4.1 Subscription
Agreement (Incorporated by reference to the registration statement on Form
SB-2/A, filed with the Commission on September 12, 2003)




10.1
Investment Agreement, dated December 12, 2007, by and between Shaanxi Longmen
Iron and Steel Co., Ltd. and certain shareholders of Hancheng Tongxing
Metallurgy Co.,Ltd. (incorporated herein by reference on Form 8-K filed on
January 11, 2008)





10.2 Equity
Purchase Agreement, dated June 25, 2008, by and between the Company and Tianjin
Qiu Steel Investment Limited with Maoming Hengda Steel Group Limited,
BeijingTianchenghengli Investments Limited and Mr. Chen Chao (incorporated
herein by reference on Form 8-K filed on June 30, 2008)





10.3
Letter of Intent, dated as of September 1, 2008 between the Company and Yantai
Steel Pipe Co., Ltd. of Laiwu Iron & Steel Group (incorporated herein by
reference on Form 8-K filed on September 4, 2008)





10.4 Debt
Waive Agreement, dated September 27, 2008, by and between the Maoming Hengda
Steel Group Limited and Guangzhou Hengda Industrial Group Limited
(incorporatedherein by reference on Form 8-K filed on September 29,
2008)





10.5 Form
of Securities Purchase Agreement (Incorporated by reference to the registration
statement on Form 8-K/A, filed with the Commission on December 14,
2007)




10.6 Form
of Registration Rights Agreement (Incorporated by reference to the registration
statement on Form 8-K/A, filed with the Commission on December 14,
2007)




10.7 Form
of Warrant (Incorporated by reference to the registration statement on Form
8-K/A, filed with the Commission on December 14, 2007)




10.8 Form
of Convertible Note (Incorporated by reference to the registration statement on
Form 8-K, filed with the Commission on December 14, 2007)





10.9 Form
DEF 14C (Incorporated by reference to the registration statement on Form DEF
14C, filed with the Commission on June 25, 2007)





10.10
Certificate of Designation dated August 15, 2007 (Incorporated by reference to
the registration statement on Form 10-K, filed with the Commission on March 31,
2008)





21.01
Subsidiaries of the registrant





92





PercentageSubsidiary
                
                Of OwnershipGeneral
      Steel Investment Co., Ltd.
                British
      Virgin Islands
                
                
                100.0
                %Tianjin
      Daqiuzhuang Metal Sheet Co., Ltd.
                P.R.C.
                
                
                100.0
                %Baotou
      Steel – General Steel Special Steel Pipe Joint Venture Co.,
      Ltd.
                P.R.C.
                
                
                80.0
                %Yangpu
      Shengtong Investment Co., Ltd.
                P.R.C.
                
                
                99.1
                %Qiu
      Steel Investment Co., Ltd.
                P.R.C.
                
                
                98.7
                %Shaanxi
      Longmen Iron and Steel Co. Ltd.
                P.R.C.
                
                
                60.0
                %Maoming
      Hengda Steel Group Co., Ltd.
                P.R.C.
                
                
                99.0
                %





31.1
Certification of Chief Executive Officer;





31.2
Certification of Chief Financial Officer;





32.1
Certification of Chief Executive Officer; and





32.2
Certification of Chief Financial Officer.





93





SIGNATURES





Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.


GENERAL
      STEEL HOLDINGS, INCBy:
              /s/ Zuosheng YuName:
      Zuosheng Yu
                Title:
      Chief Executive Officer and Chairman
                Date:
      March 10, 2009




Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.




SIGNATURE
                                                                      
                                                                      TITLE
                                                                      
                                                                      DATE/s/ Zuosheng Yu
                                                                      
                                                                      Chief
      Executive Officer and Chairman
                                                                      
                                                                      March
      10, 2009Zuosheng
      Yu/s/ John Chen
                                                                      
                                                                      Director
      and Chief Financial Officer
                                                                      
                                                                      March
      10, 2009John
      Chen/s/ Zhongkui Cao
                                                                      
                                                                      Director
                                                                      
                                                                      March
      10, 2009Zhongkui
      Cao/s/ Qinghai Du
                                                                      
                                                                      Director
                                                                      
                                                                      March
      10, 2009Qinghai
      Du/s/ James Hu
                                                                      
                                                                      Director
                                                                      
                                                                      March
      10, 2009James
      Hu/s/ Ross Warner
                                                                      
                                                                      Director
                                                                      
                                                                      March
      10, 2009Ross
      Warner/s/ Chris Wang
                                                                      
                                                                      Director
                                                                      
                                                                      March
      10, 2009Chris
      Wang/s/ John Wong
                                                                      
                                                                      Director
                                                                      
                                                                      March
      10, 2009John
      Wong/s/ Danli Zhang
                                                                      
                                                                      Director
                                                                      
                                                                      March
      10, 2009Danli
      Zhang





94