UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 Washington,
D.C. 20549
 
 FORM
10-K
 
 (Mark
One)
 
 x
              ANNUAL
      REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
 
 For
the year ended December 31, 2008
 
 o
              TRANSITION
      REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
 
 For the
transition period from ___________ to ___________
 
 Commission
File No. 000-53468
 
 CHINA
ARMCO METALS, INC.
 (Name of
small business issuer in its charter)
 
 NEVADA
              26-0491904(State
      or other jurisdiction of
                incorporation
      or organization)
              (IRS
      Employer Identification No.)One
      Waters Park Drive, Suite 98
                San
      Mateo, California
              94403(Address
      of principal executive offices)
              (Zip
      Code)
 
 (650)
212-7620
 (Registrant’s
telephone number, including area code)
 
 Securities
      registered under Section 12(b) of the Exchange Act:Title
      of each class registered:
              Name
      of each exchange on which registered:None
              NoneSecurities
      registered under Section 12(g) of the Exchange Act:Common
      Stock, par value $.001
                (Title
      of class)
 
 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 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 x No o
 
 Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§ 229.405 of this chapter) 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 Part III of this Form 10-K or
any amendment to this Form 10-K.   x
 
 Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of
the Exchange Act.
 
 Large
      accelerated filer
              o
              
              Accelerated
      filer
              oNon-accelerated
      filer
                (Do
      not check if a smaller reporting company)
              o
              
              Smaller
      reporting company
              x
 
 Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes o   No
x
 
 The
aggregate market value of the registrant’s voting common stock held by
non-affiliates as of June 30, 2008 based upon the closing price reported for
such date on the OTC Bulletin Board was $16,098,600.
 
 As of
March 13, 2009, the registrant had 10,097,449 shares of its common stock
outstanding.
 
 Documents Incorporated by
Reference:
 None.
 
   
   CHINA
ARMCO METALS, INC.
  TABLE
OF CONTENTS
 
 PAGEPART
      IITEM 1.
              
              Business
              
              1ITEM 1A.
              
              Risk Factors
              
              6ITEM 1B.
              
              Unresolved Staff Comments
              
              16ITEM 2.
              
              Properties
              
              16ITEM 3.
              
              Legal Proceedings
              
              16ITEM 4.
              
              Submission of Matters to a Vote of Security
      Holders
              
              16PART
      IIITEM 5.
              
              Market for Registrant’s Common Equity, Related Stockholder
      Matters and Issuer Purchases of Equity Securities
              
              17ITEM 6.
              
              Selected Financial Data
              
              17ITEM 7.
              
              Management’s Discussion and Analysis of Financial Condition
      and Results of Operation
              
              17ITEM 7A.
              
              Quantitative and Qualitative Disclosures About Market
      Risk
              
              26ITEM 8.
              
              Financial Statements and Supplementary
    Data
              
              26ITEM 9.
              
              Changes in and Disagreements with Accountants on Accounting
      and Financial Disclosure
              
              26ITEM 9A(T).
              
              Controls and Procedures
              
              26ITEM 9B.
              
              Other Information
              
              27PART
      IIIITEM 10.
              
              Directors, Executive Officers and Corporate
      Governance
              
              27ITEM 11.
              
              Executive Compensation
              
              28ITEM 12.
              
              Security Ownership of Certain Beneficial Owners and
      Management and Related Stockholder Matters
              
              31ITEM 13.
              
              Certain Relationships and Related Transactions, and
      Director Independence
              
              31ITEM 14.
              
              Principal Accounting Fees and Services
              
              33PART
      IVITEM 15.
              
              Exhibits, Financial Statement Schedules
              
              34SIGNATURES
              
              35
 
  
  
 PART
I
  ITEM 1.  BUSINESS
 
 Our
History
  China
Armco Metals, Inc. (“we”, “China Armco”, or the “Company”), formerly known
as Cox Distributing, Inc., was founded as an unincorporated business in January
1984 and became a “C” corporation in the State of Nevada on April 6,
2007.  On June 27, 2008, we acquired all of the issued and outstanding
capital stock of Armco & Metawise (HK), Ltd., a limited liability company
established under the laws of Hong Kong (“Armco”).  Armco owns 100% of
the capital stock of each of Armet (Lianyungang) Renewable Resources Co., Ltd.
(a/k/a Armet (Lianyungang) Scraps Co., Ltd.) (“Armet”) and Henan Armco &
Metawise Trading Co., Ltd. (“Henan Armco”), both of which are limited liability
companies established under the laws of the People’s Republic of China
(“PRC”).
 
 On
December 30, 2008, we entered into an Agreement of Assumption and Release and
Bill of Sale (“Spin-Out”) with our former Chairman and Chief Executive Officer,
Stephen E. Cox, with respective to a U.S. based fertilizer distribution business
(“Legacy Business”).  As a result of the Spin-out, Mr. Cox assumed all
the assets and liabilities of the Legacy Business and cancelled 6,200 shares of
our common stock.  Therefore, we no longer engage in the fertilizer
distribution business.
 
 Prior to
our acquisition of Armco, we had one employee, Stephen E. Cox, our founder and
former president and chief executive officer who devoted his full business
time to the operation of the fertilizer distribution business in the United
States.
 
 Also,
prior to our acquisition of Armco, our sole business was the distribution of
organic fertilizer products used to improve soil and growing conditions for the
potato farmers of eastern Idaho. These products, which are bio-based rather than
petroleum-based, add nutrients to the soil and serve as fungicides intended to
increase the size and quality of crops.  On June 27, 2008, the Company
amended its Articles of Incorporation, and changed its name to China Armco
Metals, Inc.
  Overview
China Armco
 
 Distribution
of Ore
 
 We
import, sell and distribute metal ores and non-ferrous metals to the metal
refinery industry in China.  Armco commenced operations in
2001.  We import metal ore from global suppliers in Brazil, India,
South America, Oman, Turkey, Iran, Libya, Nigeria, Indonesia, and the
Philippines and resell the metal ore to manufacturers of steel and other metal
products in China.  We source a range of raw materials which includes
iron ore, coal, chrome ore, nickel ore, copper ore, scrap metal, and manganese
ore.
 
 We are
seeking to expand our business operations within China by entering into the
scrap metal recycling business.  We are constructing a scrap metal
recycling facility capable of producing 1 million metric tons (“mmt”) of
recycled metal per year.  The facility is located in the Banqiao
Industrial Zone of Lianyungang Economic Development Zone in the Jiangsu province
of the PRC. Upon completion of our metal recycling facility, we will seek to
recycle automobiles, machinery, building materials, dismantled ships and various
other scrap metals and will sell and distribute recycled scrap metal to the
metal refinery industry utilizing our existing network of metal ore customers in
the PRC. We expect to commence recycling operations in the fourth quarter
of 2009. We believe this scrap metal recycling facility can increase our
operating results.
 
 The
Company
 
 Steel
Industry and Market for Iron Ore
 
 China is
the largest developing country in the world, and the demand for steel has been
growing steadily over the past decade as the country continues to experience an
industrial revolution.  We believe that domestic steel production will
continue to witness significant growth as China continues to
grow.  The steel industry is an important basic industry of the
national economy of China, and plays a vital role in the recent
industrialization efforts of the country.  As witnessed over the last
decade, the production of steel has increased dramatically throughout the world,
and in particular in China.  According to the www.worldsteel.org, in
2008 worldwide crude steel production amounted to 1,330 mmt.  This is
a decrease of 1.2% compared to 2007.  2008 is the second consecutive
year that world steel production has been over 1,300 mmt. China’s crude steel
production in 2008 reached 502 mmt an increase of 2.6% from
2007.  Production volume in China has more than doubled within the
past five years, from 222 mmt in 2002. China’s share of the world's steel
production continued to grow in 2008 representing 38% of the world's total
crude steel production.
  - 1
-
 Industry
Analyst Rong Gang, of Langesteel, a steel information service provider, predicts
China would consume about 500 mmt of steel assuming the economy grows at a rate
of 8 percent this year. However, Chinese production capacity exceeded 650 mmt at
the end of 2008, which means producers were making too much steel even before
the full impact of the crisis was felt.
 We have
established cooperative business relationships with global suppliers and China’s
large iron and steel enterprises.  We typically enter into contracts
with both suppliers and customers.  Overseas supplier’s ship cargo to
a designated seaport in China and, in most of cases, the cargo is then shipped
to customers directly. Payments are made in the form of telegraphic transfer
(T/T) and occasionally by a letter of credit, depending on the transaction terms
specified in the contract; the customer or supplier is responsible for all
shipping costs.
 
 Scrap Metal
Recycling Industry
 
 The steel
industry has been actively recycling for more than 150 years, in large part
because it is economically advantageous to do so. Scrap metal can replace iron
ore in the production of steel.  It is cheaper to recycle metal than
to mine iron ore and manipulate it through the production process to form 'new'
steel.  Metal does not lose any of its inherent physical properties
during the recycling process, and has drastically reduced energy and material
requirements than refinement from iron ore.  The continued utilization
of scrap metal is a vital component of the domestic steel manufacturing
industry.  The energy saved by recycling reduces the annual energy
consumption of the industry by approximately 75%.  According to World
Steel Association’s Fact
Sheet; Raw materials released in October 2008, more steel is recycled
worldwide annually than all other materials put together, with an estimated 459
mmt being recycled in 2006, approximately 37% of the crude steel produced that
year.
 
 As China continues to industrialize, we
believe recycled materials will witness growing demand.  According to
the Chinese government’s statistics, the crude steel produced from 2006 to 2010
is estimated to be 1.18 billion metric tons.  During this period, it
is estimated that the amount of scrap metal used in steel production will
account for approximately 239 mmt, approximately 20% of the steel
output.  In China the amount of scrap metal used in crude steel
production in 2008 accounts for approximately 18.4% of the total.
 
 CBI China
Co., Ltd., the largest integrated service provider in Chinese commodity markets,
estimates scrap steel supply in 2009 will reach approximately 46.79 mmt, nearly
half of the overall demand of 83.58 mmt this year assuming that China manages to
maintain 8% GDP growth rate in 2009.
 
 In China,
the scrap metal recycling industry is highly fragmented with no dominant
player.  Crude steel producers operate scrap steel processing
facilities which satisfy a portion of the production
demand.  According to China Association of Metalscrap Utilization in
November 2008, presently a dozen scrap steel companies have the capacity to
process 200,000 metric tons annually.  There are more than 2,000 scrap
metal recycling companies; the average volume for each producer is less than
11,000 metric tons per year.
 
 The PRC
identified the scrap metal recycling industry as a way to minimize the use of
scarce natural resources and reduce energy consumption and emissions in the
steel manufacturing industry.  In July 2005, China’s “Steel Industry
Development Policy” recommended domestic steel producers increase the use of
scrap metal in the production of steel.  The PRC also implemented a
preferential tax policy which provides recyclers an exemption from income tax in
2008 and 2009 followed by a 50% income tax exemption for 2010 through
2012.  In February 2006, The National Development and Reform
Commission of PRC (“NDRC”), The Ministry of Science and Technology of PRC, and
The Ministry of Environmental Protection of the PRC jointly issued the
“Automotive Products Recycling Technology Policy”.  Under the terms of
this policy, auto makers are charged with the responsibility to recover and
recycle abandoned vehicles.  We believe that this newly promulgated
law will increase the availability of raw materials necessary for scrap metal
recycling.
  Development
of Scrap Metal Recycling Facility
 
 Scrap
metal recycling operations encompass buying, processing and selling of ferrous
and non-ferrous recycled metals. We are in the early phases of planning and
constructing a scrap metal recycling facility in the Banqiao Industrial Zone of
Lianyungang Economic Development Zone in Jiangsu Province on 32 acres of
land.  The Banqiao Industrial Zone is located approximately 3 miles
from Lianyungang Port, one of the ten largest deep water seaports in China, and
one of the top 100 deep water ports in the world with annual cargo-handling
capacity of approximately 120 mmt per year. Upon completion of construction, the
full scrap metal recycling facility is expected to have a production capacity of
1 mmt of recycled scrap metal annually.
  - 2
-
  Total
cost of construction of the scrap metal recycling facility including land is
expected to be approximately $24.2 million.  Construction is expected to be
completed in the fourth quarter of 2009.  When completed, the
recycling facility is expected to include a scrap metal cutting production line,
a large scrap metal cutting line, light thin waste/thin metal packing line and a
preproduction facility that includes an automobile dismantling line, scrap metal
grasping machines, a water transportation dock, strap transportation, machines,
factory, administrative and operations offices, material pile stock and load
meters.  We plan to finance construction of this facility through a
combination of net proceeds from an offering of our securities completed in
August 2008, cash flow as well as vendor and debt financing.  The
recycling facility is expected to commence operations in the fourth quarter of
2009.
 
 Products
and Customers
 
 Metal
Ore Operations
 
 Products
 
 Our metal
ore business buys and sells the following metal ores:
 
 ·
              Iron
      Ore
              Raw
      material used to make pig iron, one of the main raw materials used to make
      steel. Approximately 98% of the mined iron ore is used to make
      steel;·
              Chrome
      Ore
              Used
      to reinforce steel and, in association with high carbon, gives resistance
      to wear and abrasion.  It is also used in heat-resisting steels
      and high duty cast irons;·
              Nickel
      Ore
              A
      silvery-white metal that takes on a high polish. It belongs to the
      transition metals, and is hard and ductile. It occurs most usually in
      combination with sulfur and iron in pentlandite, with sulfur in millerite,
      with arsenic in the mineral nickeline, and with arsenic and sulfur in
      nickel glance;·
              Copper
      Ore
              Used
      as a heat conductor, an electrical conductor, as a building material, and
      as a constituent of various metal alloys;·
              Manganese
      Ore
              A
      chemical element that is used industrially as pigments and as
      oxidation chemicals; and·
              Steel
      Billet
              A
      section of steel used for rolling into bars, rods and
      sections.
  Customers.
 
 We sell
our products to steel producing mills, steelmakers, foundries and brokers who
aggregate materials for other large users.  Most of our customers
purchase ore through negotiated spot sales contracts which establishes the
quantity purchased for the month.  The price we charge for ore depends
upon market demand and transportation costs, as well as quality and grade of the
scrap.  In many cases, our selling price also includes the cost of
transportation to the destination port.
  A summary
of revenue generated from our significant customers in 2008 and 2007 is found in
the table below.
 
 Customer
                
                2008
                
                
                2007Henan
      Jiyuan Iron and Steel (Group) Co., Ltd.
                
                
                0
                %
                
                
                30.0
                %Henan
      Chaoyang Steel Co., Ltd.
                
                
                0
                %
                
                
                33.0
                %China-Base
      Ningbo Foreign Trade Co., Ltd.
                
                
                34.0
                %
                
                
                28.0
                %Tianjin
      No. 1 Steel Group.,Ltd.
                
                
                28.0
                %
                
                
                0
                %Lianyungang
      Jiaxin Resources Import & Export Co.,Ltd.
                
                
                19.6
                %
                
                
                0
                %
  Scrap
Metal Operations
  We plan
to diversify our business into the scrap metal recycling industry and toward
that end we are constructing a scrap metal recycling facility capable of
producing 1 million metric tons of recycled metal per year.  The
facility is located in the Banqiao Industrial Zone of Lianyungang Economic
Development Zone in the Jiangsu province of the PRC.  Upon completion of
our metal recycling facility, we will seek to recycle automobiles, machinery,
building materials, dismantled ships and various other scrap metals and will
sell and distribute recycled scrap metal to the metal refinery industry
utilizing our existing network of metal ore customers in the PRC.  We
believe this scrap metal recycling facility can increase our operating
results.  Construction of the scrap metal recycling facility including
land is expected to cost approximately $24.2 million.  We expect to
commence operations of this facility when construction is completed which is
anticipated to be in the fourth quarter of 2009.  When completed, the
recycling facility is expected to include a scrap metal cutting production line,
a large scrap metal cutting line, light thin waste/thin metal packing line and a
preproduction facility that includes an automobile dismantling line, scrap metal
grasping machines, a water transportation dock, strap transportation machines,
factory, administrative and operations offices, material pile stock and load
meters.  We plan to finance construction of this facility through a
combination of net proceeds from an offering of our securities completed in
August 2008, cash flow as well as vendor and debt
financing.
   - 3
-
  Competition
  Our metal ore operations compete with a
number of metal ore providers and once operational, our scrap metal recycling
business will compete with existing scrap metal manufactures who operate their
own recycling facilities, new entrants into the scrap metal recycling business
and existing operators.
  Sources
and Availability of Raw Materials
 
 Iron
Ore
 
 We obtain
ferrous and non-ferrous ore from a variety of sources including mining
companies, brokers and other intermediaries.  A summary of our
significant suppliers in 2008 and 2007 is included in the following
table.
 
 Suppliers
                  Location
                  2008
                  2007Lianyungang
      Jiaxin Resources Import & Export Co., Ltd.
                  China
                  21.6%
                  -%Sipex
      for Investment and Promotion of Exports Co., Ltd.
                  Libya
                  10.4%
                  41.0%A3
      Una Mining Corporation
                  Philippines
                  -%
                  39.0%D.A.S.S
      Makine Insaat Madencilik Ltd.
                  Turkey
                  0.3%
                  12.0%Beston
      Holdings Group Ltd.
                  Hong
      Kong
                  14.4%
                  -%Hornor
      Resources (International) Co.,Ltd.
                  Hong
      Kong
                  15.6%
                  -%Tianjin
      Jiaxuanhua
                  China
                  28.8%
                  -%
 
 Metal
Recycling
 
 We will
begin to purchase scrap metal from the following sources prior to commencement
of operations at our proposed recycling plant when we complete construction of
the facility:
 
 ·
              obsolete
      metal which is sourced from metal dealers, retail scrap metal dealers,
      auto wreckers, demolition firms, railroads and others who generate scrap
      metal or non-ferrous metals; and·
              industrial
      generated materials which are sourced mainly from manufacturers who
      generate off cuts or by-products made from scrap metal, iron or
      non-ferrous metals, known as prompt or industrial
  metal.
 
 In most
cases, we may enter into contracts with our suppliers of raw materials and our
customers for the sale of our processed scrap metals.  Among other
things, the supply of these raw materials can be dependent on prevailing market
conditions, including the buy and sell prices of ferrous and non-ferrous
recycled metals.  In periods of low prices, suppliers may elect to
hold metal to wait for higher prices or intentionally slow their metal
collection activities.  In addition, a global slowdown of industrial
production would reduce the supply of industrial grades of metal to the metal
recycling industry, potentially reducing the amount of metals available for us
to recycle.
  The
Share Purchase Agreement and the Stock Option Agreement with the Former
Stockholder of Armco
  On June
27, 2008, Armco entered into an agreement to be acquired by
us.  Following the close of the acquisition we changed our former
corporate name Cox Distributing, Inc. to China Armco Metals, Inc.  We
acquired all of the issued and outstanding capital stock (the “Armco Shares”) of
Armco & Metawise (HK), Ltd., a limited liability company established under
the laws of Hong Kong (“Armco”) pursuant to a share purchase agreement (the
“Share Purchase Agreement”). Armco owns 100% of the capital stock of each of
Armet (Lianyungang) Renewable Resources Co., Ltd. (a/k/a Armet (Lianyungang)
Scraps Co., Ltd.)  (“Armet Lianyungang”) and Henan Armco &
Metawise Trading Co., Ltd. (“Henan Armco”), both of which are limited liability
companies established under the laws of the People’s Republic of China
(“PRC”).
   - 4
-
  Under the
Share Purchase Agreement, we purchased from the Armco Shareholder 100% of the
issued and outstanding shares of Armco’s capital stock, all of which were owned
by Feng Gao, the sole shareholder of Armco for $6,890,000 by delivery of a
promissory note.  In addition, we issued to Ms. Gao a stock option
entitling Ms. Gao to purchase 5,300,000 shares of our common stock, par value
$.001 per share (the “common stock”) at a price of $1.30 per share and 2,000,000
shares at $5.00 per share.  We had the right to redeem 7,694,000
shares of common stock held by Stephen E. Cox within 30 days after the Share
Purchase.  On July 25, 2008, we entered into an amendment to the June
27, 2008 Share Purchase Agreement to extend this redemption right until August
15, 2008. On August 12, 2008, Ms. Gao exercised her option to purchase 5,300,000
shares of the Common Stock, $0.001 par value per share and cancelled the June
25, 2008 Promissory Note in the principal amount of $6,890,000 in payment of the
purchase of the 5,300,000 shares.
 
 As a
result of the consummation of the Share Purchase, Armco now is a wholly-owned
subsidiary of our Company.
 
 Gao
Stock Option
 
 On June
27, 2008, we issued to Ms. Gao a stock option entitling her to purchase
5,300,000 shares of our common stock, par value $.001 per share at a price of
$1.30 per share which expires on September 30, 2008 and 2,000,000 shares of our
common stock at $5.00 per share which expires on June 30, 2010 (the “Gao
Option”).  On August 12, 2008, Ms. Gao exercised her option to
purchase and we issued 5,300,000 shares of our common stock in exchange for
the cancellation of our $6,890,000 promissory note owed to Ms.
Gao.  Accordingly, the 5,300,000 shares issued to Ms. Gao represent
approximately 52.51% of the issued and outstanding shares of our common
stock giving effect to the cancellation of 7,694,000 shares owned by
Stephen E. Cox as provided for in the Share Purchase Agreement.
 
 Earn-In
of Shares by Kexuan Yao
 
 Pursuant
to a call option agreement, dated June 27, 2008, as amended on December 18,
2008, entered into between our Chairman and Chief Executive Officer, Kexuan Yao
and Feng Gao, Mr. Yao exercised the call right to acquire up to 5,300,000 shares
of our common stock (the “Earn In Shares”) from Ms. Gao.
 
 Consulting
Agreements
  On June
27, 2008, Armco entered into exclusive consulting agreements with each of its
subsidiaries, Armet Lianyungang and Henan Armco. Under the consulting
agreements, Armco agreed to advise, consult, manage, operate and provide certain
financial accommodations to Armet Lianyungang and Henan Armco, respectively, in
exchange for their payment of all of their operating cash flow to
Armco.
 
 Spin
Out
 
 On
December 30, 2008, we entered into an Agreement of Assumption and Release and
Bill of Sale (“Spin-Out”) with our former Chairman and Chief Executive Officer,
Stephen E. Cox, with respective to a U.S. based fertilizer distribution business
(“Legacy Business”). As a result of the Spin-out, Mr. Cox assumed all the assets
and liabilities of the Legacy Business and cancelled 6,200 shares of our common
stock. Therefore, we no longer engage in the fertilizer distribution
business.
 
 Organizational
History of Armco & and its Subsidiaries
 
 Armco
& Metawise (HK), Ltd. (“Armco”), a Hong Kong limited liability company, was
established on July 13, 2001.  On June 6, 2002, Henan Armco &
Metawise Trading Co., Ltd. (“Henan Armco”), a Chinese limited liability company,
was formed with registered capital of $1.55 million.  In March 2008,
Henan Armco was restructured as a wholly owned subsidiary of Armet (Lianyungang)
Renewable Resources Co., Ltd. (“Armet Lianyungang”).  In December
2008, Armco transferred its ownership of Armco Lianyungang to China Armco so
that Armco Lianyungang became a wholly owned subsidiary of China
Armco.
 
 On
January 9, 2007 Armet (Lianyungang) Renewable Resources Co., Ltd. (“Armet
Lianyungang”), a Chinese limited liability company, was formed as a wholly owned
foreign enterprise by Armco with registered capital of $15
million.  Armet Lianyungang is a wholly owned subsidiary of
Armco.
 
 Employees
 
 As of
March 31, 2009, we have 30 full-time employees, including 1 employee
in the United States and 29 in the PRC.  For our employees in the
PRC, we are required to contribute a portion of their total salaries to the
Chinese government’s social insurance funds, including medical insurance,
unemployment insurance and job injuries insurance, and a housing assistance
fund, in accordance with relevant regulations.
 
 - 5
-
 
 
 GOVERNMENT
REGULATION
 
 Despite
efforts to develop the legal system over the past several decades, including but
not limited to legislation dealing with economic matters such as foreign
investment, corporate organization and governance, commerce, taxation and trade,
the PRC continues to lack a comprehensive system of laws. Further, the laws that
do exist in the PRC are often vague, ambiguous and difficult to enforce, which
could negatively affect our ability to do business in China and compete with
other companies in our segments.
 
 In
September 2006, the Ministry of Commerce (“MOFCOM”) promulgated the
Regulations on Foreign Investors' Mergers and Acquisitions of Domestic
Enterprises (M&A Regulations) in an effort to better regulate foreign
investment in China. The M&A Regulations were adopted in part as a needed
codification of certain joint venture formation and operating practices, and
also in response to the government's increasing concern about protecting
domestic companies in perceived key industries and those associated with
national security, as well as the outflow of well-known trademarks, including
traditional Chinese brands.
 
 As a U.S.
based company doing business in China and Hong Kong, we seek to comply with all
PRC laws, rules and regulations and pronouncements, and endeavor to obtain all
necessary approvals from applicable PRC regulatory agencies such as the MOFCOM,
the State Assets Supervision and Administration Commission ("SASAC"), the State
Administration for Taxation, the State Administration for Industry and Commerce,
the China Securities Regulatory Commission ("CSRC"), the State Administration of
Foreign Exchange ("SAFE") and all applicable laws of Hong Kong.
 
 Economic Reform
Issues
 
 Since
1979, the Chinese government has reformed its economic systems. Many reforms are
unprecedented or experimental; therefore they are expected to be refined and
improved. Other political, economic and social factors, such as political
changes, changes in the rates of economic growth, unemployment, inflation, or
the disparities in per capita wealth between regions within China, could lead to
further readjustment of the reform measures. We cannot predict if this refining
and readjustment process may negatively affect our operations in future periods,
particularly in relation to future policies including but not limited to foreign
investment, taxation, inflation and trade.
 
 Currency
 
 The value
of the Renminbi (“RMB”), the main currency used in China, fluctuates and is
affected by, among other things, changes in China’s political and economic
conditions. The conversion of RMB into foreign currencies such as the U.S.
dollar have been generally based on rates set by the People’s Bank of China,
which are set daily based on the previous day’s interbank foreign exchange
market rates and current exchange rates on the world financial
markets.
 
 Environment
  We are
currently subject to numerous Chinese provincial and local laws and regulations
relating to the protection of the environment which are highly relevant to our
metal ore business and the scrap metal recycling facility we intend to
construct. These laws continue to evolve and are becoming increasingly
stringent. The ultimate impact of complying with such laws and regulations is
not always clearly known or determinable because regulations under some of these
laws have not yet been promulgated or are undergoing revision.  In
2007 we did not spend any funds related to compliance with environmental
regulations.
 
 Recycling
 
 In
February 2006, The National Development and Reform Commission of PRC (“NDRC”),
The Ministry of Science and Technology of PRC, and The Ministry of Environmental
Protection of the PRC jointly issued the “Automotive Products Recycling
Technology Policy”.  Under the terms of this policy, auto makers are
charged with the responsibility to recover and recycle abandoned
vehicles.  We believe that this newly promulgated law will increase
the availability of raw materials necessary for scrap metal
recycling.
 
 
 ITEM 1A. RISK FACTORS
 
 The
risk factors in this section describe the major risks to our business,
prospects, results of operations, financial condition or cash flows, and should
be considered carefully. In addition, these factors constitute our cautionary
statements under the Private Securities Litigation Reform Act of 1995 and could
cause our actual results to differ materially from those projected in any
forward-looking statements (as defined in such act) made in this Annual Report
on Form 10-K. Investors should not place undue reliance on any such
forward-looking statements. Any statements that are not historical facts and
that express, or involve discussions as to, expectations, beliefs, plans,
objectives, assumptions or future events or performance (often, but not always,
through the use of words or phrases such as “will likely result,” “are expected
to,” “will continue,” “is anticipated,” “estimated,” “intends,”
“plans,”“believes” and “projects”) may be forward-looking and may involve
estimates and uncertainties which could cause actual results to differ
materially from those expressed in the forward-looking statements.
 - 6
-
   Further,
any forward-looking statement speaks only as of the date on which such statement
is made, and we undertake no obligation to update any forward-looking statement
to reflect events or circumstances after the date on which such statement is
made or to reflect the occurrence of anticipated or unanticipated events or
circumstances. New factors emerge from time to time, and it is not possible for
us to predict all of such factors. Further, we cannot assess the impact of each
such factor on our results of operations or the extent to which any factor, or
combination of factors, may cause actual results to differ materially from those
contained in any forward-looking statements.
  Risks
Related To Our Business
 
 WE
MAY NOT BE ABLE TO OBTAIN SUFFICIENT CAPITAL TO FUND OUR PLANNED EXPANSION AND
CONSTRUCTION OF A SCRAP STEEL RECYCLING FACILITY AND MAY BE FORCED TO LIMIT THE
SCOPE OF OUR OPERATIONS.
  If
adequate additional financing is not available on reasonable terms, we may not
be able to undertake the expansion of our metal ore business or the construction
of the scrap metal recycling facility and purchase additional machinery and
equipment for the operations of this facility and we would have to modify our
business plans accordingly. There is no assurance that additional financing will
be available to us.
  In
connection with our planned expansion and construction of a scrap metal
recycling facility, we may experience increased capital needs and accordingly,
we may not have sufficient capital to fund these initiatives without additional
capital investments. Our capital needs will depend on numerous factors,
including (i) our profitability; (ii) the actual versus planned cost to
construct and equip the scrap metal recycling facility; (iii) the level of our
investment in research and development; and (iv) the amount of our
capital expenditures, including acquisitions. We cannot assure you that we
will be able to obtain capital in the future to meet our needs.
  If we
cannot obtain additional funding, we may be required to: (i) substantially
curtail our operations; (ii) limit our marketing efforts; (iii) abandon or delay
construction of the scrap metal facility; and (iii) decrease or eliminate
capital expenditures.  Such reductions could materially adversely affect
our business and our ability to compete.
  Even if
we do find a source of additional capital, we may not be able to negotiate
acceptable terms and conditions for obtaining the additional capital. Any future
capital investments could dilute or otherwise materially and adversely affect
the holdings or rights of our existing shareholders. In addition, new equity or
convertible debt securities issued by us to obtain financing could have rights,
preferences and privileges senior to our common stock. We cannot give any
assurance that any additional financing will be available to us, or if
available, will be on terms favorable to us.
  OUR
FUTURE OPERATING RESULTS MAY BE AFFECTED BY FLUCTUATIONS IN RAW MATERIAL PRICES.
WE MAY NOT BE ABLE TO PASS ON COST INCREASES TO CUSTOMERS.
  Our
operating profits may be negatively affected by fluctuations in the price of
metal ore. We are subject to short-term metal ore price volatility and may be
forced to purchase metal ore at higher prices and may be unable to pass the cost
increase of metal ore on to our customers. This may adversely affect gross
margins and profitability. Although our sales agreements with our customers
generally do not contain a provision that permits the parties to adjust the
contract price of the metal ore upward or downward, we have, in most cases fixed
price supply contracts for the metal ore we sell.
  OUR FUTURE NET
INCOME MAY BE AFFECTED BY UNCOLLECTIBLE ACCOUNTS RECEIVABLES AND INCREASING
CUSTOMER CREDIT RISK.
  Based on
the current market conditions, we changed our credit policy from requiring
payment in full upon delivery of the goods to extending credit terms of 1 to 6
months. This may expose us to certain customer credit risks related to the
collection of our accounts receivable. Our diversified client base includes a
large number of enterprises, from small and large businesses in China. Most of
our sales are on an open credit basis. We maintain reserves that we believe are
adequate to cover exposure for any uncollectible accounts receivables and
regularly review such reserves by considering factors such as write-off history,
aging analysis and any specific, known troubled accounts. If we become aware of
additional information related to the credit worthiness of a major customer, or,
if future actual default rates on accounts receivables in general differ from
those currently anticipated, we may have to adjust our reserves, which could
affect our consolidated net income in the period the adjustments are made. More
importantly, we may incur losses from the defaults of
payments.
  - 7
-
  WE
NEED TO MANAGE GROWTH IN OPERATIONS TO MAXIMIZE OUR POTENTIAL GROWTH AND ACHIEVE
OUR EXPECTED REVENUES AND OUR FAILURE TO MANAGE GROWTH WILL CAUSE A DISRUPTION
OF OUR OPERATIONS RESULTING IN THE FAILURE TO GENERATE REVENUE.
  In order
to maximize potential growth in our current and potential markets, we believe
that we must expand our sales and marketing operations and enter into the scrap
metal business by constructing a recycling facility. This expansion will place a
significant strain on our management and our operational, accounting, and
information systems. We expect that we will need to continue to improve our
financial controls, operating procedures, and management information systems. We
will also need to effectively recruit, train, motivate, and manage our
employees. Our failure to manage our growth could disrupt our operations and
ultimately prevent us from generating the revenues we expect.
  WE
CANNOT ASSURE YOU THAT OUR GROWTH STRATEGY WILL BE SUCCESSFUL WHICH MAY RESULT
IN A NEGATIVE IMPACT ON OUR GROWTH, FINANCIAL CONDITION, RESULTS OF OPERATIONS
AND CASH FLOW.
 
 One of
our strategies is to grow through increasing the distribution and sales of our
metal ore products by penetrating existing markets in the PRC and entering new
geographic markets in the PRC. However, many obstacles to entering such new
markets exist, including, but not limited to, shipping and delivery costs, costs
associated with marketing efforts and maintaining attractive foreign exchange
ratios. We cannot, therefore, assure you that we will be able to successfully
overcome such obstacles and establish our products in any additional markets.
Our inability to implement this organic growth strategy successfully may have a
negative impact on our growth, future financial condition, results of operations
or cash flows.
 
 WE
CANNOT ASSURE THAT WE WILL SUCCESSFULLY COMPLETE CONSTRUCTION OF OUR PROPOSED
SCRAP STEEL RECYCLING FACILITY, OR, EVEN IF CONSTRUCTED, THAT OUR PROPOSED
RECYCLING FACILITY WILL CONTRIBUTE TO OUR OVERALL PROFITABILITY, WHICH MAY
ADVERSELY AFFECT OUR RESULTS OF OPERATIONS AND THE MARKET PRICE FOR OUR
SHARES.
  We expect
to increase our revenue by selling recycled scrap metal to be processed in our
scrap metal recycling facility which we intend to build. However, we will
require additional financing in order to construct the facility, and we have not
entered into agreements for all aspects of construction necessary to complete
construction of the facility. Moreover, the operation of a scrap metal recycling
facility is equipment and labor intensive and depends on a ready source of raw
unprocessed scrap metal.  Thus, even if constructed, we can provide no
assurance that we can generate significant revenues from the operation of this
facility, or that its operations will contribute to our overall profitability.
Delays in construction and/or unanticipated equipment and/or labor and raw
material costs and delays could have an adverse effect on our results of
operations, in which event the market price for our shares may be adversely
affected.
  WE
CANNOT ASSURE YOU THAT OUR ACQUISITION GROWTH STRATEGY WILL BE SUCCESSFUL
RESULTING IN OUR FAILURE TO MEET GROWTH AND REVENUE EXPECTATIONS.
  In
addition to our organic growth strategy, we may seek to grow through strategic
acquisitions. We may pursue opportunities to acquire businesses in the PRC that
are complementary or related in product lines and business structure to us. We
may not be able to locate suitable acquisition candidates at prices that we
consider appropriate or to finance acquisitions on terms that are satisfactory
to us. If we do identify an appropriate acquisition candidate, we may not be
able to negotiate successfully the terms of an acquisition, or, if the
acquisition occurs, integrate the acquired business into our existing business.
Acquisitions of businesses or other material operations may require debt
financing or additional equity financing, resulting in leverage or dilution of
ownership. Integration of acquired business operations could disrupt our
business by diverting management away from day-to-day operations. The
difficulties of integration may be increased by the necessity of coordinating
geographically dispersed organizations, integrating personnel with disparate
business backgrounds and combining different corporate cultures. We also may not
be able to maintain key employees or customers of an acquired business or
realize cost efficiencies or synergies or other benefits we anticipated when
selecting our acquisition candidates. In addition, we may need to record
write-downs from future impairments of intangible assets, which could reduce our
future reported earnings. At times, acquisition candidates may have liabilities
or adverse operating issues that we fail to discover through due diligence prior
to the acquisition. In addition to the above, acquisitions in the PRC, including
of state owned businesses, will be required to comply with laws of the PRC, to
the extent applicable. There can be no assurance that any given proposed
acquisition will be able to comply with PRC requirements, rules and/or
regulations, or that we will successfully obtain governmental approvals which
are necessary to consummate such acquisitions, to the extent required. If our
acquisition strategy is unsuccessful, we will not grow our operations and
revenues at the rate that we anticipate.
   - 8
-
 CERTAIN
AGREEMENTS TO WHICH WE ARE A PARTY AND WHICH ARE MATERIAL TO OUR OPERATIONS LACK
VARIOUS LEGAL PROTECTIONS WHICH ARE CUSTOMARILY CONTAINED IN SIMILAR CONTRACTS
PREPARED IN THE UNITED STATES.
  Our
subsidiaries include companies organized under the laws of the PRC and all of
their business and operations are conducted in China and Hong Kong. We are a
party to certain contracts related to our operations in China and Hong Kong.   While these
contracts contain the basic business terms of the agreements between the
parties, these contracts do not contain certain clauses which are customarily
contained in similar contracts prepared in the U.S., such as representations and
warranties of the parties, confidentiality and non-compete clauses, provisions
outlining events of defaults, and termination and jurisdictional
clauses.  Because our contracts in China omit these customary clauses,
notwithstanding the differences in Chinese and U.S. laws, we may not have the
same legal protections as we would if the contracts contained these additional
clauses.  We anticipate that our Chinese and Hong Kong subsidiaries
will likely enter into contracts in the future which will likewise omit these
customary legal protections.  While we have not been subject to any
adverse consequences as a result of the omission of these customary clauses, and
we consider the contracts to which we are a party to contain all the material
terms of our business arrangements with the other party, future events may occur
which lead to a dispute which could have been avoided if the contracts included
customary clauses in conformity with U.S. standards.  Contractual
disputes which may arise from this lack of legal protection could divert
management's time from the operation of our business, require us to expend funds
attempting to settle a possible dispute, limit the time our management would
otherwise devote to the operation of our business, and have a material adverse
effect on our business, financial condition and results of
operations.
  WE
DEPEND ON OUR KEY MANAGEMENT PERSONNEL AND THE LOSS OF THEIR SERVICES COULD
ADVERSELY AFFECT OUR BUSINESS.
  We place
substantial reliance upon the efforts and abilities of our executive officers,
Yao Kexuan, our Chairman and Chief Executive Officer and Fengtao Wen, our Chief
Financial Officer.  The loss of the services of any of our executive
officers could have a material adverse effect on our business, operations,
revenues or prospects.  We do not maintain key man life insurance on
the lives of these individuals.
  WE
MAY NEVER PAY ANY DIVIDENDS TO SHAREHOLDERS.
  We have
not declared any cash dividends on our common stock since we completed the
purchase of Armco pursuant to the Share Purchase Agreement and our board of
directors does not intend to declare or distribute dividends in the near
future.  The declaration, payment and amount of any future dividends
will be made at the discretion of the board of directors, and will depend upon,
among other things, the results of our operations, cash flows and financial
condition, operating and capital requirements, and other factors as the board of
directors considers relevant.  There is no assurance that future
dividends will be paid, and, if dividends are paid, there is no assurance with
respect to the amount of any such dividend.
  MANAGEMENT
EXERCISES SIGNIFICANT CONTROL OVER MATTERS REQUIRING SHAREHOLDER APPROVAL WHICH
MAY RESULT IN THE DELAY OR PREVENTION OF A CHANGE IN OUR CONTROL.
  Mr.
Kexuan Yao, our Chairman and Chief Executive Officer, would have voting power
equal to approximately 52.51% of our voting securities if he exercises his right
and fulfills the conditions to exercise an option for 5,300,000 shares of our
common stock. As a result, management through such stock ownership rights
has the ability to exercise significant control over all matters requiring
shareholder approval, including the election of directors and approval of
significant corporate transactions.  This concentration of ownership
in management may also have the effect of delaying or preventing a change in
control of us that may be otherwise viewed as beneficial by shareholders other
than management.
  WE
MAY INCUR SIGNIFICANT COSTS TO ENSURE COMPLIANCE WITH UNITED STATES CORPORATE
GOVERNANCE AND ACCOUNTING REQUIREMENTS.
  We may
incur significant costs associated with our public company reporting
requirements, costs associated with newly applicable corporate governance
requirements, including requirements under the Sarbanes-Oxley Act of 2002 and
other rules implemented by the Securities and Exchange Commission. We expect all
of these applicable rules and regulations to significantly increase our legal
and financial compliance costs and to make some activities more time consuming
and costly.  We also
expect that these applicable rules and regulations may make it more difficult
and more expensive for us to obtain director and officer liability insurance and
we may be required to accept reduced policy limits and coverage or incur
substantially higher costs to obtain the same or similar coverage.  As
a result, it may be more difficult for us to attract and retain qualified
individuals to serve on our board of directors or as executive
officers.  We are currently evaluating and monitoring developments
with respect to these newly applicable rules, and we cannot predict or estimate
the amount of additional costs we may incur or the timing of such
costs.
 - 9
-
 WE
MAY NOT BE ABLE TO MEET THE ACCELERATED FILING AND INTERNAL CONTROL REPORTING
REQUIREMENTS IMPOSED BY THE SECURITIES AND EXCHANGE COMMISSION RESULTING IN A
POSSIBLE DECLINE IN THE PRICE OF OUR COMMON STOCK AND OUR INABILITY TO OBTAIN
FUTURE FINANCING.
  As
directed by Section 404 of the Sarbanes-Oxley Act, as amended by SEC Release No.
33-8934 on June 26, 2008, the Securities and Exchange Commission adopted rules
requiring each public company to include a report of management on the company's
internal controls over financial reporting in its annual reports.  In
addition, the independent registered public accounting firm auditing a company's
financial statements must also attest to and report on management's assessment
of the effectiveness of the company's internal controls over financial reporting
as well as the operating effectiveness of the company's internal controls.
Commencing with its annual report for the year ending December 31, 2009, we will
be required to include a report of management on its internal control over
financial reporting.  The internal control report must include a
statement
  · ·
                Of
      management’s responsibility for establishing and maintaining adequate
      internal control over its financial reporting;·
                Of
      management’s assessment of the effectiveness of its internal control over
      financial reporting as of year end; and·
                Of
      the framework used by management to evaluate the effectiveness of our
      internal control over financial
reporting.
 
 Furthermore,
in the following year, our independent registered public accounting
firm is required to file its attestation report separately on our
internal control over financial reporting on whether it believes that we have
maintained, in all material respects, effective internal control over financial
reporting.
  While we
expect to expend significant resources in developing the necessary documentation
and testing procedures required by Section 404 of the Sarbanes-Oxley Act, there
is a risk that we may not be able to comply timely with all of the requirements
imposed by this rule.  In the event that we are unable to receive a
positive attestation from our independent registered public accounting firm with
respect to our internal controls, investors and others may lose confidence in
the reliability of our financial statements and our stock price and ability to
obtain equity or debt financing as needed could suffer.
  In
addition, in the event that our independent registered public accounting firm is
unable to rely on our internal controls in connection with its audit of our
financial statements, and in the further event that it is unable to devise
alternative procedures in order to satisfy itself as to the material accuracy of
our financial statements and related disclosures, it is possible that we would
be unable to file our Annual Report on Form 10-K with the Securities and
Exchange Commission, which could also adversely affect the market price of our
common stock and our ability to secure additional financing as
needed.
  WE
MAY HAVE DIFFICULTY RAISING NECESSARY CAPITAL TO FUND OPERATIONS AS A RESULT OF
MARKET PRICE VOLATILITY FOR OUR SHARES OF COMMON STOCK.
  In recent
years, the securities markets in the United States have experienced a high level
of price and volume volatility, and the market price of securities of many
companies have experienced wide fluctuations that have not necessarily been
related to the operations, performances, underlying asset values or prospects of
such companies.  For these reasons, our shares of common stock can
also be expected to be subject to volatility resulting from purely market forces
over which we will have no control.  If we are able to complete
construction of our planned scrap metal recycling facility and expand the
distribution and sales of our metal ore products, we may require additional
financing to continue to develop and exploit existing and new products and
services related to these aspects of our business and to expand into new
markets.  The exploitation of our business may, therefore, be
dependent upon our ability to obtain financing through debt and equity or other
means.
  Risks
Related To Doing Business in China
  A
SUBSTANTIAL PORTION OF OUR ASSETS AND OPERATIONS ARE LOCATED IN THE PRC AND ARE
SUBJECT TO CHANGES RESULTING FROM THE POLITICAL AND ECONOMIC POLICIES OF THE
CHINESE GOVERNMENT.
  - 10
-
 Our
business operations could be restricted by the political environment in the
PRC.  The PRC has operated as a socialist state since 1949 and is
controlled by the Communist Party of China.  In recent years, however,
the government has introduced reforms aimed at creating a "socialist market
economy" and policies have been implemented to allow business enterprises
greater autonomy in their operations.  Changes in the political
leadership of the PRC may have a significant effect on laws and policies related
to the current economic reform programs, other policies affecting business and
the general political, economic and social environment in the PRC, including the
introduction of measures to control inflation, changes in the rate or method of
taxation, the imposition of additional restrictions on currency conversion and
remittances abroad, and foreign investment.  Moreover, economic
reforms and growth in the PRC have been more successful in certain provinces
than in others, and the continuation or increases of such disparities could
affect the political or social stability of the PRC.
  Although
we believe that the economic reform and the macroeconomic measures adopted by
the Chinese government have had a positive effect on the economic development of
China, the future direction of these economic reforms is uncertain and the
uncertainty may decrease the attractiveness of our company as an investment,
which may in turn result in a decline in the trading price of our common
stock.
  WE
CANNOT ASSURE YOU THAT THE CURRENT CHINESE POLICIES OF ECONOMIC REFORM WILL
CONTINUE BECAUSE OF THIS UNCERTAINTY, THERE ARE SIGNIFICANT ECONOMIC RISKS
ASSOCIATED WITH DOING BUSINESS IN CHINA.
  Although
the majority of productive assets in China are owned by the Chinese government,
in the past several years the government has implemented economic reform
measures that emphasize decentralization and encourages private economic
activity.  In keeping with these economic reform policies, the PRC has
been openly promoting business development in order to bring more business into
the PRC.  Because these economic reform measures may be inconsistent
or ineffective, there are no assurances that:
  ·
                the
      Chinese government will continue its pursuit of economic reform
      policies;·
                economic
      policies, even if pursued, will be successful;·
                policies
      will not be significantly altered from time to time; or·
                operations
      in China will not become subject to the risk of
      nationalization.
  We cannot
assure you that we will be able to capitalize on these economic reforms,
assuming the reforms continue.  Because our business model is
dependent upon the continued economic reform and growth in China, any change in
Chinese government policy could materially adversely affect our ability to
continue to expand our business. China's economy has experienced significant
growth in the past decade, but such growth has been uneven across geographic and
economic sectors and has recently been slowing.  Even if the Chinese
government continues its policies of economic reform, there are no assurances
that economic growth in China will continue or that we will be able to take
advantage of these opportunities in a fashion that will provide financial
benefit to us.
  THE
CHINESE GOVERNMENT EXERTS SUBSTANTIAL INFLUENCE OVER THE MANNER IN WHICH OUR
CHINESE SUBSIDIARIES MUST CONDUCT THEIR BUSINESS ACTIVITIES.
  The PRC
only recently has permitted provincial and local economic autonomy and private
economic activities.  The government of the PRC has exercised and
continues to exercise substantial control over virtually every sector of the
Chinese economy through regulation and state ownership.  Accordingly,
government actions in the future, including any decision not to continue to
support recent economic reforms and to return to a more centrally planned
economy or regional or local variations in the implementation of economic
policies, could have a significant effect on economic conditions in the PRC or
particular regions of the PRC, and could require us to divest ourselves of any
interest we then hold in our Chinese subsidiaries.
  FUTURE
INFLATION IN CHINA MAY INHIBIT ECONOMIC ACTIVITY IN CHINA.
  In recent
years, the Chinese economy has experienced periods of rapid expansion and high
rates of inflation.  During the past 10 years, the rate of inflation
in China has been as high as 20.7% and as low as -2.2%.  These factors
have led to the adoption by the PRC government, from time to time, of various
corrective measures designed to restrict the availability of credit or regulate
growth and contain inflation.  While inflation has been more moderate
since 1995, high inflation in the future could cause the PRC government to
impose controls on credit and/or prices, or to take other action, which could
inhibit economic activity in China.  Any actions by the PRC government
to regulate growth and contain inflation could have the effect of limiting our
ability to grow our revenues in future periods.
  - 11
-
 ANY
RECURRENCE OF SEVERE ACUTE RESPIRATORY SYNDROME, OR SARS, OR ANOTHER WIDESPREAD
PUBLIC HEALTH PROBLEM, COULD INTERRUPT OUR OPERATIONS.
  A renewed
outbreak of SARS or another widespread public health problem in China could have
a negative effect on our operations. Our operations may be impacted by a number
of health-related factors, including the following:
  ·
                quarantines
      or closures of some of our offices which would severely disrupt our
      operations;·
                the
      sickness or death of our key management and employees; or·
                a
      general slowdown in the Chinese
economy.
  An
occurrence of any of the foregoing events or other unforeseen consequences of
public health problems could result in a loss of revenues in future periods and
could impact our ability to conduct the operations of our Chinese subsidiaries
as they are presently conducted.  If we were unable to continue the
operations of our Chinese subsidiaries as they are now conducted, our revenues
in future periods would decline and our ability to continue as a going concern
could be in jeopardy.  If we were unable to continue as a going
concern, investors could lose their entire investment in our
company.
  RESTRICTIONS
ON CURRENCY EXCHANGE MAY LIMIT OUR ABILITY TO RECEIVE AND USE OUR REVENUES
EFFECTIVELY. WE MAY NOT HAVE READY ACCESS TO CASH ON DEPOSIT IN BANKS IN THE
PRC.
  Because a
substantial portion of our revenues are in the form of RMB, the main currency
used in China, any future restrictions on currency exchanges may limit our
ability to use revenue generated in RMB to fund any future business activities
outside China or to make dividend or other payments in U.S.
Dollars.  Although the Chinese government introduced regulations in
1996 to allow greater convertibility of the RMB for current account
transactions, significant restrictions still remain, including primarily the
restriction that foreign-invested enterprises may only buy, sell or remit
foreign currencies, after providing valid commercial documents, at those banks
authorized to conduct foreign exchange business.  In addition,
conversion of RMB for capital account items, including direct investment and
loans, is subject to government approval in China, and companies
are required to open and maintain separate foreign exchange accounts for
capital account items.  We cannot be certain that we could have ready
access to the cash should we wish to transfer it to bank accounts outside the
PRC nor can we be certain that the Chinese regulatory authorities will not
impose more stringent restrictions on the convertibility of the RMB, especially
with respect to foreign exchange transactions.
  WE
MAY BE UNABLE TO ENFORCE OUR RIGHTS DUE TO POLICIES REGARDING THE REGULATION OF
FOREIGN INVESTMENTS IN CHINA.
  The PRC's
legal system is a civil law system based on written statutes in which decided
legal cases have little value as precedent, unlike the common law system
prevalent in the United States.  The PRC does not have a
well-developed, consolidated body of laws governing foreign investment
enterprises.  As a result, the administration of laws and regulations
by government agencies may be subject to considerable discretion and variation,
and may be subject to influence by external forces unrelated to the legal merits
of a particular matter.  China's regulations and policies with respect
to foreign investments are evolving.  Definitive regulations and
policies with respect to such matters as the permissible percentage of foreign
investment and permissible rates of equity returns have not yet been
published.  Statements regarding these evolving policies have been
conflicting and any such policies, as administered, are likely to be subject to
broad interpretation and discretion and to be modified, perhaps on a
case-by-case basis.  The uncertainties regarding such regulations and
policies present risks which may affect our current operations and future plans
in China.  If we are unable to enforce any legal rights we may have
under our contracts or otherwise, our ability to compete with other companies in
the steel industry could be limited which could result in a loss of revenue in
future periods which could have a material adverse effect on our business,
financial condition and results of operations.
  RECENT
REGULATIONS RELATING TO OFFSHORE INVESTMENT ACTIVITIES BY CHINESE RESIDENTS MAY
INCREASE THE ADMINISTRATIVE BURDEN WE FACE AND CREATE REGULATORY UNCERTAINTIES
THAT MAY LIMIT OR ADVERSELY EFFECT OUR ABILITY TO COMPLETE A BUSINESS
COMBINATION WITH PRC COMPANIES.
  Regulations
were issued on November 1, 2005 (SAFE Circular 75), on September 2006 (2006
M&A Rules), and on May 29, 2007 (SAFE Implementation Notice 106), by the PRC
State Administration of Foreign Exchange, or SAFE, that will require approvals
from, and registrations with, PRC government authorities in connection with
direct or indirect offshore investment activities by PRC residents and PRC
corporate entities; however, there has been a recent announcement that such
regulations may be partially reversed. The SAFE regulations retroactively
require approval and registration of direct or indirect investments previously
made by PRC residents in offshore companies.
 - 12
-
  In the
event that a PRC shareholder with a direct or indirect stake in an
offshore parent company fails to obtain the required SAFE approval and make
the required registration, the PRC subsidiaries of such offshore parent company
may be prohibited from making distributions of profit to the offshore parent and
from paying the offshore parent proceeds from any reduction in capital, share
transfer or liquidation in respect of the PRC subsidiaries. Further, failure to
comply with the various SAFE approval and registration requirements described
above, as currently drafted, could result in liability under PRC law for foreign
exchange evasion. The regulations discussed could also result in the relevant
Chinese government authorities limiting or eliminating our ability to purchase
and retain foreign currencies in the future, which could limit or eliminate
our ability to pay dividends in the future. More recently, however, new
regulations have been drafted that would partially reverse the policy that
requires Chinese companies to obtain permission from SAFE to own overseas
corporate entities.
  As a
result of the lack of implementing rules, the uncertainty as to when the new
draft regulations will take effect, and uncertainty concerning the
reconciliation of the new regulations with other approval requirements, it
remains unclear how these existing regulations, and any future legislation
concerning offshore or cross-border transactions, will be interpreted, amended
and implemented by the relevant government authorities. We believe that our
acquisition of Armco complies with the relevant rules. As a result of the
foregoing, however, we cannot assure you that we or the former owners of Armco
or owners of a target business we might acquire, as the case may be, will be
able to complete the necessary approval, filings and registrations for a
proposed business combination if such approval were required. This may restrict
our ability to implement our business combination strategy and adversely affect
our operations.
  FAILURE
TO COMPLY WITH THE UNITED STATES FOREIGN CORRUPT PRACTICES ACT COULD SUBJECT US
TO PENALTIES AND OTHER ADVERSE CONSEQUENCES.
  We are
subject to the United States Foreign Corrupt Practices Act, which generally
prohibits United States companies from engaging in bribery or other prohibited
payments to foreign officials for the purpose of obtaining or retaining
business.  Corruption, extortion, bribery, pay-offs, theft and other
fraudulent practices occur from time-to-time in the PRC.  We can make
no assurance, however, that our employees or other agents will not engage in
such conduct for which we might be held responsible.  If our
employees or other agents are found to have engaged in such practices, we could
suffer severe penalties and other consequences that may have a material adverse
effect on our business, financial condition and results of
operations.
  WE
MAY HAVE DIFFICULTY ESTABLISHING ADEQUATE MANAGEMENT, LEGAL AND FINANCIAL
CONTROLS IN THE PRC.
  PRC
companies have in some cases, been resistant to the adoption of Western styles
of management and financial reporting concepts and practices, which include
sufficient corporate governance, internal controls and, computer, financial and
other control systems.  In addition, we may have difficulty in hiring
and retaining a sufficient number of qualified employees to work in the
PRC.  As a result of these factors, we may experience difficulties in
establishing management, legal and financial controls, collecting financial data
and preparing financial statements, books of account and corporate records and
instituting business practices that meet Western standards with future
acquisitions.  Therefore, we may, in turn, experience difficulties in
implementing and maintaining adequate internal controls. Any such
deficiencies, weaknesses or lack of compliance could have a material adverse
effect on our business, financial condition and results of
operations.
  Risks
Related To Our Securities
  OUR
ARTICLES OF INCORPORATION PROVIDE FOR INDEMNIFICATION OF OFFICERS AND DIRECTORS
AT OUR EXPENSE AND LIMIT THEIR LIABILITY WHICH MAY RESULT IN A MAJOR COST TO US
AND HURT THE INTERESTS OF OUR SHAREHOLDERS BECAUSE CORPORATE RESOURCES MAY BE
EXPENDED FOR THE BENEFIT OF OFFICERS AND/OR DIRECTORS.
  Our
articles of incorporation and applicable Nevada law provide for the
indemnification of our directors, officers, employees, and agents, under certain
circumstances, against attorney's fees and other expenses incurred by them in
any litigation to which they become a party arising from their association with
or activities on our behalf. We will also bear the expenses of such litigation
for any of our directors, officers, employees, or agents, upon such person's
written promise to repay us if it is ultimately determined that any such person
shall not have been entitled to indemnification. This indemnification policy
could result in substantial expenditures by us which we will be unable to
recoup.
  We have
been advised that, in the opinion of the SEC, indemnification for liabilities
arising under federal securities laws is against public policy as expressed in
the Securities Act and is, therefore, unenforceable. In the event that a claim
for indemnification for liabilities arising under federal securities laws, other
than the payment by us of expenses incurred or paid by a director, officer
or controlling person in the successful defense of any action, suit or
proceeding, is asserted by a director, officer or controlling person in
connection with the securities being registered, we will (unless in the opinion
of our counsel, the matter has been settled by controlling precedent) submit to
a court of appropriate jurisdiction, the question whether indemnification by us
is against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue. The legal
process relating to this matter if it were to occur is likely to be very costly
and may result in us receiving negative publicity, either of which factors is
likely to materially reduce the market and price for our shares, if such a
market ever develops.
   - 13
-
  CURRENTLY, THERE
IS NO PUBLIC MARKET FOR OUR SECURITIES, AND THERE CAN BE NO ASSURANCES THAT ANY
PUBLIC MARKET WILL EVER DEVELOP OR THAT OUR COMMON STOCK WILL BE QUOTED FOR
TRADING AND, EVEN IF QUOTED, IT IS LIKELY TO BE SUBJECT TO SIGNIFICANT PRICE
FLUCTUATIONS.
  We have a
trading symbol for our common stock, CNAM, which permits our shares to be quoted
on the over-the-counter bulletin board ("OTCBB"). However, our stock has been
thinly traded since approval of our quotation on the OTCBB by the Financial
Industry Regulartory Authority ("FINRA"). Consequently, there can be no
assurances as to whether:
  ·
              any
      market for our common stock will develop;·
              the
      prices at which our common stock will trade; or·
              the
      extent to which investor interest in us will lead to the development of an
      active, liquid trading market.
 
 Active
trading markets generally result in lower price volatility and more efficient
execution of buy and sell orders for investors.
  In
addition, our common stock is unlikely to be followed by any market analysts,
and there may be few institutions acting as market makers for our common stock.
Either of these factors could adversely affect the liquidity and trading price
of our common stock. Until our common stock is fully distributed and an orderly
market develops in our common stock, if ever, the price at which it trades is
likely to fluctuate significantly. Prices for our common stock will be
determined in the marketplace and may be influenced by many factors, including
the depth and liquidity of the market for shares of our common stock,
developments affecting our business, including the impact of the factors
referred to elsewhere in these risk factors, investor perception of us and
general economic and market conditions.  No assurances can be given that an
orderly or liquid market will ever develop for the shares of our common
stock.
  ANY
MARKET THAT DEVELOPS IN SHARES OF OUR COMMON STOCK WILL BE SUBJECT TO THE PENNY
STOCK REGULATIONS AND RESTRICTIONS WHICH WILL CREATE A LACK OF LIQUIDITY AND
MAKE TRADING DIFFICULT OR IMPOSSIBLE.
  The
trading of our securities, if any, will be in the OTCBB as maintained by FINRA.
As a result, an investor may find it difficult to dispose of, or to obtain
accurate quotations as to the price of our common stock.
  Rule
3a51-1 of the Securities Exchange Act of 1934 establishes the definition of a
"penny stock," for purposes relevant to us, as any equity security that has a
minimum bid price of less than $5.00 per share or with an exercise price of less
than $5.00 per share, subject to a limited number of exceptions which are
not available to us. It is likely that our shares will be considered to be penny
stocks for the immediately foreseeable future. This classification severely and
adversely affects any market liquidity for our common stock.
  For any
transaction involving a penny stock, unless exempt, the penny stock rules
require that a broker or dealer approve a person's account for transactions in
penny stocks and the broker or dealer receive from the investor a written
agreement to the transaction setting forth the identity and quantity of the
penny stock to be purchased.  In order to approve a person's account for
transactions in penny stocks, the broker or dealer must obtain financial
information and investment experience and objectives of the person and make a
reasonable determination that the transactions in penny stocks are suitable for
that person and that that person has sufficient knowledge and experience in
financial matters to be capable of evaluating the risks of transactions in penny
stocks.
  The
broker or dealer must also deliver, prior to any transaction in a penny stock, a
disclosure schedule prepared by the SEC relating to the penny stock market,
which, in highlight form, sets forth:
  ·
              the
      basis on which the broker or dealer made the suitability determination,
      and·
              that
      the broker or dealer received a signed, written agreement from the
      investor prior to the transaction.
 
  - 14
-
  Disclosure
also has to be made about the risks of investing in penny stocks in both public
offerings and in secondary trading and commissions’ payable to both the
broker-dealer and the registered representative, current quotations for the
securities and the rights and remedies available to an investor in cases
of fraud in penny stock transactions. Finally, monthly statements have to
be sent disclosing recent price information for the penny stock held in the
account and information on the limited market in penny stocks.
  Because
of these regulations, broker-dealers may not wish to engage in the
above-referenced necessary paperwork and disclosures and/or may encounter
difficulties in their attempt to sell shares of our common stock, which may
affect the ability of selling shareholders or other holders to sell
their shares in any secondary market and have the effect of reducing the
level of trading activity in any secondary market. These additional sales
practice and disclosure requirements could impede the sale of our common stock,
if and when our common stock becomes publicly traded. In addition, the liquidity
for our common stock may decrease, with a corresponding decrease in the price of
our common stock. Our shares, in all probability, will be subject to such penny
stock rules for the foreseeable future and our shareholders will, in all
likelihood, find it difficult to sell their common stock.
  THE
MARKET FOR PENNY STOCKS HAS EXPERIENCED NUMEROUS FRAUDS AND ABUSES WHICH COULD
ADVERSELY IMPACT INVESTORS IN OUR STOCK.
  We
believe that the market for penny stocks has suffered from patterns of fraud and
abuse. Such patterns include:
  ·
              Control
      of the market for the security by one or a few broker-dealers that are
      often related to the promoter or issuer;·
              Manipulation
      of prices through prearranged matching of purchases and sales and false
      and misleading press releases;·
              “Boiler
      room" practices involving high pressure sales tactics and unrealistic
      price projections by inexperienced sales persons;·
              Excessive
      and undisclosed bid-ask differentials and markups by selling
      broker-dealers; and·
              Wholesale
      dumping of the same securities by promoters and broker-dealers after
      prices have been manipulated to a desired level, along with the inevitable
      collapse of those prices with consequent investor
  losses.
  We
believe that many of these abuses have occurred with respect to the promotion of
low price stock companies that lacked experienced management, adequate financial
resources, an adequate business plan and/or marketable and successful business
or product.
  OUR
CONTROLLING SECURITY HOLDERS MAY TAKE ACTIONS THAT CONFLICT WITH YOUR
INTERESTS.
  All of
our officers and directors beneficially own approximately 52.71% of our common
stock.  In this case, all of our officers and directors will be able to
exercise control over all matters requiring stockholder approval, including the
election of directors, amendment of our certificate of incorporation and
approval of significant corporate transactions, and they will have significant
control over our management and policies. The directors elected by these
security holders will be able to significantly influence decisions affecting our
capital structure. This control may have the effect of delaying or preventing
changes in control or changes in management, or limiting the ability of our
other security holders to approve transactions that they may deem to be in their
best interest. For example, our controlling security holders will be able to
control the sale or other disposition of our operating businesses and
subsidiaries to another entity.
  SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
  This
prospectus contains forward-looking statements. The forward-looking statements
are contained principally in the sections entitled “Summary,” “Risk Factors,”
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations,” and “Business.” These statements involve known and unknown
risks, uncertainties and other factors which may cause our actual results,
performance or achievements to be materially different from any future results,
performances or achievements expressed or implied by the forward-looking
statements. These risks and uncertainties include, but are not limited to; the
factors described in the section captioned “Risk Factors” above.
  In some cases, you can identify
forward-looking statements by terms such as “anticipates,” “believes,” “could,”
“estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,”
“projects,” “should,” “would” and similar expressions intended to identify
forward-looking statements. Forward-looking statements reflect our current views
with respect to future events and are based on assumptions and subject to risks
and uncertainties. Given these uncertainties, you should not place undue
reliance on these forward-looking statements. These forward-looking statements
include, among other things, statements relating to:
   - 15
-
  ·
              Our
      plans to successfully complete construction of our proposed scrap metal
      recycling facility, or, even if constructed, our ability to operate the
      proposed recycling facility profitably;·
              Our
      intentions to obtain sufficient additional capital to fund our planned
      expansion and construction of a scrap metal recycling
      facility;·
              our
      expectations regarding the market for our iron ore and recycled metal
      products and services;·
              our
      beliefs regarding the continued growth of the metal ore and recycled
      metals market;·
              our
      beliefs regarding the competitiveness of our metal ore distribution
      business;·
              our
      expectations with respect to increased revenue growth from our metal ore
      distribution operations and our ability to achieve profitability resulting
      from sales of recycled metal ;·
              our
      future business development, results of operations and financial
      condition; and·
              Competition
      from other metal ore distributors and recycled metal
      manufacturers.
 
 Also,
forward-looking statements represent our estimates and assumptions only as of
the date of this prospectus. You should read this prospectus and the documents
that we reference in this prospectus, or that we filed as exhibits to the
registration statement of which this prospectus is a part, completely and with
the understanding that our actual future results may be materially different
from what we expect.
  Except as
required by law, we assume no obligation to update any forward-looking
statements publicly, or to update the reasons actual results could differ
materially from those anticipated in any forward-looking statements, even if new
information becomes available in the future.
 
 ITEM 1B.  UNRESOLVED STAFF COMMENTS
 
 None.
 
 ITEM 2.  PROPERTIES
  Our
principal executive offices in the U.S. are located at One Waters Park Drive,
Suite 98, San Mateo, CA 94403.  We pay rent of $2,624.50 per month to
occupy this location on an arrangement that may be terminated by us on 30 days
notice.  The lease is between Prime Armet Group, Inc., a related party
and The Realty Associates Fund VIII, L.P., a Delaware limited
partnership.
  Our
subsidiary Henan Armco operates from offices located in Zhengzhou, Henan
Province, China.  The office space consists of three suites with
approximately 5,611 square feet in total.  Henan Armco owns two suites
with approximately 3,713 square feet and leases another suite with approximately
1,898 square feet from Mr. Yao our Chief Executive Officer pursuant to a lease
that expires on December 31, 2011.  The monthly rent is approximately
$1,400, due on the last day of the previous month.
 
 Our
subsidiary Armet Lianyungang operates from offices located in Lianyungang,
Jiangsu province, China.  Armet Lianyungang leases approximately 3,229
square feet of office space at an annual cost of approximately $12,200 due on
July 31st of each
year.  The lease expires on July 31, 2010.
 
 Armet
Lianyungang has acquired land use right for approximately 32 acres of land
located in Lianyungang at a cost of approximately $2.25 million according to the
land use right acquisition agreement dated September 30, 2007.  The
land use right allows for industrial production pursuant to a land use right
certificate we obtained in November 2007.  The land use right expire
in 2057.
  ITEM 3. LEGAL PROCEEDINGS
  We are
not a party to any pending legal proceedings and, to our knowledge, none of our
officers, directors or principal shareholders are party to any legal proceeding
in which they have an interest adverse  to us.
 
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
  None.
   - 16
-
  PART
II
  ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
  There is
no established current public market for the shares of our common stock.  A
symbol was assigned for our common stock so that our common stock may be quoted
for trading on the OTCBB under the symbol “CNAM.OB”.  Since the close of
our reverse merger in June 2008, our stock has been thinly traded. There can be
no assurance that a liquid market for our common stock will ever develop.
Transfer of our common stock may also be restricted under the securities or blue
sky laws of various states and foreign jurisdictions. Consequently, investors
may not be able to liquidate their investments and should be prepared to hold
the common stock for an indefinite period of time.
 
 Holders
of Our Common Stock
 
 As of
March 13, 2009, there were approximately144 security holders of record of our
common stock.
 
 Transfer
Agent and Registrant
 
 Our
transfer agent is Action Stock Transfer Corp, at the address of 7069 S. Highland
Drive, Suite 300, Salt Lake City, UT 84121; its telephone number is
801-274-1088.
  Penny
Stock Considerations
 
 Broker-dealer
practices in connection with transactions in “penny stocks” are regulated by
certain penny stock rules adopted by the Securities and Exchange Commission
(SEC). Penny stocks generally are equity securities with a price of less than
$5.00 (other than securities registered on certain national securities exchanges
or quoted on the NASDAQ system). Penny stock rules require a broker-dealer,
prior to a transaction in a penny stock not otherwise exempt from the rules, to
deliver a standardized risk disclosure document that provides information about
penny stocks and the risks in the penny stock market. The broker-dealer also
must provide the customer with current bid and offer quotations for the penny
stock, the compensation of the broker-dealer and its salesperson in the
transaction, and monthly account statements showing the market value of each
penny stock held in the customer’s account. The broker-dealer must also make a
special written determination that the penny stock is a suitable investment for
the purchaser and receive the purchaser’s written agreement to the transaction.
These requirements may have the effect of reducing the level of trading
activity, if any, in the secondary market for a security that becomes subject to
the penny stock rules.
 
 Dividend
Policy
  We have
not declared any cash dividends on our common stock since we completed the
purchase of Armco. Our board of directors will make any future decisions
regarding dividends. We currently intend to retain and use any future earnings
for the development and expansion of our business and do not anticipate paying
any cash dividends in the foreseeable future. Our board of directors has
complete discretion on whether to pay dividends, subject to the approval of our
shareholders. Even if our board of directors decides to pay dividends, the form,
frequency and amount will depend upon our future operations and earnings,
capital requirements and surplus, general financial condition, contractual
restrictions and other factors that the board of directors may deem
relevant.
  ITEM 6. SELECTED FINANCIAL DATA
 
 Not
applicable.
 
 ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
 
 The
following discussion and analysis of our consolidated financial condition and
results of operations for the years ended December 31, 2008 and 2007 should
be read in conjunction with the consolidated financial statements, including
footnotes, and other information presented elsewhere in this Form 10-K. The
year ended December 31, 2008 is referred to as “2008”, the year ended
December 31, 2007 is referred to as “2007”, and the coming year which will
end December 31, 2009 is referred to as “2009”.
 
  - 17
-
 Overview
  Our
Business
 
 We
import, sell and distribute metal ores and non-ferrous metals to the metal
refinery industry in China. We obtain raw materials from global suppliers in
Brazil, India, South America, Oman, Turkey, Iran, Libya, Nigeria, Indonesia, and
the Philippines. We distribute these raw materials to the metal refinery
industry within China including but not limited to iron ore, coal, chrome ore,
nickel ore, copper ore, scrap metal, and manganese ore.
 
 We are in
the process of constructing a scrap metal recycling facility in the Banqiao
Industrial Zone of Lianyungang Economic Development Zone in the Jiangsu province
of the PRC. Upon completion of our planned metal recycling facility, we will
seek to recycle automobiles, machinery, building materials, dismantled ships and
various other scrap metals and will sell and distribute recycled scrap metal to
the metal refinery industry utilizing our existing network of metal ore
customers in the PRC. We expect to commence recycling operations in the fourth
quarter of 2009.
 
 Effective
June 27, 2008, Armco entered into an agreement to be acquired by us. Following
the close of the acquisition we changed our former corporate name Cox
Distributing, Inc. to China Armco Metals, Inc.
 
 China is
the largest developing country in the world, and the demand for steel has been
growing steadily over the past decade as the country continues to experience an
industrial revolution. Management estimates domestic steel production should
continue to witness significant growth as China continues to grow. The steel
industry is an important basic industry of the national economy of China, and
plays a vital role in the recent industrialization efforts of the country. As
witnessed over the last decade, the production of steel has increased
dramatically throughout the world, and particular in China. According to the
www.worldsteel.org, in 2008 worldwide crude
steel production amounted to 1,330 mmt. This is a decrease of 1.2% compared to
2007. 2008 is the second consecutive year that world steel production has been
over 1,300 mmt.  China’s crude steel production in 2008 reached 502
mmt, an increase of 2.6% from 2007. Production volume in China has more than
doubled within five years, from 222 mmt in 2002. China’s share of world steel
production continued to grow in 2008 producing 38% of world total crude
steel.
 
 We
believe recycling operations will become strong growth drivers worldwide as
natural resources continue to be depleted and the amount of unprocessed scrap
metal becomes available as a result of increases in consumer demand for products
made from steel that eventually are recycled. We intend to invest substantially
all of the $6.6 million in net proceeds we raised in our private offering of our
common stock and warrants we closed in August 2008 to fund the construction of
our planned scrap metal recycling facility beginning in the third quarter of
2008. This planned investment is in addition to the approximately $3 million of
investment capital we have expended on this project in 2007 and
2008.
 
 Our
Performance
 
 In 2008,
we experienced a decrease in net revenues, income and an increase in assets.
This decrease was attributable to interruptions of business in the third quarter
due to the Beijing Olympics from July to September and the impact of current
economic crisis in the fourth quarter of 2008. During the third quarter, the
Chinese government imposed restrictions limiting the transportation of goods and
the operations of several industries to reduce industrial emissions and power
requirements inherent to Armco’s customers and their end-users, mostly PRC based
steel businesses and consumers of metal.  Our operations were
negatively impacted due to these restrictions. For the year ended December 31,
2008 steel billet, chrome ore, iron ore, and nickel ore represented
approximately 27%, 2%, 61% and 8% of our revenues respectively. For the year
ended December 31, 2007 chrome ore, iron ore, and nickel ore represented
approximately 20%, 50% and 30 % of or revenues respectively. The performance was
offset by increased costs incurred in connection with the planning and
construction of our scrap metal recycling facility which we expect to complete
in the fourth quarter of 2009.
 
 Presentation
of Financial Statements
 
 The
presentation of the statements of operations in this Form 10-K have been
modified to allow for the reporting of deductions from net income to arrive at
income (loss) applicable to common stockholders.  Items reflected in
our comprehensive income for the periods reported are now included in our
financial notes to the audited financial statements included in this Form
10-K.
  - 18
-
  RESULTS
OF OPERATIONS
 
 The table
below summarizes the consolidated operating results for the years ended December
31, 2008 and 2007.
  Year
      ended December 31, 2008
                                    
                                    
                                    Year
      ended December 31, 2007
                                    
                                    
                                    $
      Change
                                    
                                    
                                    %
      ChangeNet
      Revenues
                                    
                                    
                                    
                                    
                                    $
                                    55,358,567
                                    
                                    
                                    $
                                    75,278,853
                                    
                                    
                                    $
                                    (19,920,286
                                    )
                                    
                                    
                                    -26.46
                                    %Cost
      of Goods Sold
                                    
                                    
                                    
                                    
                                    
                                    51,226,667
                                    
                                    
                                    
                                    68,817,654
                                    
                                    
                                    
                                    (17,590,987
                                    )
                                    
                                    
                                    -25.56
                                    %Gross
      Profit
                                    
                                    
                                    
                                    
                                    
                                    4,131,900
                                    
                                    
                                    
                                    6,461,199
                                    
                                    
                                    
                                    (2,329,299
                                    )
                                    
                                    
                                    36.05
                                    %Selling
      Expenses
                                    
                                    
                                    
                                    
                                    
                                    121,362
                                    
                                    
                                    
                                    449,048
                                    
                                    
                                    
                                    (327,686
                                    )
                                    
                                    
                                    -72.97
                                    %General
      and Administration Expenses
                                    
                                    
                                    
                                    
                                    
                                    1,129,442
                                    
                                    
                                    
                                    567,081
                                    
                                    
                                    
                                    562,361
                                    
                                    
                                    
                                    99.17
                                    %Total
      Operating Expenses
                                    
                                    
                                    
                                    
                                    
                                    1,250,804
                                    
                                    
                                    
                                    1,016,129
                                    
                                    
                                    
                                    234,675
                                    
                                    
                                    
                                    23.10
                                    %Income
      (Loss) from Operations
                                    
                                    
                                    
                                    
                                    
                                    2,881,096
                                    
                                    
                                    
                                    5,445,070
                                    
                                    
                                    
                                    (2,563,974
                                    )
                                    
                                    
                                    47.09
                                    %Total
      Other (Income) Expense
                                    
                                    
                                    
                                    
                                    
                                    (1,177,764
                                    )
                                    
                                    
                                    53,891
                                    
                                    
                                    
                                    (1,231,655
                                    )
                                    
                                    
                                    -2285.46
                                    %Gain
      on disposal of discontinued operations, net of tax
                                    
                                    
                                    -
                                    
                                    
                                    
                                    61,514
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    61,514
                                    
                                    
                                    
                                    100.00
                                    %Taxes
                                    
                                    
                                    
                                    
                                    
                                    
                                    787,759
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    787,759
                                    
                                    
                                    
                                    0.00
                                    %Net
      Income (Loss)
                                    
                                    
                                    
                                    
                                    
                                    $
                                    3,332,615
                                    
                                    
                                    $
                                    5,391,179
                                    
                                    
                                    $
                                    (2,058,564
                                    )
                                    
                                    
                                    38.18
                                    %
 
 Comparison
of Result of Operations for the Year Ended December 31, 2008 and
2007
 
 Year
      ended December 31, 2008
                                  
                                  Year
      ended December 31, 2007Other
      Key Indicators:Cost
      of Sales as a percentage of Sales
                                  
                                  93%
                                  
                                  91%Gross
      Profit Margin
                                  
                                  7%
                                  
                                  9%Selling
      Expenses as a percentage of Sales
                                  
                                  0%
                                  
                                  1%General
      and Administration Expenses as a percentage of Sales
                                  
                                  2%
                                  
                                  1%Total
      Operating Expenses as a percentage of Sales
                                  
                                  2%
                                  
                                  1%
 
  - 19
-
   Gross
Revenues
 
 Gross
revenues for 2008 were $55,358,567, a decrease of approximately 26% compared to
the prior year, this decrease was primarily due to the global economic slowdown,
especially in the construction and manufacturing sectors, which had a negative
impact on our business.  Additionally, from July through September of
2008, the Chinese government imposed restrictions limiting the transport of
goods during the Beijing Olympics.  We witnessed some business
interruptions due to these government limitations; our operations were
negatively impacted as a result.  For 2008, chrome ore, iron ore, steel
billet, nickel ore, and manganese ore represented approximately 2%, 61%, 27%, 8%
and 2% of our revenues respectively.  In 2007, chrome ore, iron ore
and nickel ore represented approximately 20%, 50% and 30% of our revenues
respectively.
  Cost
of Revenues
 
 Cost of
sales was $51,226,667 and $68,817,654 for the year ended December 31, 2008 and
2007, respectively. This decrease of approximately 26% is directly related to
the decrease in net revenues of approximately 26% from the prior
year.  Cost of revenues remained relatively constant as a percentage
of net revenues of 92% and 91% in 2008 and 2007, respectively.  In
2008 cost of revenues decreased $17,590,987 compared to 2007, as a result of the
decrease in net revenues from period to period.
 
 Total
Operating Expenses
 
 Operating
expenses for the year ended December 31, 2008 were $1,250,804 an increase of
approximately 23% compared to the year ended 2007. Our operating expenses are
comprised of selling expenses as well as general and administrative
expenses.  These increases are a result of additional costs related to
professional fees, and wages and benefits.
 
 Other
Income
 
 Total
other income for the year ended December 31, 2008 was $1,177,764, compared to
other expense in 2007 of $53,891.  In 2008 total other income was
mainly comprised of gain from contract termination penalties, which was
partially offset by interest expense of $164,110.
 
 Income
Tax Provision
 
 Effective
January 1, 2008 Armco is subject to Hong Kong SAR income tax; the statutory tax
rate for Armco is 17.5%. Accordingly, we recorded an income tax provision
of $787,759 for 2008. For 2007 Armco was exempt from Hong Kong SAR income taxes
since none of its income was derived from operations conducted within Hong Kong
during the relevant periods. Accordingly, no provision for income tax was made
for the relevant periods.
 
 Discontinued
Operations
 
 Income
from discontinued operations was $61,514 due to the sale of our legacy
fertilizer business on December 31, 2008.
 
 Net
Income
 
 As a
result of the factors discussed above, our net income in 2008 was $3,332,615
compared to $5,391,179 in 2007.
  LIQUIDITY
AND CAPITAL RESOURCES
 
 At
December 31, 2008 and December 31, 2007 we had cash and cash equivalents of
$3,253,533, and $232,286, respectively. We have historically met our liquidity
requirements utilizing internally generated cash derived from our
operations.
 
  - 20
-
  We raised
approximately $6.6 million, net of fees, in connection with a private placement
of 24.9 units consisting of 100,000 shares of our common stock at a per
share purchase price of $3.00, and five (5) year warrants to purchase 100,000
shares of our common stock with an exercise price of $5.00 per
share.  We closed this offering on August 29, 2008.  We
invested substantially all of the $6.6 million of the net proceeds from this
offering to fund the construction of our planned scrap metal recycling
facility.  We will use a portion of the net proceeds for working
capital to expand our metal ore distribution business.  We believe
that upon completion of the construction of the scrap metal recycling facility,
we will be able to sell the recycled scrap metal utilizing our existing network
of customers. In addition to the net proceeds of this offering, we will need to
secure additional investment capital as well as bank and vendor financing to
provide sufficient funds to complete this project. There is no assurance,
however, that we will be successful in obtaining the additional financing that
we require or that such financing may not be on terms deemed to be desirable to
our management. In the event we are successful, there is no assurance that such
investment will result in enhanced operating performance. Unless we can obtain
additional financing, we will be unable to complete construction of our planned
scrap metal recycling project. Any inability on our part to secure additional
financing during 2009, as needed, will have a material adverse effect on our
growth plans.
 
 The
following table provides certain selected balance sheet comparisons as of
December 31, 2008 and December 31, 2007.
  December
      31,
                
                December
      31,
                
                Increase
      / (decrease)
                
                %2008
                2007Cash
                
                $
                3,253,533
                
                $
                232,286
                
                $
                3,021,247
                
                
                1301%Accounts
      receivable, net
                
                
                16,722,307
                
                
                2,586,529
                
                
                14,135,778
                
                
                547%Inventories,
      net
                
                
                197,402
                
                
                2,434,908
                
                
                (2,237,506)
                
                
                -92%Advance
      on purchases
                
                
                3,680,872
                
                
                1,846,113
                
                
                1,834,759
                
                
                99%Total
      current assets
                
                
                24,233,566
                
                
                7,663,986
                
                
                16,569,580
                
                
                216%Property
      and equipment, net
                
                
                2,377,816
                
                
                131,596
                
                
                2,246,220
                
                
                1707%Land
      use rights, net
                
                
                2,208,902
                
                
                2,108,983
                
                
                99,919
                
                
                5%Total
      assets
                
                
                28,820,284
                
                
                9,904,565
                
                
                18,915,719
                
                
                191%Short-term
      loans
                
                
                2,914,345
                
                
                -
                
                
                2,914,345
                
                
                nmAccounts
      payable
                
                
                6,694,534
                
                
                290,740
                
                
                6,403,794
                
                
                2203%Total
      current liabilities
                
                
                13,531,338
                
                
                4,820,432
                
                
                8,710,906
                
                
                181%Net
      Shareholder's Equity
                
                $
                15,288,946
                
                $
                5,084,133
                
                $
                10,204,813
                
                
                201%
 
 
 nm – not
meaningful
   - 21
-
  At
December 31, 2008, we had $2,149,325 in USD and $1,104,208 in RMB of our cash
reserves were held in bank accounts at financial institutions located in the
PRC, none of which were insured. The value of cash on deposit in RMB in China at
December 31, 2008 has been translated based on the exchange rate as of December
31, 2008.  Commencing July 21, 2005, the Chinese government
introduced regulations which relaxed restrictions on the conversion of the RMB;
however restrictions still remain, including but not limited to restrictions on
foreign invested entities.  Foreign invested entities may only buy,
sell or remit foreign currencies after providing valid commercial documents at
only those banks authorized to conduct foreign
exchanges.  Furthermore, the conversion of RMB for capital account
items, including direct investments and loans, is subject to PRC government
approval.  Chinese entities are required to establish and maintain
separate foreign exchange accounts for capital account items.  We
cannot be certain Chinese regulatory authorities will not impose more stringent
restrictions on the convertibility of the RMB, especially with respect to
foreign exchange transactions.  Accordingly, cash on deposit in banks
in the PRC is not readily deployable by us for purposes outside of
China.
 
 Our total
assets at December 31, 2008 and 2007 were $28,820,284 and $9,904,565,
respectively. This increase of $18,915,719 or approximately 191% was mainly due
to an increase in our cash balance of $3,021,247, an increase in property, plant
and equipment of $2,246,220, an increase in accounts receivables of $14,135,778,
and an increase in advances on purchases of $1,834,759.  Our current
liabilities increased by $8,710,906, or approximately 181%, at December 31,
2008 from December 31, 2007; this increase was mainly due to an increase in
accounts payable of $6,403,794, loans payable of $2,914,345, and taxes payables
of $1,039,304.
 
 Accounts
Receivable as of December 31, 2008 was $16,722,307, which is an increase of
$14,135,778 over the prior year.  This increase was mainly due to the
company’s increase in credit extension to certain of our customers due to the
current market conditions.
 
 As of
December 31, 2008 and 2007, our advances on purchases were $3,680,872 and
$1,846,113, respectively, which is an increase of approximately 99%. Advances on
purchases consist of prepayments to vendors for merchandise, security and
deposits.  This increase is directly attributed to the increase
in amounts paid to vendors for future delivery of products and metal
recycling production equipment.  A portion of the increase was mainly
due to an advance deposit paid to one vendor.
 
 Inventories
at December 31, 2008 and 2007 totaled $197,402 and $2,434,908, respectively.
This decrease of $2,237,506 was mainly due to a timing difference between our
receipt of the inventory purchased for our customers and the shipment of these
inventories to our customers.  Our inventory levels at December 31,
2008 are in line with historical levels; and we expect they will remain at these
levels in 2009.
 
 Total
current liabilities were $13,531,338 and $4,820,432 at December 31, 2008 and
2007, respectively. This increase of $8,710,906 was mainly due to the increase
in accounts payable of $6,403,794 for balances due for goods purchased that were
originally advances to vendors that are now due for payment in
full.  In addition, the increases were also attributed to taxes
payable of $1,039,312, and loans payable of $2,914,345 for two loans from a
financial institution, guaranteed by the Company’s Chairman and Chief Executive
Officer, with interest of approximately 7.8% per annum payable monthly, with
principal due and paid January 15, 2009. These increases were partially offset
by a $1,025,798 decrease in accrued expenses and other current
liabilities.
 
 2008
Offering
 
 Between
July and August 2008 we sold $7,459,929 (net proceed of $6,616,247 worth of
securities to 95 accredited investors through the sale of 24.73
units.  Each unit sold in the 2008 Offering consists of 100,000 shares
of Common Stock, $.001 par value per share at a per share purchase price of
$3.00, and five year warrants to purchase 100,000 shares of Common Stock with an
exercise price of $5.00 per share (the “Warrants“). The accredited investors
entered into a subscription agreement with the Company; the material terms of
which are set forth in the exhibits filed with our Form 8-K filed on August 1,
2008.
  Statement
of Cash Flows
 
 At
December 31, 2008, our cash totaled $3,253,533.  During 2008 we used
$3,802,863 in operating activities, $1,673,776 used in investing activities, and
$8,484,449 was provided by financing activities, and the effect of prevailing
exchange rates on our cash position was $343,023.
 
 At
December 31, 2007, our cash totaled $232,286.  During 2007 we
generated $907,440 from operating activities, while we used $2,503,735 in
investing activities, and $1,409,487 was provided by financing activities, and
the effect of prevailing exchange rates on our cash position was
$308,744.
 
  - 22
-
  Cash
(Used in) Provided by Operating Activities
 
 In 2008
cash used in operations of $3,802,863 was mainly due to an increase in accounts
receivables of $15,476,396 due primarily to longer payment terms extended to
clients during the year ended December 31, 2008, an increase in advances on
purchases of $1,720,207, and an increase in prepayments and other current assets
of $260,437. These were mainly offset by our net income for the year of
$3,332,615, an increase in accounts payables of $6,444,793, a decrease in
inventory levels of $2,405,995, and taxes payable of $1,158,952.
 
 In 2007
cash provided by operations was $907,440, which was mainly comprised of our net
income of $5,391,179, an increase in accrued expenses of $999,880, these were
partially offset by inventory purchases of $1,876,367, a decrease in customer
deposits of $1,360,542,  and a decrease of $1,459,388 of advances to
sole stockholder treated as dividends.
 
 Cash
used in Investing Activities
 
 In 2008
cash used in investing activities of $1,673,776 was mainly due to purchases of
property, plant and equipment of $2,276,963.  The decreases were
offset by releases of pledged deposits of $603,187.
 
 In 2007
cash used in investing activities of $2,503,735 which was mainly due to
purchases of property, plant and equipment of $2,119,417, and payments made
towards pledged deposits of $564,150.  These decreases were partially
offset by releases of pledged deposits of $305,000.
 
 Cash
provided by Financing Activities
 
 In 2008
cash provided by financing activities of $8,484,449 was due to proceeds from
loans of $2,914,345, proceeds from equity financing of $6,623,168, net of
offering cost, offset by payments of $343,023 of forward foreign exchange
contracts and payment of $710,041 due to Mr. Kexuan Yao, our Chairman and Chief
Executive Officer.
 
 In 2007
cash provided by financing activities of $1,490,487 which was due to proceeds
received from related parties of $1,181,743 and proceeds from forward foreign
exchange contacts of $308,744.
 
 Off
Balance Sheet Arrangements
 
 Under SEC
regulations, we are required to disclose our off-balance sheet arrangements that
have or are reasonably likely to have a current or future effect on our
financial condition, such as changes in financial condition, revenues or
expenses, results of operations, liquidity, capital expenditures or capital
resources that are material to investors. An off-balance sheet arrangement means
a transaction, agreement or contractual arrangement to which any entity that is
not consolidated with us is a party, under which we have:
 
 ·
              Any
      obligation under certain guarantee contracts;·
              Any
      retained or contingent interest in assets transferred to an unconsolidated
      entity or similar arrangement that serves as credit, liquidity or market
      risk support to that entity for such assets;·
              Any
      obligation under a contract that would be accounted for as a derivative
      instrument, except that it is both indexed to our stock and classified in
      stockholder’s equity in our statement of financial position;
      and·
              Any
      obligation arising out of a material variable interest held by us in an
      unconsolidated entity that provides financing, liquidity, market risk or
      credit risk support to us, or engages in leasing, hedging or research and
      development services with us.
 
 We do not
have any off-balance sheet arrangements that we are required to disclose
pursuant to these regulations. In the ordinary course of business, we enter into
operating lease commitments, purchase commitments and other contractual
obligations. These transactions are recognized in our financial statements in
accordance with generally accepted accounting principles in the United
States.
 
 Critical
Accounting Policies
 
 The
discussion and analysis of our 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.
The preparation of these consolidated financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and
liabilities. On an on-going basis, we evaluate our estimates based on historical
experience and on various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
  - 23
-
  
 A summary
of significant accounting policies is included in Note 2 to the unaudited
consolidated financial statements included in this annual report. Management
believes that the application of these policies on a consistent basis enables us
to provide useful and reliable financial information about our Company's
operating results and financial condition.
 
 Recently
Issued Accounting Pronouncements
 
  On June
5, 2003, the United States Securities and Exchange Commission (“SEC”) adopted
final rules under Section 404 of the Sarbanes-Oxley Act of 2002 (“Section 404”),
as amended by SEC Release No. 33-8934 on June 26, 2008.  Commencing
with its annual report for the year ending December 31, 2009, the Company will
be required to include a report of management on its internal control over
financial reporting. The internal control report must include a
statement:
  
              Of
      management’s responsibility for establishing and maintaining adequate
      internal control over its financial
reporting;
  
              Of
      management’s assessment of the effectiveness of its internal control over
      financial reporting as of year end;
and
  
              Of
      the framework used by management to evaluate the effectiveness of the
      Company’s internal control over financial
  reporting.
  Furthermore,
in the following year, it is required to file the auditor’s attestation report
separately on the Company’s internal control over financial reporting on whether
it believes that the Company has maintained, in all material respects, effective
internal control over financial reporting.
  In
December 2007, the FASB issued FASB Statement No. 141 (Revised 2007)“Business Combinations”
(“SFAS No. 141(R)”), which requires the Company to record fair value estimates
of contingent consideration and certain other potential liabilities during the
original purchase price allocation, expense acquisition costs as incurred and
does not permit certain restructuring activities previously allowed under
Emerging Issues Task Force Issue No. 95-3 to be recorded as a component of
purchase accounting.  SFAS No. 141(R) applies prospectively to
business combinations for which the acquisition date is on or after the
beginning of the first annual reporting period beginning on or after December
15, 2008, except for the presentation and disclosure requirements, which shall
be applied retrospectively for all periods presented.  The Company has
not determined the effect that the adoption of SFAS No. 141(R) will have on the
financial results of the Company.
  In
December 2007, the FASB issued FASB Statement No. 160“Non-controlling Interests in
Consolidated Financial Statements - an amendment of ARB No. 51” (“SFAS
No. 160”), which causes non-controlling interests in subsidiaries to be included
in the equity section of the balance sheet.  SFAS No. 160 applies
prospectively to business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning on or after
December 15, 2008, except for the presentation and disclosure requirements,
which shall be applied retrospectively for all periods presented.  The
Company has not determined the effect that the adoption of SFAS No. 160 will
have on the financial results of the Company.
  In March
2008, the FASB issued FASB Statement No. 161“Disclosures about Derivative
Instruments and Hedging Activities an amendment of FASB Statement No.
133” (“SFAS No. 161”), which changes the disclosure requirements for
derivative instruments and hedging activities.  Pursuant to SFAS
No.161, 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 No. 161 is effective for financial statements issued for
fiscal years and interim periods beginning after November 15, 2008 with early
application encouraged.  SFAS No. 161 encourages but does not require
disclosures for earlier periods presented for comparative purposes at initial
adoption.  In years after initial adoption, this Statement requires
comparative disclosures only for periods subsequent to initial
adoption.  The Company does not expect the adoption of SFAS No. 161 to
have a material impact on the financial results of the Company.
   - 24
-
  Management
does not believe that any other recently issued, but not yet effective
accounting pronouncements, if adopted, would have a material effect on the
accompanying consolidated financial statements.
  Cautionary
Note Regarding Forward-Looking Information and Factors That May Affect Future
Results
 
 This
report contains forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933, as amended and Section 21E of the Securities
Exchange Act of 1934, as amended. The Securities and Exchange Commission
encourages companies to disclose forward-looking information so that investors
can better understand a company’s future prospects and make informed investment
decisions. This Quarterly Report on Form 10-K and other written and oral
statements that we make from time to time contain such forward-looking
statements that set out anticipated results based on management’s plans and
assumptions regarding future events or performance. We have tried, wherever
possible, to identify such statements by using words such as “anticipate,”
“estimate,” “expect,” “project,” “intend,” “plan,” “believe,” “will” and similar
expressions in connection with any discussion of future operating or financial
performance. In particular, these include statements relating to future actions,
future performance or results of current and anticipated sales efforts,
expenses, the outcome of contingencies, such as legal proceedings, and financial
results. A list of factors that could cause our actual results of operations and
financial condition to differ materially is set forth below, and these factors
are discussed in greater detail under Item 1A Risk Factors of our Annual
Report on Form 10-K for the year ended December 31, 2008:
 
 
 ·
              Continued
      global economic weakness is expected to reduce demand for our
      products.·
              Our
      ability to obtain sufficient capital to fund our planned expansion and
      construction of a scrap steel recycling facility.·
              Fluctuations
      in raw material prices may affect our operating results as we may not be
      able to pass on cost increases to customers.·
              Our
      ability to manage growth in operations to maximize our potential growth
      and achieve our expected revenues.·
              Our
      organic growth strategy, if unsuccessful, may result in a negative impact
      on our growth, financial condition, results of operations and cash
      flow.·
              Our
      ability to successfully complete construction of our proposed scrap steel
      recycling facility, or, even if constructed, our ability to operate the
      proposed recycling facility profitably.·
              Our
      ability to collect accounts receivables may affect our future net
      income.·
              Customer’s
      failure to take delivery of ordered products may affect our financial
      results as we may accumulate excess or obsolete inventory that result in
      unanticipated price reductions and write downs.·
              Our
      ability to successfully implement our acquisition growth strategy and meet
      growth and revenue expectations.·
              The
      lack various legal protections in certain agreements to which we are a
      party and which are material to our operations which are customarily
      contained in similar contracts prepared in the United
    States.·
              Our
      dependence on our key management personnel.·
              Our
      inability to meet the accelerated filing and internal control reporting
      requirements imposed by the SEC.·
              The
      effect of changes resulting from the political and economic policies of
      the Chinese government on our assets and operations located in the
      PRC.·
              The
      influence of the Chinese government over the manner in which our Chinese
      subsidiaries must conduct our business activities, including the impact of
      governmental regulations associated with the Beijing Olympic
      games.·
              The
      impact on future inflation in China on economic activity in
      China.·
              The
      impact of any recurrence of severe acute respiratory syndrome, or SAR’s,
      or another widespread public health problem.·
              The
      limitation on our ability to receive and use our revenues effectively as a
      result of restrictions on currency exchange in China.·
              Our
      ability to enforce our rights due to policies regarding the regulation of
      foreign investments in China.·
              The
      restrictions imposed under recent regulations relating to offshore
      investment activities by Chinese residents and the increased
      administrative burden we face and the creation of regulatory uncertainties
      that may limit or adversely affect our ability to complete the business
      combination with our PRC based subsidiaries.·
              Our
      ability to comply with the United States Foreign Corrupt Practices Act
      which could subject us to penalties and other adverse
      consequences.·
              Our
      ability to establish adequate management, legal and financial controls in
      the PRC.·
              The
      provisions of our articles of incorporation and bylaws which may delay or
      prevent a takeover which may not be in the best interests of our
      shareholders.·
              Our
      controlling stockholders may take actions that conflict with your
      interests.
 
  - 25
-
  We
caution that the factors described herein and other factors could cause our
actual results of operations and financial condition to differ materially from
those expressed in any forward-looking statements we make and that investors
should not place undue reliance on any such forward-looking statements. Further,
any forward-looking statement speaks only as of the date on which such statement
is made, and we undertake no obligation to update any forward-looking statement
to reflect events or circumstances after the date on which such statement is
made or to reflect the occurrence of anticipated or unanticipated events or
circumstances. New factors emerge from time to time, and it is not possible for
us to predict all of such factors. Further, we cannot assess the impact of each
such factor on our results of operations or the extent to which any factor, or
combination of factors, may cause actual results to differ materially from those
contained in any forward-looking statements.
 
 The RMB
is not freely convertible into foreign currencies and no representation is made
that RMB or U.S. Dollar amounts referred to herein could have been or could be
converted into U.S. Dollars or RMB, as the case may be, at the stated rate or at
all. Unless otherwise noted, all currency figures in this filing are in U.S.
dollars. References to "RMB" are to the Chinese Yuan, also known as the
Renminbi.
  
 ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
  Not
applicable.
  ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA
  Our
consolidated financial statements are contained in pages F-1 through F-25 which
appear at the end of this annual report.
 
 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
  None
 
 ITEM 9A (T) CONTROLS AND PROCEDURES
  Evaluation
of Disclosure Controls and Procedures
 
 The
Company’s management, with the participation of our Chief Executive Officer and
Chief Financial Officer, carried out an evaluation of have evaluated the
effectiveness of our “the Company’s disclosure, controls and procedures” (as
defined in Rules Rule 13a-15(3) and 15-d-15(3) of the e) under the
Securities Exchange Act of 1934) as of the end of the period covered by this
Annual Report (the “Evaluation Date”). As a result of such evaluation, Chief
Executive Officer and the Chief Financial Officer have concluded that, as of the
Evaluation Date, our such disclosure, controls and procedures are effective,
providing them with material to provide reasonable assurance that the
information relating to our company as required to be disclosed in the reports
we file the Company files or submits under the Securities Exchange Act on a
timely basis.
 
 There
were no changes in our internal controls over of 1934 is (i) recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission's   rules and forms, and (ii)
accumulated and communicated to management, including the Company’s principal
executive and principal financial reporting, known to our Chief Executive
Officer or Chief Financial Officer, persons performing such functions, as
appropriate, to allow timely decisions regarding disclosure. The Company
believes that a control system, no matter how well designed and operated, cannot
provide absolute assurance that the objectives of the control system are met,
and no evaluation of controls can provide absolute assurance that all control
issues and instances of fraud, if any, within a company have been
detected.
 
 Management's
Annual Report on Internal Control over Financial Reporting
 
 The
management of the Company is responsible for establishing and maintaining
adequate internal control over financial reporting for the
Company.  Our internal control system was designed to, in general,
provide reasonable assurance to the Company’s management and board regarding the
preparation and fair presentation of published financial statements, but because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements.  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.
 
  - 26
-
  Our
management assessed the effectiveness of the Company’s internal control over
financial reporting as of December 31, 2008.  The framework used by
management in making that assessment was the criteria set forth in the document
entitled “ Internal Control – Integrated Framework” issued by the Committee of
Sponsoring Organizations of the Treadway Commission. Based on that assessment,
our management has determined that as of December 31, 2008, the Company’s
internal control over financial reporting was effective for the purposes for
which it is intended.
 
 This
annual report does not include an attestation report of the Company’s registered
public accounting firm regarding internal control over financial reporting.
Management's report was not subject to attestation by the Company's registered
public accounting firm pursuant to temporary rules of the Securities and
Exchange Commission that permit the Company to provide only management's report
in this annual report.
  Changes
in Internal Control over Financial Reporting
 
 No change
in our system of internal control over financial reporting occurred during the
period covered by this report, fourth quarter of the fiscal year ended December
31, 2008 that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
 
 ITEM 9B.  OTHER INFORMATION
 
 None
 
 PART
III
  ITEM 10.  DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE
GOVERANCE
  Our
directors and executive officers, their ages and titles, are as
follows.  Each of our current executive officers and each of our
directors (except for Mr. Chen) is a resident of the PRC. As a result, it may be
difficult for investors to affect service of process within the United States
upon them or to enforce court judgments obtained against them in the United
States courts.
 
 Name
              Age
              Positions
      and Offices HeldKexuan
      Yao
              37
              Chairman
      and Chief Executive OfficerFengtao
      Wen
              34
              Chief
      Financial OfficerWeigang
      Zhao
              31
              Director
      and Vice General Manager of Armet LianyungangQuan
      Chen (1)
              41
              Director
 
 (1) On
February 26, 2009, Quan Chen, a director of China Armco Metals, Inc. (the
“Company”) resigned.  Mr. Chen’s resignation was not the result of any
disagreement with the Company on any matter relating to its operation, policies
(including accounting or financial policies) or practices.
 
 All of
our directors hold offices until the next annual meeting of the shareholders of
our company, and until their successors have been qualified after being elected
or appointed. Officers serve at the discretion of the board of directors. 
The following sets forth biographical information regarding the above Officers
and Directors.
 
 Kexuan
Yao.  Mr.Yao was appointed as our Chairman of the Board of
Directors and Chief Executive Officer in June 2008 in connection with our
purchase of Armco.  Mr. Yao has served as the Chairman and General
Manager of Armco since its inception in 2001.  From 1996 to 2001, Mr.
Yao served as the General Manager of the Tianjian Branch for Zhengzhou Gaoxin
District Development Co., Ltd.  Mr. Yao received a bachelor’s degree
from Henan University of Agriculture in 1996.
 
 Fengtao
Wen.  Mr. Wen was appointed as our Chief Financial Officer in
June 2008 in connection with our purchase of Armco.  Mr. Wen has
served as the accounting manager of Armco and Henan Armco since 2005 and is
responsible for supervision of financial controls and management of these
entities.  From 1996 to 2005 Mr. Wen worked in the accounting
department of Zhengzhou Smithing Co., Ltd.  Mr. Wen graduated from the
Economics Department of Zhengzhou University in 1996.
 
 Weigang
Zhao.  Mr. Zhao was appointed as a member of our Board of
Directors in June 2008 in connection with our purchase of Armco.  Mr.
Zhao has served as the Vice General Manager of Armet Lianyungang since
2007.  From 2005 through 2006 Mr. Zhao served as a manager in the
supply department at Henan Anyang Steel Co., Ltd.  From 2003 through
2004 Mr. Zhao served as the marketing manager at Sinotrans Henan Co.,
Ltd.  Mr. Zhao graduated with a bachelor’s degree in Economics from
Henan College of Finance and Economics in 2002.
  - 27
-
  
 Quan
Chen.  Mr. Chen was appointed as a member of our Board of
Directors June, 2008 in connection with our purchase of the Armco
shares.  He resigned on February 26, 2009. Mr. Chen is an attorney
licensed to practice law in the State of New York and has been practicing law
for more than the past five years.  Mr. Chen has a bachelor’s of law
degree from Peking University, Beijing China and a master of laws degree from
the University of Virginia School of Law.
 
 
 Director
Compensation
  None of
our directors receive any compensation for their services as a member of the
board of directors.
  Audit
Committee
  We have
not yet appointed an audit committee. At the present time, we believe that the
members of board of directors are collectively capable of analyzing and
evaluating our financial statements and understanding internal controls and
procedures for financial reporting.
  Audit
Committee Financial Expert
  Our board
of directors currently acts as our audit committee. We currently do not have a
member who qualifies as an “audit committee financial expert” as defined in
Regulation S-K and are in search of one director who is “independent” as the
term is used in Item 7(d) (3) (iv) of Schedule 14A under the Securities Exchange
Act. Our board of directors is in the process of searching for additional
suitable candidates for this position.
 
 Family
Relationships
 
 There are
no family relationships among any of our officers or directors.
 
 Involvement
in Certain Legal Proceedings
  To the
best of our knowledge, none of our directors or executive officers have been
convicted in a criminal proceeding, excluding traffic violations or similar
misdemeanors, or has been a party to any judicial or administrative proceeding
during the past five years that resulted in a judgment, decree or final order
enjoining the person from future violations of, or prohibiting activities
subject to, federal or state securities laws, or a finding of any violation of
federal or state securities laws, except for matters that were dismissed without
sanction or settlement. Except as set forth in our discussion below in ?癈ertain
Relationships and Related Transactions,” none of our directors, director
nominees or executive officers has been involved in any transactions with us or
any of our directors, executive officers, affiliates or associates which are
required to be disclosed pursuant to the rules and regulations of the
SEC.
 
 Compliance with Section
16(A) of the Exchange Act
  Section
16(a) of the Exchange Act requires the Company’s officers and directors, and
persons who beneficially own more than 10% of a registered class of the Company
equity securities, to file reports of ownership and changes in ownership with
the Securities and Exchange Commission and are required to furnish copies to the
Company. To the best of the Company’s knowledge, any reports required to be
filed were timely filed in the year ended December 31, 2008.
  Code of
Ethics
  We
currently do not have a code of ethics that applies to our officers, employees
and directors, including our Chief Executive Officer and senior
executives.
  ITEM 11.   EXECUTIVE COMPENSATION
  Compensation of Executive
Officers
 
 The
following summary compensation table sets forth all compensation awarded to,
earned by, or paid to the named executive officers paid by us during the years
ended December 31, 2008 and 2007  in all capacities for the accounts
of our executives, including the Chief Executive Officer (CEO) and Chief
Financial Officer (CFO):
  - 28
-
  
  SUMMARY
      COMPENSATION TABLEName
                        and
                        principal
                        position
                      Year
                      
                      Salary
                        ($)
                      
                      Bonus
                        ($)
                      
                      Stock
                        Awards
                        ($)
                      
                      Option
                        Awards
                        ($)
                      
                      Non-Equity
                        Incentive Plan
                        Compensation
                        ($)
                      
                      Nonqualified
                        Deferred
                        Compensation
                        Earnings ($)
                      All Other
                        Compensation
                        ($)
                      
                      Total ($)Stephen
      E. Cox (1)
                      2008
                      
                      $
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      $2007
                      
                      $
                      105,286
                      
                      —
                      
                      
                      —
                      
                      —
                      
                      
                      —
                      
                      —
                      —
                      
                      $
                      105,286Kexuan
      Yao, Chief
                        Executive
      Officer and Director (2)
                      2008
                      
                      $
                      74,285
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      -
                      
                      $
                      74,2852007
                      
                      $
                      7,000
                      
                      —
                      
                      
                      —
                      
                      —
                      
                      
                      —
                      
                      —
                      -
                      
                      $
                      7,000Fengtao
      Wen, Chief Financial Officer (3)
                      2008
                      
                      $
                      20,150
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      -
                      
                      $
                      20,1502007
                      
                      $
                      10,000
                      
                      —
                      
                      
                      —
                      
                      —
                      
                      
                      —
                      
                      —
                      -
                      
                      $
                      10,000
  (1)
                  On
      June 27, 2008, we acquired Armco in a reverse acquisition transaction that
      was structured as a share exchange and in connection with that
      transaction, Stephen E. Cox tendered his resignation as a director and
      from all offices he held in our company effective
    immediately.(2)
                  In
      connection with the reverse acquisition of Armco on June 27, 2008, Mr. Yao
      was appointed as our Chairman and Chief Executive Officer and
      Director effective immediately.(3)
                  In
      connection with the reverse acquisition of Armco on June 27, 2008, Mr. Wen
      was appointed as our Chief Financial Officer effective
      immediately.
 
 Employment
Agreements
  We have
an employment agreement with Mr. Kexuan Yao, our CEO and Chairman. Please refer
to our Form 8-K filed on January 13, 2009 for details of the employment
agreement. We do not have employment agreements in place with our other officers
and directors.
 
 Compensation of
Directors
 
 Directors
do not receive any compensation for their services as directors. The Board of
Directors has the authority to fix the compensation of directors. No amounts
have been paid to, or accrued to, directors in such capacity.
  - 29
-
   Outstanding Equity
Awards
  The
following table provides information concerning unexercised stock options that
has not vested and equity incentive plan awards for each named executive officer
outstanding as of December 31, 2008:
  OPTION
      AWARDS
              
              STOCK
      AWARDSName
              
              Number
      of securities underlying unexercised options
                Exercisable
              
              Number
      of
                Securities
                Underlying
                Unexercised
                options
                unexercisable
              
              Equity
                Incentive
                plan
      awards:
                Number
      of
                Securities
                Underlying
                Unexercised
                Unearned
                options
              
              Option
                Exercise
                price
                ($)
              
              Option
                Expiration
                date
              
              Number
                of
      shares
                or
      units
                of
      stock
                that
                have
      not vested
              
              Market
      value of shares or units of stock that have not vested ($)
              
              Equity
      incentive plan awards: Number of unearned shares, units or other rights
      that have not vested
              
              Equity
      incentive plan awards: Market or payout value of unearned shares, units or
      other rights that have not vestedFeng
      Gao (1)
              
              2,000,000
              
              N/A
              
              N/A
              
              $5.00
              
              September
      30, 2010
              
              N/A
              
              N/A
              
              N/A
              
              N/A
  (1)
              Ms.
      Gao was granted an option on June 27, 2008 in connection with our
      acquisition of Armco to purchase 2,000,000 shares of common stock at an
      exercise price of $5.00 per share expiring on September 30,
      2010.
  Option
exercises and stock vested table
  The
following table provides information concerning each exercise of stock options,
SARs and similar instruments, and each vesting of stock, including restricted
stock, restricted stock units and similar instruments for each named executive
officer outstanding as of December 31, 2008:
  OPTION
      EXERCISES AND STOCK VESTEDOPTION
      AWARDS
              STOCK
      AWARDSName
              Number
      of
                Shares
                Acquired
                on
      Exercise
              Value
                Realized
                on
                Exercise
                ($)
              Number
      of
                Shares
                Acquired
                on
                Vesting
              Value
                Realized
                on
                Vesting
                ($)Feng
      Gao (1)
              5,300,000
              6,890,000
              —
              —
  (1)
              On
      June 27, 2008, Ms. Gao was granted an option to purchase 5,300,000 shares
      of common stock at an exercise price of $1.30 per share expiring on
      September 30, 2008 pursuant to the Gao Stock Option.  On August
      12, 2008, Ms. Gao exercised her option to purchase 5,300,000 shares
      of our common stock, and cancelled the June 25, 2008 promissory note
      in the principal amount of $6,890,000 in payment of the purchase of the
      5,300,000 shares. On January 7, 2009, Mr. Kexuan Yao, our Chairman and
      Chief Executive Officer, exercised his call rights pursuant to a call
      option agreement to acquire 5,300,000 shares of our common stock from Mr.
      Gao.
  Compensation
Committee Interlocks and Insider Participation
  During
the last calendar year we did not have a standing Compensation Committee.
The Board was responsible for the functions that would otherwise be handled by
the compensation committee.
 
  - 30
-
  ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS
  The
following table sets forth certain information as of March 13, 2009 with respect
to the beneficial ownership of our common stock, the sole outstanding class of
our voting securities, by (i) any person or group owning more than 5% of each
class of voting securities, (ii) each director, (iii) each executive officer
named in the Summary Compensation Table in the section entitled “Executive
Compensation” below and (iv) all executive officers and directors as a
group.
 
 Beneficial
ownership is determined in accordance with the rules of the Securities and
Exchange Commission and generally includes voting or investment power with
respect to securities. Shares of common stock subject to options, warrants or
convertible securities exercisable or convertible within 60 days of March 13,
2009 are deemed outstanding for computing the percentage of the person or entity
holding such options, warrants or convertible securities but are not deemed
outstanding for computing the percentage of any other person, and is based on
10,097,449 common shares issued and outstanding and options, warrants or
convertible securities for each individual beneficial owner on a fully converted
basis as of March 13, 2009.
 
 Amount
      and Nature of Beneficial OwnershipName
      and Address of Beneficial Owners (1) (2)
                                                                  
                                                                  #
      of Shares
                                                                  
                                                                  
                                                                  %
      of ClassKexuan
      Yao
                                                                  
                                                                  
                                                                  5,300,000
                                                                  
                                                                  
                                                                  
                                                                  52.49
                                                                  %Weigang
      Zhao (3)
                                                                  
                                                                  
                                                                  10,000
                                                                  
                                                                  
                                                                  
                                                                  *Fengtao
      Wen (4)
                                                                  
                                                                  
                                                                  8,000
                                                                  
                                                                  
                                                                  
                                                                  *All named executive officers
      and directors as a group (four (4) persons)
                                                                  
                                                                  
                                                                  5,318,000
                                                                  
                                                                  
                                                                  
                                                                  52.67
                                                                  %Feng
      Gao (5)
                                                                  
                                                                  
                                                                  2,000,000
                                                                  
                                                                  
                                                                  
                                                                  16.53
                                                                  %China
      Direct, Inc. (6)
                                                                  
                                                                  
                                                                  1,380,081
                                                                  
                                                                  
                                                                  
                                                                  13.56
                                                                  %
 
 
 *
                Less than 1%.(1)
                Pursuant
      to Rule 13d-3 under the Exchange Act, a person has beneficial ownership of
      any securities as to which such person, directly or indirectly, through
      any contract, arrangement, undertaking, relationship or otherwise has or
      shares voting power and/or investment power or as to which such person has
      the right to acquire such voting and/or investment power within 60
      days.(2)
                Unless
      otherwise stated, each beneficial owner has sole power to vote and dispose
      of the shares and the address of such person(s) in c/o our principal U.S.
      offices at One Waters Park Drive, Suite 98, San Mateo, CA
      94403.(3)
                The
      number of shares beneficially owned by Mr. Zhao includes warrants to
      purchase 5,000 shares of our common stock at $5.00 per
    share.(4)
                The
      number of shares beneficially owned by Mr. Wen includes warrants to
      purchase 4,000 shares of our common stock at $5.00 per
    share.(5)
                The
      number of shares beneficially owned by Ms. Gao includes an option to
      purchase 2,000,000 shares of our common stock at an exercise price of
      $5.00 per share expiring on September 30, 2010.(6)
                Includes
      (i) 448,100 shares of common stock held by China Direct Investments, Inc.
      and (ii) 841,700 shares of common stock held by Capital One Resource Co.,
      Ltd., both of whom are wholly owned subsidiaries of China Direct, Inc. and
      (iii) a warrant to purchase 90,281 number of shares of common stock
      with an exercise price of $5.00 per share fully earned and exercisable and
      an expiration date of August 8, 2014.  The address of China
      Direct, Inc., is 431 Fairway Drive, Suite 200, Deerfield Beach, Florida
      33441
 
 ITEM 13. CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTORINDEPENDENCE
 
 Transactions
with Related Persons
  The
following includes a summary of transactions, or any currently proposed
transaction, in which we were or are to be a participant and the amount involved
exceeded or exceeds the lesser of $120,000 or one percent of the average of our
total assets at year-end for the last three completed fiscal years, and in which
any related person had or will have a direct or indirect material interest
(other than compensation described under “Executive Compensation”). We believe
the terms obtained or consideration that we paid or received, as applicable, in
connection with the transactions described below were comparable to terms
available or the amounts that would be paid or received, as applicable, in
arm’s-length transactions.
 
  - 31
-
  Related Party
Transactions
 
 On
January 1, 2006, we entered into a lease for our office space in the City of
Zhengzhou, Henan Province from Mr. Yao, our Chief Executive
Officer.  The office space consists of approximately 2,000 square feet
pursuant to a lease that expires on December 31, 2011.  Lease payments
of RMB120,000 per year under the lease were $16,451and $15,775 for year
ended December 31, 2008 and 2007, respectively.
 
 We
purchased certain products from Prime Armet Group Inc. (“Prime Armet”), an
entity wholly-owned and controlled by Mr. Yao, our Chief Executive
Officer.  The Company did not purchase any products from Prime Armet
for the year ended December 31, 2008.  For the year ended December 31,
2007 total purchases from Prime Armet amounted to $496,951 representing 0.8% of
our total purchases.
 Mr. Yao,
our Chairman and Chief Executive Officer advanced funds to the Company for our
working capital purposes. These advances were unsecured, due on demand and
non-interest bearing.  Advances from our CEO at December 31, 2008 and
2007 were $236,595 and $921,444, respectively.
  Reorganization Related
Transactions
 
 On June
27, 2008, we acquired all of the issued and outstanding capital stock of Armco
pursuant to a Share Purchase Agreement. Armco owns 100% of the capital stock of
each of Armet Lianyungang and Henan Armco, both of which are limited liability
companies established under the laws of the People’s Republic of China. Pursuant
to the Share Purchase Agreement, we purchased 100% of the issued and outstanding
shares of Armco’s capital stock from Feng Gao for $6,890,000 by delivery of our
promissory note. In addition, we issued to Ms. Gao a stock option entitling Ms.
Gao to purchase a total of 5,300,000 shares of our common stock at $1.30 per
share and 2,000,000 shares at $5.00 per share which expire on June 30,
2010.  On August 12, 2008, Ms. Gao exercised her option to purchase
and we issued 5,300,000 shares in exchange for the $6,890,000 of our purchase
money promissory note owed to Ms. Gao.  On January 7, 2009, Mr. Yao
exercised his call rights with respect to 5,300,000 shares of our common stock
at an exercise price of $0.001 per share from Ms. Gao, pursuant to a call option
agreement.
 
 Policies
and Procedures for Review, Approval or Ratification of Transactions with Related
Persons
  We are in
the process of adopting a written related-person transactions policy that sets
forth our policies and procedures regarding the identification, review,
consideration and approval or ratification of “related-persons transactions.”
For purposes of our policy only, a “related-person transaction” will be a
transaction, arrangement or relationship (or any series of similar transactions,
arrangements or relationships) in which we and any “related person” are
participants involving an amount that exceeds $50,000. Transactions involving
compensation for services provided to us as an employee, director, consultant or
similar capacity by a related person will not be covered by this policy. A
related person will be any executive officer, director or a holder of more than
five percent of our common stock, including any of their immediate family
members and any entity owned or controlled by such persons.
  Under the
policy, we expect that where a transaction has been identified as a
related-person transaction, management must present information regarding the
proposed related-person transaction to our audit committee (or, where approval
by our audit committee would be inappropriate, to another independent body of
our board of directors) for consideration and approval or ratification. The
presentation will be expected to include a description of, among other things,
the material facts, and the direct and indirect interests of the related
persons, the benefits of the transaction to us and whether any alternative
transactions are available. To identify related-person transactions in advance,
we will rely on information supplied by our executive officers, directors and
certain significant stockholders. In considering related-person transactions,
our audit committee will take into account the relevant available facts and
circumstances including, but not limited to:
  ·
              the
      risks, costs and benefits to us;·
              the
      impact on a director’s independence in the event the related person is a
      director, immediate family member of a director or an entity with which a
      director is affiliated;·
              the
      terms of the transaction;·
              the
      availability of other sources for comparable services or products;
      and·
              the
      terms available to or from, as the case may be, unrelated third parties or
      to or from our employees
generally.
  In the
event a director has an interest in the proposed transaction, the director must
excuse himself or herself form the deliberations and approval. Our policy will
require that, in determining whether to approve, ratify or reject a
related-person transaction, our audit committee must consider, in light of known
circumstances, whether the transaction is in, or is not inconsistent with, the
best interests of our company and our stockholders, as our audit committee
determines in the good faith exercise of its discretion. We did not previously
have a formal policy concerning transactions with related
persons.
  - 32
-
  
 ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
  Audit
Fees
 
 Li &
Company, PC served as our independent registered public accounting firm for 2008
and 2007. The following table shows the fees that were billed for the audit and
other services provided by such firm for 2008 and 2007.
 
 2008
                      
                      
                      2007Audit
      Fees
                      
                      $
                      90,000
                      
                      
                      $
                      72,146Audit-Related
      Fees
                      
                      
                      —
                      
                      
                      
                      —Tax
      Fees
                      
                      
                      —
                      
                      
                      
                      —All
      Other Fees
                      
                      
                      2,500
                      
                      
                      
                      —Total
                      
                      $
                      92,500
                      
                      
                      $
                      72,146
 
 Audit Fees — This category
includes the audit of our annual financial statements included in our Form 10-K
Annual Report, review of financial statements included in our Form 10-Q
Quarterly Reports and services that are normally provided by the independent
auditors in connection with engagements for those fiscal years. This category
also includes advice on audit and accounting matters that arose during, or as a
result of, the audit or the review of interim financial statements.
 
 Audit-Related Fees — This
category consists of assurance and related services by the independent auditors
that are reasonably related to the performance of the audit or review of our
financial statements and are not reported above under “Audit Fees”. The services
for the fees disclosed under this category include consultation regarding our
correspondence with the SEC and other accounting consulting.
 
 Tax Fees — This category
consists of professional services rendered by our independent auditors for tax
compliance and tax advice. The services for the fees disclosed under this
category include tax return preparation and technical tax advice.
 
 All Other Fees — This
category consists of fees for review of our registration statement included in
our Form S-1 Registration Report.
 
 Effective
May 6, 2003, the Securities and Exchange Commission adopted rules that require
that before our auditor is engaged by us or our subsidiaries to render any
auditing or permitted non-audit related service, the engagement be:
 
 ·
              approved
      by our audit committee; or·
              entered
      into pursuant to pre-approval policies and procedures established by the
      audit committee, provided the policies and procedures are detailed as to
      the particular  service,  the  audit
      committee is informed of each service, and such policies and procedures do
      not include delegation of the audit committee's responsibilities to
      management.
 
 We do not
have an audit committee.  Our entire board of directors pre-approves
all services provided by our independent auditors. The pre-approval process has
just been implemented in response to the new rules. Therefore, our board of
directors does not have records of what percentages of the above
fees were pre-approved.  However, all of the above services and fees
were reviewed and approved by the entire board of directors either before or
after the respective services were rendered.
   - 33
-
   PART
IV
 
 ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
 
 a)
Documents filed as part of this Annual Report
  1.
Consolidated Financial Statements
  2.
Financial Statement Schedules
  3.
Exhibits
  ExhibitNumber
                  
                  Description2.1
      (1)
                  
                  Share
      Purchase Agreement between Cox Distributing, Inc. and Armco & Metawise
      (HK), Ltd., dated June 27, 2008.3.1
      (2)
                  
                  Articles
      of Incorporation of the Registrant as filed with the Secretary of State of
      Nevada.3.2
      (2)
                  
                  Bylaws
      of the registrant.4.1
      (3)
                  
                  Form
      of Warrant10.1
      (1)
                  
                  Stock
      Option Agreement between Cox Distributing, Inc. and Feng Gao dated June
      27, 200810.2
      (1)
                  
                  Call
      Option Agreement between Kexuan Yao and Feng Gao, dated June 27,
      200810.3
      (1)
                  
                  Exclusive
      Consulting Agreement between Armco & Metawise (HK) Ltd. and Henan
      Armco & Metawise Trading Co., Ltd. dated June 27,
2008.10.4
      (1)
                  
                  Exclusive
      Consulting Agreement between Armco & Metawise (HK) Ltd. and Armet
      (Lianyungang) Scraps Co., Ltd. dated June 27, 2008.10.5
      (1)
                  
                  Consulting
      Agreement between Stephen E. Cox (“Client”), and Capital Once Resource
      Co., Ltd. dated June 27, 200810.6
      (1)
                  
                  Services
      Agreement between Stephen D. Cox Supply and Cox Distributing, Inc. dated
      June 27, 2008.10.7
      (3)
                  
                  Form
      of Subscription Agreement10.8
      (3)
                  
                  Form
      of Regulation S Subscription Agreement10.9
      (4)
                  
                  Cancellation
      Agreement with Feng Gao10.10
      (5)+
                  
                  Employment
      Agreement between the China Armco Metals, Inc. and Mr. Kexuan Yao, dated
      December 18, 200810.11
      (5)
                  
                  Amendment
      to Call Option Agreement between Mr. Kexuan Yao and Ms. Feng Gao, dated
      December 18, 200821.1*
                  
                  List of subsidiaries of the
      Registrant24
                  
                  Power
      of Attorney (included on the signature page of this Registration
      Statement).31.1*
                  
                  Rule 13a-14(a)/ 15d-14(a) Certification of Chief
      Executive Officer31.2*
                  
                  Rule 13a-14(a)/ 15d-14(a) Certification of Chief
      Financial Officer32*
                  
                  Section 1350 Certification of Chief Executive Officer
      and Chief Financial Officer
 
 
 (1)
Incorporated herewith by reference to the Registrant’s Current Report on Form
8-K filed on July 1, 2008.
 (2)
Incorporated herewith by reference to the Registrant’s Registration Statement on
Form SB-2 filed on August 27, 2007.
 (3)
Incorporated herewith by reference to the Registrant’s Current Report on Form
8-K filed on July 31, 2008.
 (4)
Incorporated herewith by reference to the Registrant’s Registration Statement on
Form S-1 filed on September 11, 2008.
 (5)
Incorporated herewith by reference to the Registrant’s Current Report on Form
8-K filed on January 13, 2009.
  Management
contract or compensatory plan or arrangement.  Filed
herewith.
 
 - 34
-
 
  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, there unto duly authorized on March 13, 2009.
  CHINA ARMCO METALS,
INC.
  By:
              /s/Kexuan
    YaoChief
      Executive Officer and
                Chairman
      of the Board of Directors (Principal Executive
  Officer)
 
 We, the
undersigned directors and officers of China Armco Metals, Inc., hereby severally
constitute Kexuan Yao and Fengtao Wen, and each of them singly, our true and
lawful attorneys with full power to them and each of them to sign for us, in our
names in the capacities indicated below, any and all amendments to this Annual
Report on Form 10-K filed with the Securities and Exchange
Commission.
  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/
      Kexuan Yao
              
              Chief
      Executive Officer, and Chairman of the Board (Principal Executive
      Officer)
              March
      27, 2009Kexuan
      Yao/s/Fengtao
      Wen
              
              Chief
      Financial Officer (Principal Financial and Accounting
    Officer)
              March
      27, 2009Fengtao
      Wen/s/Weigang
      Zhao
              
              Director
              March
      27, 2009Weigang
      Zhao
  - 35
-
  Item
8.  Financial Statements and Supplementary Data
  China
Armco Metals, Inc. and Subsidiaries
  
  December
31, 2008 and 2007
  
  Index to
Audited Consolidated Financial Statements
  Contents
              Page(s)Report of Independent Registered Public Accounting
      Firm
              F-2Consolidated Balance Sheets
              F-3Consolidated Statements of Incomeand Comprehensive Income
              F-4Consolidated Statement of Stockholders’
      Equity
              F-5Consolidated Statements of Cash
      Flows
              F-6Notes to the Audited Consolidated Financial
      Statements
              F-7
      to F-24Schedule:Schedule
      II Valuation and Qualifying Accounts for the year ended December 31, 2008
      and 2007
              F-25
  - F-1
-
  REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
  
  To the
Board of Directors and Stockholders of
 China
Armco Metals, Inc.
 San
Mateo, California
  We have
audited the accompanying consolidated balance sheets of China Armco Metals, Inc.
and Subsidiaries (collectively “Armco Metals” or the “Company”) as of December
31, 2008 and 2007, and the related consolidated statements of income and
comprehensive income, stockholders’ equity and cash flows for the years then
ended.  These consolidated financial statements are the responsibility
of the Company’s management.  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.  The
Company is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting.  Our audits included
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purposes of expressing an opinion on the effectiveness of the Company’s
internal control over financial reporting.  Accordingly, we express no
such opinion.  An audit includes examining on a test basis, evidence
supporting the amount and disclosures in the financial statements.  An
audit also includes 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 the Company as of December 31, 2008 and 2007, and the
related consolidated statements of income and comprehensive income,
stockholders’ equity and cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States of
America.
  
  /s/Li & Company,
PC
 Li &
Company, PC
  
  Skillman,
New Jersey
 March 12,
2009
  
  - F-2
-
  CHINA
      ARMCO METALS, INC. AND SUBSIDIARIESCONSOLIDATED
      BALANCE SHEETSDecember
      31, 2008
                                                                                                                            
                                                                                                                            December
      31, 2007ASSETSCURRENT
      ASSETS:Cash
                                                                                                                            $
                                                                                                                            3,253,533
                                                                                                                            
                                                                                                                            $
                                                                                                                            232,286Pledged
      deposits
                                                                                                                            
                                                                                                                            -
                                                                                                                            
                                                                                                                            
                                                                                                                            564,150Accounts
      receivable, net
                                                                                                                            
                                                                                                                            16,722,307
                                                                                                                            
                                                                                                                            
                                                                                                                            2,586,529Inventories
                                                                                                                            
                                                                                                                            197,402
                                                                                                                            
                                                                                                                            
                                                                                                                            2,434,908Advance
      on purchases
                                                                                                                            
                                                                                                                            3,680,872
                                                                                                                            
                                                                                                                            
                                                                                                                            1,846,113Prepayments
      and other current assets
                                                                                                                            
                                                                                                                            379,452
                                                                                                                            
                                                                                                                            
                                                                                                                            -Total
      Current Assets
                                                                                                                            
                                                                                                                            24,233,566
                                                                                                                            
                                                                                                                            
                                                                                                                            7,663,986PROPERTY,
      PLANT AND EQUIPMENT, net
                                                                                                                            
                                                                                                                            2,377,816
                                                                                                                            
                                                                                                                            
                                                                                                                            131,596LAND
      USE RIGHTS, net
                                                                                                                            
                                                                                                                            2,208,902
                                                                                                                            
                                                                                                                            
                                                                                                                            2,108,983Total
      Assets
                                                                                                                            
                                                                                                                            28,820,284
                                                                                                                            
                                                                                                                            
                                                                                                                            9,904,565LIABILITIES
      AND STOCKHOLDERS' EQUITYCURRENT
      LIABILITIES:Forward
      foreign currency exchange contracts
                                                                                                                            
                                                                                                                            -
                                                                                                                            
                                                                                                                            
                                                                                                                            308,744Forward
      foreign currency exchange swap liabilities
                                                                                                                            
                                                                                                                            -
                                                                                                                            
                                                                                                                            
                                                                                                                            12,079Loans
      payable
                                                                                                                            
                                                                                                                            2,914,345
                                                                                                                            
                                                                                                                            
                                                                                                                            -Accounts
      payable
                                                                                                                            
                                                                                                                            6,694,534
                                                                                                                            
                                                                                                                            
                                                                                                                            290,740Advances
      from stockholder
                                                                                                                            
                                                                                                                            236,595
                                                                                                                            
                                                                                                                            
                                                                                                                            921,444Customer
      deposits
                                                                                                                            
                                                                                                                            2,613,653
                                                                                                                            
                                                                                                                            
                                                                                                                            2,228,720Taxes
      payable
                                                                                                                            
                                                                                                                            1,039,312
                                                                                                                            
                                                                                                                            
                                                                                                                            8Accrued
      expenses and other current liabilities
                                                                                                                            
                                                                                                                            32,899
                                                                                                                            
                                                                                                                            
                                                                                                                            1,058,697Total
      Current Liabilities
                                                                                                                            
                                                                                                                            13,531,338
                                                                                                                            
                                                                                                                            
                                                                                                                            4,820,432COMMITMENTS
      AND CONTINGENCIESSTOCKHOLDERS'
      EQUITY:Preferred
      stock, $0.001 par value; 1,000,000 shares authorized;none
      issued or outstanding
                                                                                                                            
                                                                                                                            -
                                                                                                                            
                                                                                                                            
                                                                                                                            -Common
      stock, $0.001 par value, 74,000,000 shares authorized,10,092,449
      and 5,300,000 shares issued and outstanding, respectively
                                                                                                                            
                                                                                                                            10,092
                                                                                                                            
                                                                                                                            
                                                                                                                            5,300Additional
      paid-in capital
                                                                                                                            
                                                                                                                            6,942,588
                                                                                                                            
                                                                                                                            
                                                                                                                            367,726Retained
      earnings
                                                                                                                            
                                                                                                                            7,967,064
                                                                                                                            
                                                                                                                            
                                                                                                                            4,634,449Accumulated
      other comprehensive income:Foreign
      currency translation gain
                                                                                                                            
                                                                                                                            369,202
                                                                                                                            
                                                                                                                            
                                                                                                                            76,658Total
      Stockholders' Equity
                                                                                                                            
                                                                                                                            15,288,946
                                                                                                                            
                                                                                                                            
                                                                                                                            5,084,133Total
      Liabilities and Stockholders' Equity
                                                                                                                            $
                                                                                                                            28,820,284
                                                                                                                            
                                                                                                                            $
                                                                                                                            9,904,565See
      accompanying notes to the Consolidated Financial
  Statements
  - F-3
-
   CHINA
      ARMCO METALS, INC. AND SUBSIDIARIESCONSOLIDATED
      STATEMENTS OF INCOME AND COMPREHENSIVE INCOMEFor
      the Year
                                                  
                                                  
                                                  For
      the YearEnded
                                                  
                                                  
                                                  EndedDecember
      31, 2008
                                                  
                                                  
                                                  December
      31, 2007NET
      REVENUES
                                                  
                                                  $
                                                  55,358,567
                                                  
                                                  
                                                  $
                                                  75,278,853COST
      OF GOODS SOLD
                                                  
                                                  
                                                  51,226,667
                                                  
                                                  
                                                  
                                                  68,817,654GROSS
      PROFIT
                                                  
                                                  
                                                  4,131,900
                                                  
                                                  
                                                  
                                                  6,461,199OPERATING
      EXPENSES:Selling
      expenses
                                                  
                                                  
                                                  121,362
                                                  
                                                  
                                                  
                                                  449,048General
      and administrative expenses
                                                  
                                                  
                                                  1,129,442
                                                  
                                                  
                                                  
                                                  567,081Total
      operating expenses
                                                  
                                                  
                                                  1,250,804
                                                  
                                                  
                                                  
                                                  1,016,129INCOME
      FROM CONTINUING OPERATIONS
                                                  
                                                  
                                                  2,881,096
                                                  
                                                  
                                                  
                                                  5,445,070OTHER
      (INCOME) EXPENSE:Interest
      income
                                                  
                                                  
                                                  (15,696
                                                  )
                                                  
                                                  
                                                  (585
                                                  )Interest
      expense
                                                  
                                                  
                                                  164,110
                                                  
                                                  
                                                  
                                                  17,556Import
      and export agency income
                                                  
                                                  
                                                  (3,367
                                                  )
                                                  
                                                  
                                                  (14,070
                                                  )Gain
      from contracts termination
                                                  
                                                  
                                                  (1,151,453
                                                  )
                                                  
                                                  
                                                  -Loss
      on forward foreign currency contracts
                                                  
                                                  
                                                  19,739
                                                  
                                                  
                                                  
                                                  12,079Other
      (income) expense
                                                  
                                                  
                                                  (191,097
                                                  )
                                                  
                                                  
                                                  38,911Total
      other (income) expense
                                                  
                                                  
                                                  (1,177,764
                                                  )
                                                  
                                                  
                                                  53,891INCOME
      FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
                                                  
                                                  
                                                  4,058,860
                                                  
                                                  
                                                  
                                                  5,391,179INCOME
      TAXES
                                                  
                                                  
                                                  787,759
                                                  
                                                  
                                                  
                                                  -INCOME
      FROM CONTINUING OPERATIONS
                                                  
                                                  
                                                  3,271,101
                                                  
                                                  
                                                  
                                                  5,391,179DISCONTINUED
      OPERATIONSGain
      on disposal of discontinued operations, net of tax
                                                  
                                                  
                                                  61,514
                                                  
                                                  
                                                  
                                                  -INCOME
      FROM DISCONTINUED OPERATIONS
                                                  
                                                  
                                                  61,514
                                                  
                                                  
                                                  
                                                  -NET
      INCOME
                                                  
                                                  
                                                  3,332,615
                                                  
                                                  
                                                  
                                                  5,391,179OTHER
      COMPREHENSIVE INCOME:Foreign
      currency translation gain
                                                  
                                                  
                                                  292,544
                                                  
                                                  
                                                  
                                                  67,026COMPREHENSIVE
      INCOME
                                                  
                                                  $
                                                  3,625,159
                                                  
                                                  
                                                  $
                                                  5,458,205NET
      INCOME PER COMMON SHARE - BASIC AND DILUTED:Continuing
      operations
                                                  
                                                  $
                                                  0.44
                                                  
                                                  
                                                  $
                                                  1.02Discontinued
      operations
                                                  
                                                  $
                                                  0.00
                                                  
                                                  
                                                  $
                                                  0.00Total
      net income per common share
                                                  
                                                  $
                                                  0.44
                                                  
                                                  
                                                  $
                                                  1.02Weighted
      Common Shares Outstanding - basic and diluted
                                                  
                                                  
                                                  7,512,085
                                                  
                                                  
                                                  
                                                  5,300,000See
      accompanying notes to the Consolidated Financial
Statements
  - F-4
-
 CHINA
      ARMCO METALS, INC. AND SUBSIDIARIESCONSOLIDATED
      STATEMENT OF STOCKHOLDERS' EQUITYFor
      the Year Ended December 31, 2008Common
      Stock, $0.001 Par Value
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          Accumulated
      Other Comprehensive IncomeNumber
      of Shares
                                          
                                          
                                          Amount
                                          
                                          
                                          Additional
      Paid-in Capital
                                          
                                          
                                          Retained
      Earnings (Deficit)
                                          
                                          
                                          Foreign
      Currency Translation Gain
                                          
                                          
                                          Total
      Stockholders' EquityBalance,
      December 31, 2006
                                          
                                          
                                          5,300,000
                                          
                                          
                                          $
                                          5,300
                                          
                                          
                                          $
                                          367,726
                                          
                                          
                                          $
                                          702,658
                                          
                                          
                                          $
                                          9,632
                                          
                                          
                                          $
                                          1,085,316Comprehensive
      incomeNet
      income
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          5,391,179
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          5,391,179Foreign
      currency translation gain
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          67,026
                                          
                                          
                                          
                                          67,026Total
      comprehensive income
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          5,458,205Dividends
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          (1,459,388
                                          )
                                          
                                          
                                          
                                          
                                          
                                          
                                          (1,459,388
                                          )Balance,
      December 31, 2007
                                          
                                          
                                          5,300,000
                                          
                                          
                                          
                                          5,300
                                          
                                          
                                          
                                          367,726
                                          
                                          
                                          
                                          4,634,449
                                          
                                          
                                          
                                          76,658
                                          
                                          
                                          
                                          5,084,133Reverse
      acquisition adjustment
                                          
                                          
                                          2,306,000
                                          
                                          
                                          
                                          2,306
                                          
                                          
                                          
                                          (61,326
                                          )
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          (59,020
                                          )Issuance
      of common stock for cash fromJuly
      25, 2008 through August 8, 2008,
                                          
                                          
                                          2,486,649
                                          
                                          
                                          
                                          2,487
                                          
                                          
                                          
                                          1,520,790
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          1,523,277net
      of offering costsIssuance
      of warrants in connection with sale ofcommon
      stock for cash in July and August, 2008
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          5,097,404
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          5,097,404Issuance
      of common stock for services onOctober
      15, 2008
                                          
                                          
                                          6,000
                                          
                                          
                                          
                                          6
                                          
                                          
                                          
                                          17,994
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          18,000Cancellation
      of common stock for sale offertilizer
      business on December 30, 2008
                                          
                                          
                                          (6,200
                                          )
                                          
                                          
                                          (7
                                          )
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          (7
                                          )Comprehensive
      incomeNet
      income
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          3,332,615
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          3,332,615Foreign
      currency translation gain
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          292,544
                                          
                                          
                                          
                                          292,544Total
      comprehensive income
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          3,625,159Balance,
      December 31, 2008
                                          
                                          
                                          10,092,449
                                          
                                          
                                          $
                                          10,092
                                          
                                          
                                          $
                                          6,942,588
                                          
                                          
                                          $
                                          7,967,064
                                          
                                          
                                          $
                                          369,202
                                          
                                          
                                          $
                                          15,288,946See
      accompanying notes to the Consolidated Financial
Statements
 
   - F-5
-
  
  CHINA
      ARMCO METALS, INC. AND SUBSIDIARIESCONSOLIDATED
      STATEMENTS OF CASH FLOWSFor
      the Year
                                                  
                                                  
                                                  For
      the YearEnded
                                                  
                                                  
                                                  EndedDecember
      31, 2008
                                                  
                                                  
                                                  December
      31, 2007CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income
                                                  
                                                  $
                                                  3,332,615
                                                  
                                                  
                                                  $
                                                  5,391,179Adjustments
      to reconcile net income to net cashprovided
      by (used in) operating activitiesDepreciation
      expenses
                                                  
                                                  
                                                  34,413
                                                  
                                                  
                                                  
                                                  46,370Amortization
      expense
                                                  
                                                  
                                                  46,018
                                                  
                                                  
                                                  
                                                  -Stock
      based compensation
                                                  
                                                  
                                                  18,000
                                                  
                                                  
                                                  
                                                  -Advances
      to sole stockholder treated as dividends
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  (1,459,388
                                                  )Loss
      from disposal of property and equipment
                                                  
                                                  
                                                  5,433
                                                  
                                                  
                                                  
                                                  12,803Gain
      from disposal of discontinued operations
                                                  
                                                  
                                                  (61,514
                                                  )
                                                  
                                                  
                                                  -Changes
      in operating assets and liabilities:Accounts
      receivable
                                                  
                                                  
                                                  (15,476,396
                                                  )
                                                  
                                                  
                                                  (747,438
                                                  )Inventories
                                                  
                                                  
                                                  2,405,995
                                                  
                                                  
                                                  
                                                  (1,876,367
                                                  )Advance
      on purchases
                                                  
                                                  
                                                  (1,720,207
                                                  )
                                                  
                                                  
                                                  36,270Prepayments
      and other current assets
                                                  
                                                  
                                                  (260,437
                                                  )
                                                  
                                                  
                                                  -Forward
      foreign exchange contracts swap
                                                  
                                                  
                                                  19,739
                                                  
                                                  
                                                  
                                                  12,079Accounts
      payable
                                                  
                                                  
                                                  6,444,793
                                                  
                                                  
                                                  
                                                  4,954Customer
      deposits
                                                  
                                                  
                                                  230,711
                                                  
                                                  
                                                  
                                                  (1,360,542
                                                  )Taxes
      payable
                                                  
                                                  
                                                  1,158,952
                                                  
                                                  
                                                  
                                                  (152,360
                                                  )Accrued
      expenses and other current liabilities
                                                  
                                                  
                                                  19,022
                                                  
                                                  
                                                  
                                                  999,880NET
      CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
                                                  
                                                  
                                                  (3,802,863
                                                  )
                                                  
                                                  
                                                  907,440CASH
      FLOWS FROM INVESTING ACTIVITIES:Proceeds
      from release of pledged deposits
                                                  
                                                  
                                                  603,187
                                                  
                                                  
                                                  
                                                  305,000Payment
      made towards pledged deposits
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  (564,150
                                                  )Purchases
      of property and equipment
                                                  
                                                  
                                                  (2,276,963
                                                  )
                                                  
                                                  
                                                  (125,168
                                                  )Purchase
      of land use right
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  (2,119,417
                                                  )NET
      CASH USED IN INVESTING ACTIVITIES
                                                  
                                                  
                                                  (1,673,776
                                                  )
                                                  
                                                  
                                                  (2,503,735
                                                  )CASH
      FLOWS FROM FINANCING ACTIVITIES:Proceeds
      from forward foreign exchanage contracts
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  308,744Payment
      of forward foreign exchanage contracts
                                                  
                                                  
                                                  (343,023
                                                  )
                                                  
                                                  
                                                  -Proceeds
      from loans payable
                                                  
                                                  
                                                  2,914,345
                                                  
                                                  
                                                  
                                                  -Amounts
      received from (paid to) related parties
                                                  
                                                  
                                                  (710,041
                                                  )
                                                  
                                                  
                                                  1,181,743Sale
      of common stock and warrants, net of offering costs
                                                  
                                                  
                                                  6,623,168
                                                  
                                                  
                                                  
                                                  -NET
      CASH PROVIDED BY FINANCING ACTIVITIES
                                                  
                                                  
                                                  8,484,449
                                                  
                                                  
                                                  
                                                  1,490,487EFFECT
      OF EXCHANGE RATE CHANGES ON CASH
                                                  
                                                  
                                                  13,436
                                                  
                                                  
                                                  
                                                  200,296NET
      CHANGE IN CASH
                                                  
                                                  
                                                  3,021,246
                                                  
                                                  
                                                  
                                                  94,488Cash
      at beginning of year
                                                  
                                                  
                                                  232,286
                                                  
                                                  
                                                  
                                                  137,798Cash
      at end of year
                                                  
                                                  $
                                                  3,253,532
                                                  
                                                  
                                                  $
                                                  232,286SUPPLEMENTAL
      DISCLOSURE OF CASH FLOWS INFORMATION:Interest
      paid
                                                  
                                                  $
                                                  164,110
                                                  
                                                  
                                                  $
                                                  17,556Taxes
      paid
                                                  
                                                  $
                                                  -
                                                  
                                                  
                                                  $
                                                  -NON
      CASH FINANCING AND INVESTING ACTIVITIES:Advances
      to then sole stockholder treated as dividends
                                                  
                                                  $
                                                  -
                                                  
                                                  
                                                  $
                                                  1,459,388See
      accompanying notes to the Consolidated Financial
    Statements.
 
  - F-6
-
 CHINA
ARMCO METALS, INC. AND SUBSIDIARIES
 NOTES
TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2008 AND 2007
  NOTE
1 – ORGANIZATION AND OPERATIONS
   Cox
Distributing was founded as an unincorporated business in January 1984 and was
incorporated as Cox Distributing, Inc., a C corporation in the State of Nevada
on April 6, 2007 at which time 9,100,000 shares of common stock were issued to
the founder in exchange for the existing unincorporated business.  No
value was given to the stock issued by the newly formed corporation.
 Therefore, the shares were recorded to reflect the $.001 par value and
paid in capital was recorded as a negative amount ($910).  The Company
engaged in the distribution of organic fertilizer products used to improve soil
and growing conditions for the potato farmers of eastern Idaho.  On
June 27, 2008, the Company amended its Articles of Incorporation, and changed
its name to China Armco Metals, Inc. (“Armco Metals” or the “Company”) upon the
acquisition of Armco & Metawise (H.K) Limited and
Subsidiaries.  The Company believes that the new name will better
identify the Company with the business conducted by its wholly owned
subsidiaries in China, Armco & Metawise (H.K) Limited and Subsidiaries,
namely, the import, export and distribution of ferrous and non-ferrous ores and
metals, and the recycling of scrap steel.  On December 30, 2008, the
Company discontinued its business of distribution of organic fertilizer
products.
   Merger of Armco &
Metawise (H.K) Limited and Subsidiaries (“Armco??
   On June
27, 2008, the Company entered into a share purchase agreement (the “Share
Purchase Agreement”) and consummated a share purchase (the “Share Purchase”)
with Armco and Feng Gao, who owned 100% of the issued and outstanding shares of
Armco (the “Armco Shareholder”).  In connection with the acquisition,
the Company purchased from the Armco Shareholder 100% of the issued and
outstanding shares of Armco’s capital stock for $6,890,000 by delivery of the
Company’s purchase money promissory note.  In addition, the Company
issued to Ms. Gao a stock option entitling Ms. Gao to purchase a total of
5,300,000 shares of the Company’s common stock, par value $.001 per share (the
“Common Stock”) at $1.30 per share which expires on September 30, 2008 and
2,000,000 shares at $5.00 per share which expires on June 30, 2010 (the “Gao
Option”).  On August 12, 2008, Ms. Gao exercised her option to
purchase and the Company issued 5,300,000 shares of its common stock in exchange
for the $6,890,000 note owed to Ms. Gao.  The shares issued
represented approximately 69.7% of the issued and outstanding Common Stock
immediately after the consummation of the Share Purchase and exercise of the
option to purchase 5,300,000 shares of the Company’s common stock at $1.30 per
share.  As a result of the ownership interests of the former
shareholders of Armco, for financial statement reporting purposes, the merger
between the Company and Armco has been treated as a reverse acquisition with
Armco deemed the accounting acquirer and the Company deemed the accounting
acquiree under the purchase method of accounting in accordance with Statement of
Financial Accounting Standards No. 141 “Business Combinations”(“SFAS
No. 141”).  The reverse merger is deemed a capital transaction and the
net assets of Armco (the accounting acquirer) are carried forward to the Company
(the legal acquirer and the reporting entity) at their carrying value before the
combination.  The acquisition process utilizes the capital structure
of the Company and the assets and liabilities of Armco which are recorded at
historical cost.  The equity of the Company is the historical equity
of Armco retroactively restated to reflect the number of shares issued by the
Company in the transaction.
   Armco
& Metawise (H.K) Limited (“Armco”) was incorporated on July 13, 2001 under
the laws of the Hong Kong Special Administrative Region (“HK SAR”) of the
People’s Republic of China (“PRC”).  Armco engages in the import,
export and distribution of ferrous and non-ferrous ores and metals, and the
recycling of scrap steel.
   On
January 9, 2007, Armco formed Armet (LianYunGang) Renewable Resources Co,
Ltd. (“Armet”), as a wholly-owned foreign enterprise (“WOFE”) subsidiary in the
City of Lianyungang, Jiangsu Province, PRC.  Armet engages in the
recycling of scrap steel.
  Henan
Armco and Metawise Trading Co., Ltd. (“Henan”) was incorporated on June 6, 2002
in the City of Zhengzhou, Henan Province, PRC.  Henan engages in the
import, export and distribution of ferrous and non-ferrous ores and
metals.
   Merger of Henan Armco and
Metawise Trading Co., Ltd. (“Henan”) with Armet, Companies under Common
Control
   On
December 28, 2007, Armco by and through its wholly owned subsidiary, Armet,
entered into a Share Transfer Agreement with Henan, a company under common
control with Armco.  The acquisition of Henan has been recorded on the
purchase method of accounting at historical amounts as Armet and Henan were
under common control since June 2002.  The consolidated financial
statements have been presented as if the acquisition of Henan had occurred on
January 1, 2006.
   - F-7
-
 CHINA
ARMCO METALS, INC. AND SUBSIDIARIES
 NOTES
TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2008 AND 2007—CONTINUED
  
  
  NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
  Basis of
presentation
  The
Company’s consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America
(“U.S. GAAP”).
  The
consolidated financial statements include all the accounts of Armco and Henan as
of December 31, 2008 and 2007 and for the years then ended.  Armet is
included as of December 31, 2008 and for the year ended December 31, 2008 and
for the period from January 9, 2007 (inception) through December 31,
2007.  Armco Metals is included as of December 31, 2008 and for the
period from June 27, 2008 (date of acquisition) through December 31,
2008.  All inter-company balances and transactions have been
eliminated.
  Use of
estimates
  The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reporting amounts of revenues and expenses
during the reported period.  Significant estimates include the
estimated useful lives of property and equipment.  Actual results
could differ from those estimates.
  Cash
equivalents
  The
Company considers all highly liquid investments with maturities of three months
or less at the time of purchase to be cash equivalents.
  Pledged
deposits
  Pledged
deposits consists of (i) amounts held for outstanding letters of credit maturing
in specified periods and (ii) deposits held for outstanding forward foreign
currency hedging contracts maturing in specified periods.
  Trade accounts
receivable
  Trade
accounts receivable are recorded at the invoiced amount, net of an allowance for
doubtful accounts.  The allowance for doubtful accounts is the
Company’s best estimate of the amount of probable credit losses in the
Company’s existing accounts receivable. The Company determines the allowance
based on historical write-off experience, customer specific facts and economic
conditions. Bad debt expense is included in general and administrative expenses,
if any.
  Outstanding
account balances are reviewed individually for
collectability.  Account balances are charged off against the
allowance after all means of collection have been exhausted and the potential
for recovery is considered remote.  The Company does not have any
off-balance-sheet credit exposure to its customers.
  Inventories
  The
Company values inventories, consisting of purchased products, at the lower of
cost or market.  Cost is determined on the First-in and First-out
method.  The Company regularly reviews its inventories on hand and,
when necessary, records a provision for excess or obsolete inventories based
primarily on current selling price and sales prices of confirmed backlog
orders.  The Company determined that there was no inventory
obsolescence as of December 31, 2008 or 2007.
  Advance on
purchases
  Advance
on purchases primarily represent amounts paid to vendors for future delivery of
products, all of which were fully or partially refundable depending upon the
terms and conditions of the purchase agreements.
   - F-8
-
 CHINA
ARMCO METALS, INC. AND SUBSIDIARIES
 NOTES
TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2008 AND 2007—CONTINUED
  Property, plant and
equipment
  Property,
plant and equipment are recorded at cost.  Expenditures for major
additions and betterments are capitalized.  Maintenance and repairs
are charged to operations as incurred.  Depreciation of property,
plant and equipment is computed by the straight-line method (after taking into
account their respective estimated residual values) over the assets estimated
useful lives ranging from five (5) years to twenty (20) years.  Upon
sale or retirement of property, plant and equipment, the related cost and
accumulated depreciation are removed from the accounts and any gain or loss is
reflected in the consolidated statements of income and comprehensive
Income.  Leasehold improvements, if any, are amortized on a
straight-line basis over the term of the lease or the estimated useful lives,
whichever is shorter. Upon becoming fully amortized, the related cost and
accumulated amortization are removed from the accounts.
  Land use
right
  Land use
right represents the cost to obtain the right to use certain parcel of land in
the City of Lianyungang, Jiangsu Province, PRC.  Land use right is
carried at cost and amortized on a straight-line basis over the life of the
right of fifty (50) years.  Upon becoming fully amortized, the related
cost and accumulated amortization are removed from the accounts.
  Impairment of long-lived
assets
  The
Company follows Statement of Financial Accounting Standards No. 144 “Accounting for the Impairment or
Disposal of Long-Lived Assets”(“SFAS No. 144”) for its long-lived
assets. The Company’s long-lived assets, which include property, plant and
equipment, and land use right are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable.
  The
Company assesses the recoverability of its long-lived assets by comparing the
projected undiscounted net cash flows associated with the related long-lived
asset or group of long-lived assets over their remaining estimated useful lives
against their respective carrying amounts. Impairment, if any, is based on the
excess of the carrying amount over the fair value of those
assets.  Fair value is generally determined using the asset’s expected
future discounted cash flows or market value, if readily
determinable.  If long-lived assets are determined to be recoverable,
but the newly determined remaining estimated useful lives are shorter than
originally estimated, the net book values of the long-lived assets are
depreciated over the newly determined remaining estimated useful
lives.  The Company determined that there were no impairments of
long-lived assets as of December 31, 2008 or 2007.
  Customer
deposits
  Customer
deposits primarily represent amounts received from customers for future delivery
of products, all of which were fully or partially refundable depending upon the
terms and conditions of the sales agreements.
  Derivatives
  The
Company accounts for derivatives in accordance with Statement of Financial
Accounting Standards No. 133 “Accounting for Derivative
Instruments and Hedging Activities” (“SFAS No. 133”) and the related
interpretations. SFAS No. 133, as amended, requires companies to recognize all
derivative instruments as either assets or liabilities in the balance sheet at
fair value.  The accounting for changes in the fair value of a
derivative instrument depends on: (i) whether the derivative has been designated
and qualifies as part of a hedging relationship, and (ii) the type of hedging
relationship.  For those derivative instruments that are designated
and qualify as hedging instruments, a company must designate the hedging
instrument based upon the exposure being hedged as either a fair value hedge,
cash flow hedge or hedge of a net investment in a foreign
operation.
  The
Company employs foreign currency forward contracts to convert unforeseeable
foreign currency exchange rate to fixed foreign currency exchange
rate.  The Company does not use derivatives for speculation or trading
purposes.  Changes in the fair value of derivatives are recorded each
period in current earnings or through other comprehensive income, depending on
whether a derivative is designated as part of a hedge transaction and the type
of hedge transaction.  The ineffective portion of all hedges is
recognized in current earnings.  The Company has sales and purchase
commitments denominated in foreign currencies.  Foreign currency
forward contracts are used to hedge against the risk of change in the fair value
of these commitments attributable to fluctuations in exchange rates (“Fair Value
Hedges”).  Changes in the fair value of the derivative instrument are
generally offset in the income statement by changes in the fair value of the
item being hedged.
   - F-9
-
 CHINA
ARMCO METALS, INC. AND SUBSIDIARIES
 NOTES
TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2008 AND 2007—CONTINUED
  Fair value of financial
instruments
  The
Company follows Statement of Financial Accounting Standards No. 107 “Disclosures about Fair Value of
Financial Instruments”(“SFAS No. 107”) for its financial
instruments.  The fair value of a financial instrument is the amount
at which the instrument could be exchanged in a current transaction between
willing parties.  The carrying amounts of financial assets and liabilities,
such as cash, accounts receivable, advance on purchases, prepayments and other
current assets, accounts payable, customer deposits, corporate income tax
payable, value added tax and other taxes payable, accrued expenses and other
current liabilities, approximate their fair values because of the short maturity
of these instruments.  The Company’s loans payable approximate the
fair value of such instruments based upon management’s best estimate of interest
rates that would be available to the Company for similar financial arrangements
at December 31, 2008.
  Revenue
recognition
  The
Company follows the guidance of the United States Securities and Exchange
Commission’s Staff Accounting Bulletin (“SAB”) No. 101 “Revenue Recognition” (“SAB
No. 101”), as amended by SAB No. 104 (“SAB No. 104”) and Topic 13 for revenue
recognition.  The Company recognizes revenue when it is realized or
realizable and earned less estimated future doubtful accounts.  The
Company considers revenue realized or realizable and earned when all of the
following criteria are met: (i) persuasive evidence of an arrangement exists,
(ii) the product has been shipped or the services have been rendered to the
customer, (iii) the sales price is fixed or determinable, and (iv)
collectability is reasonably assured.  In addition to the
aforementioned general policy, the following are the specific revenue
recognition policies for each major category of revenue:
 
 (i) Import, exportand distribution of ferrous and
non-ferrous ores and metals:  The Company derives its revenues
from sales contracts with customers with revenues being generated upon the
shipment of goods.  Persuasive evidence of an arrangement is
demonstrated via invoice, product delivery is evidenced by warehouse shipping
log as well as a signed bill of lading from the trucking or rail company and
title transfers upon shipment, based on free on board (“FOB”) warehouse terms;
the sales price to the customer is fixed upon acceptance of the purchase order
and there is no separate sales rebate, discount, or volume
incentive.  When the Company recognizes revenue, no provisions are
made for returns because, historically, there have been very few sales returns
and adjustments that have impacted the ultimate collection of
revenues.
  (ii) Import and exportagent
services:  Revenue from import and export agent services is
recognized as the services are provided.  The import and export agent
services are considered provided when the goods to be imported or exported by
the customer are delivered to the designated port specified by the service
contract.  The Company follows the Financial Accounting Standards
Board Emerging Issues Task Force Issue No. 99-19 “Reporting Revenue Gross as a
Principal versus Net as an Agent” for revenue recognition to report revenue net
for its import and export agent services since the Company (1) takes title to
the products with full payment for the goods and related cost from the customer,
(2) has no risks and rewards of ownership, such as the risk of loss for
collection, delivery, or returns, and (3) acts as an agent or broker (including
performing services, in substance, as an agent or broker) with compensation on a
commission or fee basis on any of its outsourcing projects.
  Net sales
of products represent the invoiced value of goods, net of value added taxes
(“VAT”).  The Company is subject to VAT which is levied on the
majority of the Company’s products at the rate of 13% on the invoiced value of
sales for year ended December 31, 2008 and 2007 and 17% on the invoiced value of
sales as of January 1, 2009.  Sales or Output VAT is borne by
customers in addition to the invoiced value of sales and Purchase or Input VAT
is borne by the Company in addition to the invoiced value of purchases to the
extent not refunded for export sales.
  Stock-based
compensation
  The
Company accounted for its stock based compensation under the recognition and
measurement principles of the fair value recognition provisions of Statement of
Financial Accounting Standards No. 123 (revised 2004) “Share-Based Payment” (“SFAS
No. 123R”) and the Financial Accounting Standards Board Emerging Issues Task
Force Issue No. 96-18“Accounting For Equity Instruments That Are Issued To Other Than Employees For
Acquiring, Or In Conjunction With Selling Goods Or Services” (“EITF No.
96-18”) using the modified prospective method.  All transactions in
which goods or services are the consideration received for the issuance of
equity instruments are accounted for based on the fair value of the
consideration received or the fair value of the equity instrument issued,
whichever is more reliably measurable.  The measurement date used to
determine the fair value of the equity instrument issued is the earlier of the
date on which the third-party performance is complete or the date on which it is
probable that performance will occur.  The fair value of each option
grant estimated on the date of grant uses the Black-Scholes option-pricing model
with the following weighted-average assumptions:
   - F-10
-
 CHINA
ARMCO METALS, INC. AND SUBSIDIARIES
 NOTES
TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2008 AND 2007—CONTINUED
  
  
  June
      27, 2008Expected
      option life (year)
                    
                    
                    2.00Expected
      volatility
                    
                    
                    0.00%Risk-free
      interest rate
                    
                    
                    2.65%Dividend
      yield
                    
                    
                    0.00%
 
  The
expected life of the options has been determined using the simplified method as
prescribed in SEC Staff Accounting Bulletin No. 107 (“SAB 107”).  The
Company’s policy is to recognize compensation cost for awards with only service
conditions and a graded vesting schedule on a straight-line basis over the
requisite service period for the entire award.  Additionally, the
Company’s policy is to issue new shares of common stock to satisfy stock option
exercises.
  The fair
value of each option award is estimated on the date of grant using a
Black-Scholes option-pricing valuation model.  The ranges of
assumptions for inputs shown in the table above for 2008 are as
follows:
  
              The
      Company uses historical data to estimate employee termination
      behavior.  The expected life of options granted is derived from
      SAB 107 and represents the period of time the options are expected to be
      outstanding.
  
              The
      expected volatility is based on a combination of the historical volatility
      of the comparable companies’ stock over the contractual life of the
      options.
  
              The
      risk-free interest rate is based on the U.S. Treasury yield curve in
      effect at the time of grant for periods within the contractual life of the
      option.
  
              The
      expected dividend yield is based on the Company’s current dividend yield
      as the best estimate of projected dividend yield for periods within the
      contractual life of the option.
 
 
 Shipping and handling
costs
 The Company accounts for shipping and
handling fees in accordance with the Financial Accounting Standards Board
Emerging Issues Task Force Issue No. 00-10 “Accounting for Shipping and Handling
Fees and Costs” (“EITF Issue No. 00-10”).  While amounts
charged to customers for shipping products are included in revenues, the related
costs are classified in cost of goods sold as incurred.
 
 
 Income
taxes
 The
Company follows Statement of Financial Accounting Standards No. 109 “Accounting for Income Taxes”
(“SFAS No. 109”), which requires recognition of deferred tax assets and
liabilities for the expected future tax consequences of events that have been
included in the financial statements or tax returns.  Under this
method, deferred tax assets and liabilities are based on the differences between
the financial statement and tax bases of assets and liabilities using enacted
tax rates in effect for the year in which the differences are expected to
reverse.  Deferred tax assets are reduced by a valuation allowance to
the extent management concludes it is more likely than not that the assets will
not be realized.  Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or
settled.  The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in the Consolidated Statements of Income and
Comprehensive Income in the period that includes the enactment
date.
 
  - F-11
-
 CHINA
ARMCO METALS, INC. AND SUBSIDIARIES
 NOTES
TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2008 AND 2007—CONTINUED
  Foreign currency
translation
 
 Transactions
and balances originally denominated in U.S. dollars are presented at their
original amounts.  Transactions and balances in other currencies are
converted into U.S. dollars in accordance with Statement of Financial Accounting
Standards No. 52 “Foreign
Currency Translation” (“SFAS No. 52”) and are included in determining net
income or loss.
  The
financial records of the Company are maintained in their local currency, the
Renminbi (“RMB”), which is the functional currency.  Assets and
liabilities are translated from the local currency into the reporting currency,
U.S. dollars, at the exchange rate prevailing at the balance sheet
date.  Revenues and expenses are translated at weighted average
exchange rates for the period to approximate translation at the exchange rates
prevailing at the dates those elements are recognized in the consolidated
financial statements.  Foreign currencytranslation gain (loss)
resulting from the process of translating the local currency financial
statements into U.S. dollars are included in determining accumulated other
comprehensive income in the consolidated statement of stockholders’
equity.
  RMB is
not a fully convertible currency.  All foreign exchange transactions
involving RMB must take place either through the People’s Bank of China (the
“PBOC”) or other institutions authorized to buy and sell foreign
exchange.  The exchange rate adopted for the foreign exchange
transactions are the rates of exchange quoted by the PBOC.  Commencing
July 21, 2005, China adopted a managed floating exchange rate regime based
on market demand and supply with reference to a basket of
currencies.  The exchange rate of the US dollar against the RMB was
adjusted from approximately RMB 8.28 per US dollar to approximately RMB
8.11 per US dollar on July 21, 2005.  Since then, the PBOC
administers and regulates the exchange rate of the US dollar against the RMB
taking into account demand and supply of RMB, as well as domestic and foreign
economic and financial conditions.
  Unless
otherwise noted, the rate presented below per U.S. $1.00 was the noon buying
rate for RMB in New York City as reported by the Federal Reserve Bank of New
York on the date of its balance sheets contained in this consolidated financial
statements.  The management believes that the difference between RMB
vs. US$ exchange rate quoted by the PBOC and RMB vs. US$ exchange rate reported
by the Federal Reserve Bank of New York were immaterial.  Translations
do not imply that the RMB amounts actually represent, or have been or could be
converted into, equivalent amounts in U.S. dollars.  Translation of
amounts from RMB into United States dollars (“US$”) has been made at the
following exchange rates for the respective periods:
  December 31, 2008Balance
      sheet
                            RMB
      6.8225 to US$1.00Statement
      of income and comprehensive income
                            RMB
      6.9477 to US$1.00December 31, 2007Balance
      sheet
                            RMB
      7.2946 to US$1.00Statement
      of income and comprehensive income
                            RMB
      7.6072 to
US$1.00
 
  Net gains
and losses resulting from foreign exchange transactions, if any, are included in
the Consolidated Statements of Income and Comprehensive Income.  The
foreign currency translation gain at December 31, 2008 and 2007 was $292,544 and
$67,026 and the effect of exchange rate changes on cash flows for years then
ended were $13,436 and $200,296, respectively.
  Comprehensive
income
  The
Company has adopted Statement of Financial Accounting Standards No. 130 “Reporting Comprehensive
Income” (“SFAS No. 130”).  This statement establishes rules for
the reporting of comprehensive income and its
components.  Comprehensive income, for the Company, consists of net
income and foreign currency translation adjustments and is presented in the
Consolidated Statements of Income and Comprehensive Income and Stockholders’
Equity.
  Commitments and
contingencies
  Liabilities
for loss contingencies arising from claims, assessments, litigation, fines and
penalties and other sources are recorded when it is probable that a liability
has been incurred and the amount of the assessment can be reasonably
estimated.
   - F-12
-
 CHINA
ARMCO METALS, INC. AND SUBSIDIARIES
 NOTES
TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2008 AND 2007—CONTINUED
  Net income per common
share
  Net
income per common share is computed pursuant to Statement of Financial
Accounting Standards No. 128 “Earnings Per Share” (“SFAS
No. 128”).   Basic net income per common share is computed by
dividing net income by the weighted average number of shares of common stock
outstanding during each period.  Diluted net income per common share
is computed by dividing net income by the weighted average number of shares of
common stock and potentially outstanding shares of common stock during each
period to reflect the potential dilution that could occur from common shares
issuable through stock options, which excludes 2,000,000 shares of common stock
issuable under the stock options and 2,728,913 shares of common stock issuable
under the warrants in connection with the Company’s August 1, 2008 equity
financing for the year ended December 31, 2008 as they were
anti-dilutive.  There were no potentially dilutive shares outstanding
for the year ended December 31, 2007.
  Recently issued
      accounting pronouncements
  In March
2008, the FASB issued SFAS 161, “Disclosures about Derivative Instruments and
Hedging Activities ” (“SFAS 161”). SFAS 161 is intended to improve financial
reporting about derivative instruments and hedging activities by requiring
enhanced disclosures to enable investors to better understand their effects on
an entity’s financial position, financial performance, and cash flows. It is
effective for financial statements issued for fiscal years and interim periods
beginning after November 15, 2008, with early application encouraged. We
are currently evaluating the requirements of SFAS 161 and the impact of adoption
on our consolidated financial statements.
  In May
2008, the Financial Accounting Standards Board (“FASB”) issued FASB Staff
Position (“FSP”) APB 14-1, Accounting for Convertible Debt Instruments That May
Be Settled in Cash upon Conversion (Including Partial Cash Settlement. FSP APB
14-1 clarifies that convertible debt instruments that may be settled in cash
upon either mandatory or optional conversion (including partial cash settlement)
are not addressed by paragraph 12 of APB Opinion No. 14, Accounting for
Convertible Debt and Debt issued with Stock Purchase Warrants. Additionally, FSP
APB 14-1 specifies that issuers of such instruments should separately account
for the liability and equity components in a manner that will reflect the
entity’s nonconvertible debt borrowing rate when interest cost is recognized in
subsequent periods. FSP APB 14-1 is effective for financial statements issued
for fiscal years beginning after December 15, 2008, and interim periods within
those fiscal years. We will adopt FSP APB 14-1 beginning in the first quarter of
fiscal 2009, and this standard must be applied on a retrospective basis. We are
evaluating the impact the adoption of FSP APB 14-1 will have on our consolidated
financial position and results of operations.
  In May
2008, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No.
162, The Hierarchy of Generally Accepted Accounting Principles. This standard is
intended to improve financial reporting by identifying a consistent framework,
or hierarchy, for selecting accounting principles to be used in preparing
financial statements that are presented in conformity with generally accepted
accounting principles in the United States for non-governmental entities. SFAS
No. 162 is effective 60 days following approval by the U.S. Securities and
Exchange Commission (“SEC”) of the Public Company Accounting Oversight Board’s
amendments to AU Section 411, The Meaning of Present Fairly in Conformity with
Generally Accepted Accounting Principles. We do not expect SFAS No. 162 to have
a material impact on the preparation of our consolidated financial
statements.
  On
September 16, 2008, the FASB issued final Staff Position (FSP) No. EITF 03-6-1,
“Determining Whether Instruments Granted in Share-Based Payment Transactions Are
Participating Securities,” to address the question of whether instruments
granted in share-based payment transactions are participating securities prior
to vesting. The FSP determines that unvested share-based payment awards that
contain rights to dividend payments should be included in earnings per share
calculations. The guidance will be effective for fiscal years beginning after
December 15, 2008. We are currently evaluating the requirements of (FSP) No.
EITF 03-6-1, as well as the impact of the adoption on our consolidated financial
statements.
  On
October 10, 2008, the FASB issued Statement of Financial Accounting Standards
(“SFAS”) No. 157-3, Determining the Fair Value of a Financial Asset When the
Market for That Asset Is Not Active.  This FASB Staff Position (FSP)
clarifies the application of FASB Statement No. 157, Fair Value Measurements, 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. Statement 157 was issued in
September 2006, and is effective for financial assets and financial liabilities
for financial statements issued for fiscal years beginning after November
15, 2007, and interim periods within those fiscal years.  We have
adopted SFAS 157-3 and determined that it had no impact as of December 31, 2008,
and we will continue to evaluate the impact, if any, of SFAS 157-3 on our
financial statements.
  A variety
of proposed or otherwise potential accounting standards are currently under
study by standard setting organizations and various regulatory agencies. Due to
the tentative and preliminary nature of those proposed standards, management has
not determined whether implementation of such proposed standards would be
material to our consolidated financial statements.
   - F-13
-
 CHINA
ARMCO METALS, INC. AND SUBSIDIARIES
 NOTES
TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2008 AND 2007—CONTINUED
  NOTE
3 – PLEDGED DEPOSITS
  Pledged
deposits at December 31, 2008 and 2007 consisted of the following:
  Pledged
deposits for:
  December
      31, 2008
                              
                              
                              December
      31, 2007Letters
      of credit
                              
                              $
                              -
                              
                              
                              $
                              242,671
                              (1)Foreign
      currency forward contracts
                              
                              
                              -
                              
                              
                              
                              321,479
                              (2)$
                              -
                              
                              
                              $
                              564,150
  (1)
              See
      Note 12.
 (2)
              See
      Note 7.
 
  NOTE
4 – INVENTORIES
  Inventories
at December 31, 2008 and 2007 consisted of the following:
  December
      31, 2008
                                  
                                  
                                  December
      31, 2007Goods
      purchased
                                  
                                  $
                                  197,402
                                  
                                  
                                  $
                                  2,434,908$
                                  197,402
                                  
                                  
                                  $
                                  2,434,908
 
  NOTE
5 – PROPERTY, PLANT AND EQUIPMENT
  Property,
plant and equipment, stated at cost, less accumulated depreciation at December
31, 2008 and 2007 consisted of the following:
  Estimated
      Useful Life (Years)
                                
                                December
      31, 2008
                                
                                
                                December
      31, 2007Buildings
      and leasehold improvements
                                20
                                
                                $
                                332,738
                                
                                
                                $
                                10,133Construction
      in progress (ii)
                                
                                
                                
                                1,837,503
                                
                                
                                
                                -Vehicles
                                5
                                
                                
                                200,270
                                
                                
                                
                                164,549Office
      equipment
                                5-8
                                
                                
                                68,508
                                
                                
                                
                                36,5082,439,019
                                
                                
                                
                                211,190Less
      accumulated depreciation
                                
                                
                                
                                (61,203
                                )
                                
                                
                                (79,594
                                )$
                                2,377,816
                                
                                
                                $
                                131,596
 
  (i)           Depreciation and
amortization expense
  Depreciation
and amortization expense for the year ended December 31, 2008 and 2007 was
$35,066 and $34,459, respectively.
  (ii)           Construction in
progress
  Construction
in progress comprises capital expenditures for construction of Armet’s new metal
recycling production facility, including buildings, machinery, equipment and
facility set up charges.  For the year ended December 31, 2008 and
2007, the Company did not capitalize any interest to construction in
progress.
   - F-14
-
 CHINA
ARMCO METALS, INC. AND SUBSIDIARIES
 NOTES
TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2008 AND 2007—CONTINUED
  NOTE
6 – LAND USE RIGHT
  Land use
right at cost at December 31, 2008 and 2007, consisted of the
following:
  December
      31, 2008
                              
                              
                              December
      31, 2007Land
      use right
                              
                              $
                              2,266,076
                              
                              
                              $
                              2,119,417Accumulated
      amortization
                              
                              
                              (57,174
                              )
                              
                              
                              (10,434
                              )$
                              2,208,902
                              
                              
                              $
                              2,108,983
  Amortization
expense
  Amortization
expense for the years ended December 31, 2008 and 2007 was $45,188 and $10,434,
respectively.  Amortization expense for the next five years is
approximately $46,018 per year.
  NOTE
7 – FINANCIAL INSTRUMENTS
  The
Company utilized forward foreign currency exchange contracts with a financial
institution, resulting in a fixed foreign currency exchange rate of US$1.00 to
RMB 7.3750.  These forward foreign currency exchange contracts expired
on August 2, 2008. Loss on these foreign currency exchange contracts for the
year ended December 31, 2008 and 2007 amounted to $19,739 and $12,079,
respectively.
  The
forward foreign currency exchange contracts and related swap liabilities at
December 31, 2008 and 2007 consisted of the following:
  December
      31, 2008
                              
                              
                              December
      31, 2007Forward
      foreign currency exchange contracts
                              
                              $
                              -
                              
                              
                              $
                              308,744Forward
      foreign currency exchange swap liabilities
                              
                              
                              -
                              
                              
                              
                              12,079$
                              -
                              
                              
                              $
                              320,823
 
  NOTE
8 – LOANS PAYABLE
  Loans
payable at December 31, 2008 and 2007 consisted of the following:
  December
      31, 2008
                            
                            
                            December
      31, 2007Loan
      payable from a financial institution, guaranteed by the Company’s chairman
      and Chief Exchange Officer, with interest at 7.80% per annum payable
      monthly, with principal due and paid January 15, 2009.
                            
                            $
                            1,414,345
                            
                            
                            $
                            -Loan
      payable from a financial institution, guaranteed by the Company’s chairman
      and Chief Exchange Officer, with interest at 7.85% per annum payable
      monthly, with principal due and paid January 15, 2009.
                            
                            
                            1,500,000
                            
                            
                            
                            -$
                            2,914,345
                            
                            
                            $
                            -
 
   - F-15
-
 CHINA
ARMCO METALS, INC. AND SUBSIDIARIES
 NOTES
TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2008 AND 2007 CONTINUED
  NOTE
9 – RELATED PARTY TRANSACTIONS
  Advances fromstockholder
  Advances
from stockholder at December 31, 2008 and 2007 consisted of the
following:
  December
      31, 2008
                              
                              
                              December
      31, 2007Advances
      from chairman, chief executive officer and stockholder
                              
                              $
                              (236,595
                              )
                              
                              $
                              (921,444
                              )$
                              (236,595
                              )
                              
                              $
                              (921,444
                              )
 
  The
advances bear no interest and have no formal repayment terms.
  Operating lease from
Chairman, CEO and Stockholder
  On
January 1, 2006, Henan entered into a non-cancellable operating lease for its
176.37 square meter commercial office space in the City of Zhengzhou, Henan
Province, PRC from Chairman, Chief Executive Officer and stockholder of the
Company for RMB10,000 per month, which expired on December 31, 2008 and has been
extended through December 31, 2011.  Total lease payments for the years
ended December 31, 2008 and 2007 amounted to RMB120,000 per year (equivalent to
$17,272 and $15,775, respectively).  Future minimum lease payments
required under the non-cancelable operating lease are RMB120,000 per year
(equivalent to $17,589 at December 31, 2008) for 2009 through 2011.
  NOTE
10 – STOCKHOLDERS’ EQUITY
  Sale of common
stock
  On July
25, 2008 and July 31, 2008, the Company closed the first and second rounds of a
private placement by raising $6,896,229 from eighty-two (82) investors through
the sale of 22.9 units of its securities at an offering price of $300,000 per
unit in a private placement. Each unit sold in the offering consisted of 100,000
shares of the Company’s common stock, $.001 par value per share at a per share
purchase price of $3.00, and five (5) year warrants to purchase 100,000 shares
of common stock with an exercise price of $5.00 per share (the
“Warrants“).
 
 On August 8, 2008 the Company closed
the third round of the offering by raising $523,500 from ten (10) investors
through the sale of 1.745 units of its securities at an offering price of
$300,000 per unit.
 
 On August
11, 2008 the Company closed the fourth round of the offering by raising $40,200
from five (5) investors through the sale of 0.134 units of its securities at an
offering price of $300,000 per unit.
 
 The
Company paid (i) FINRA member broker-dealers cash commissions of $162,660 and
issued those firms five (5) year warrants to purchase a total of 99,650 shares
of its common stock at $5.00 per share as compensation for services to the
Company, (ii) due diligence fees to certain investors or their advisors in
connection with the Offering aggregating $579,316 in cash and issued those firms
five (5) year warrants to purchase a total of 142,614 shares of its common stock
at $5.00 per share as compensation for services to the Company, and (iii)
professional fees in the amount of $97,689 paid in cash in connection with the
Offering.  The recipients of these fees included China Direct
Investments, Inc., a subsidiary of China Direct, Inc. and a principal
stockholder of the company.
  In
aggregate, the Company raised $7,459,929 in the offering from ninety-seven (97)
investors through the sale of 24.87 units and after payment of cash commissions,
broker dealer fee, due diligence fees and other costs associated with the
Offering, the Company received net proceeds of $6,620,681, all of which will be
used for construction of a scrap steel recycling facility in China as previously
disclosed by the Company and general corporate working capital
purposes.
  Issuance of common stock for
services
  On
October 15, 2008, the Company issued 6,000 shares of its common stock for
services rendered valued at $3.00 per share for $18,000 (the estimated fair
value on the date of grant).
 
   - F-16
-
 CHINA
ARMCO METALS, INC. AND SUBSIDIARIES
 NOTES
TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2008 AND 2007—CONTINUED
  Stock
options
  On June
27, 2008, the Company entered into a share purchase agreement (the “Share
Purchase Agreement”) and consummated a share purchase (the “Share Purchase”)
with Armco & Metawise (H.K) Limited (“Armco”) and Feng Gao, who owned 100%
of the outstanding shares of Armco (the “Armco Shareholder”).  Under
the Share Purchase Agreement, the Company purchased from Ms. Gao, the sole
shareholder of Armco (the “Armco Shareholder”), 100% of the issued and
outstanding shares of Armco’s capital stock for $6,890,000 by delivery of the
Company’s purchase money promissory note (the “Share Purchase”).  In
addition, the Company issued to Ms. Gao a stock option entitling Ms. Gao to
purchase 5,300,000 shares of our common stock, par value $.001 per share (the
“Common Stock”) at $1.30 per share expiring on September 30, 2008 and 2,000,000
shares at $5.00 per share expiring on June 30, 2010, vested immediately (the
“Gao Option”).  On August 12, 2008, Ms. Gao exercised her option to
purchase and the Company issued 5,300,000 Shares in exchange for the $6,890,000
note owed to Ms. Gao.  Accordingly, the 5,300,000 Shares issued to Ms.
Gao represented approximately 69.7% of the issued and outstanding Shares of the
Company giving effect to the cancellation of 7,694,000 Shares owned by Mr.
Cox.
  The fair
value of the stock options issued in June 2008 under Share Purchase Agreement
using the Black-Scholes Option Pricing Model was $0 at the date of
grant.  For the year ended December 31, 2008, the Company did not
record any stock-based compensation for shares vested.  For the year
ended December 31, 2007, the Company did not issue any stock
options.
  The table
below summarizes the Company’s stock option activity for the year ended December
31, 2008:
  Number of
                    Option Shares
                  Exercise Price Range
                    Per Share
                  Weighted Average
      Exercise Price
                  
                  Fair
      Value
                    at
      Date of Grant
                  Aggregate
                    Intrinsic
                    ValueBalance,
      December 31, 2007
                  
                  
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  
                  -
                  
                  
                  $
                  -Granted
                  
                  
                  2,000,000
                  
                  
                  
                  5.00
                  
                  
                  
                  5.00
                  
                  
                  
                  *
                  
                  
                  
                  *Canceled
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  
                  
                  
                  
                  -Exercised
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  
                  
                  
                  
                  -Expired
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  
                  
                  
                  
                  -Balance,
      December 31, 2008
                  
                  
                  2,000,000
                  
                  
                  $
                  5.00
                  
                  
                  $
                  5.00
                  
                  
                  
                  *
                  
                  
                  $
                  -Vested
      and exercisable, December 31, 2008
                  
                  
                  2,000,000
                  
                  
                  $
                  5.00
                  
                  
                  $
                  5.00
                  
                  
                  
                  *
                  
                  
                  $
                  -Unvested,
      December 31, 2008
                  
                  
                  -
                  
                  
                  $
                  5.00
                  
                  
                  $
                  5.00
                  
                  
                  
                  *
                  
                  
                  $
                  -
 
  * - Less
than $1.00
  The
following table summarizes information concerning outstanding and exercisable
stock options as of December 31, 2008:
  Options
      Outstanding
                  
                  Options
      ExercisableRange
      of Exercise Prices
                  
                  
                  Number
      Outstanding
                  
                  Average
      Remaining Contractual Life  (in years)
                  
                  Weighted
      Average Exercise Price
                  
                  Number
      Exercisable
                  Average
      Remaining Contractual Life  (in years)
                  
                  Weighted
      Average Exercise Price$
                  5.00
                  
                  
                  
                  2,000,000
                  
                  1.50
                  
                  $
                  5.00
                  
                  2,000,000
                  1.50
                  
                  $
                  5.00$
                  5.00
                  
                  
                  
                  2,000,000
                  
                  1.50
                  
                  $
                  5.00
                  
                  2,000,000
                  1.50
                  
                  $
                  5.00
 
   - F-17
-
 CHINA
ARMCO METALS, INC. AND SUBSIDIARIES
 NOTES
TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2008 AND 2007—CONTINUED
  Warrants
  In
connection with the four (4) rounds of private placements from July 25, 2008
through August 8, 2008, the Company issued (i) warrants for 2,486,649 shares to
the investors and (ii) warrants for 242,264 shares to the brokers, or 2,728,913
shares in aggregate with an exercise price of $5.00 per share and an expiration
date of August 8, 2014, all of which have been earned upon
issuance.  The fair value of these warrants granted, estimated on the
date of grant, was $5,097,404, which has been recorded as additional paid-in
capital, using the Black-Scholes option-pricing model with the following
weighted-average assumptions:
  Expected
      option life (year)
                      
                      
                      5.00Expected
      volatility
                      
                      
                      89.00%Risk-free
      interest rate
                      
                      
                      3.23%Dividend
      yield
                      
                      
                      0.00%
 
  The
remaining balance of the net proceeds of $1,523,277 has been assigned to Common
stock.
  The table
below summarizes the Company’s warrants activity for the year ended December 31,
2008:
  Number of
                      Warrant Shares
                    Exercise Price Range
                      Per Share
                    Weighted Average
      Exercise Price
                    Fair
      Value at Date of Issuance
                    Aggregate
                      Intrinsic
                      ValueBalance,
      December 31, 2007
                    
                    
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    $
                    -
                    
                    $
                    -Granted
                    
                    
                    2,728,913
                    
                    
                    
                    5.00
                    
                    
                    
                    5.00
                    
                    
                    5,092,970
                    
                    
                    -Canceled
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    -
                    
                    
                    -Exercised
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    -
                    
                    
                    -Expired
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    -
                    
                    
                    -Balance,
      December 31, 2008
                    
                    
                    2,728,913
                    
                    
                    $
                    5.00
                    
                    
                    $
                    5.00
                    
                    $
                    5,092,970
                    
                    $
                    -Earned
      and exercisable, December 31, 2008
                    
                    
                    2,728,913
                    
                    
                    $
                    5.00
                    
                    
                    $
                    5.00
                    
                    $
                    5,092,970
                    
                    $
                    -Unvested,
      December 31, 2008
                    
                    
                    -
                    
                    
                    $
                    5.00
                    
                    
                    $
                    5.00
                    
                    $
                    -
                    
                    $
                    -
 
  The
following table summarizes information concerning outstanding and exercisable
warrants as of December 31, 2008:
  Warrants
      Outstanding (*)
                  
                  Warrants
      Exercisable (*)Range
      of Exercise Prices
                  
                  
                  Number
      Outstanding
                  
                  Average
      Remaining Contractual Life  (in years)
                  
                  Weighted
      Average Exercise Price
                  
                  Number
      Exercisable
                  Average
      Remaining Contractual Life  (in years)
                  
                  Weighted
      Average Exercise Price$
                  5.00
                  
                  
                  
                  2,728,913
                  
                  5.00
                  
                  $
                  5.00
                  
                  2,728,913
                  5.00
                  
                  $
                  5.00$
                  5.00
                  
                  
                  
                  2,728,913
                  
                  5.00
                  
                  $
                  5.00
                  
                  2,728,913
                  5.00
                  
                  $
                  5.00
 
  * warrant
for 5,000 shares of the common stock of the Company with an exercise price of
$5.00 per share has been exercised on January 30, 2009, payment of $25,000 in
cash have been received and 5,000 shares of common stock have been issued to the
investor and warrant holder by the Company on February 2, 2009.
  Dividends
  On
December 31, 2007, the Company declared advances of $1,459,388 to Chairman,
Chief Executive Officer and then sole stockholder treated as
dividends.
   - F-18
-
 CHINA
ARMCO METALS, INC. AND SUBSIDIARIES
 NOTES
TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2008 AND 2007—CONTINUED
  NOTE
11 – INCOME TAXES
  Armco
Metals is a non-operating holding company.  Armco, the Company’s Hong
Kong subsidiary is subject to Hong Kong SAR income taxes.  Henan and
Armet, the Company’s PRC subsidiaries are subject to PRC income taxes, file
income tax returns under the Income Tax Law of the People’s Republic of China
concerning Foreign Investment Enterprises and Foreign Enterprises and local
income tax laws (the “PRC Income Tax Law”) accordingly.  Henan and Armet
derive substantially all of their income (loss) before income taxes and related
tax expenses from PRC sources.
  United Statesincome
tax
  Armco
Metals is incorporated in the State of Delaware and is subjected to United
States of America tax law.  Armco Metals did not have any taxable
income for the year ended December 31, 2008 and 2007 and no provision for income
taxes has been made in the United States.
  Hong Kong SAR income
tax
  Armco is
registered and operates in the Hong Kong Special Administrative Region (“HK
SAR”) of the People’s Republic of China (“PRC”) and is subject to HK SAR tax
law.  Armco’s statutory income tax rate is 17.5% and there were no
significant differences between income reported for financial reporting purposes
and income reported for income tax purposes for the year ended December 31,
2008. Armco is exempt from Hong Kong income taxes for the year ended
December 31, 2007 since none of its income was from Hong Kong
sources.
  PRC Tax
  Armet and
Henan are governed by and file separate income tax returns under the Income Tax
Law of the People’s Republic of China concerning Foreign Investment Enterprises
and Foreign Enterprises and local income tax laws (the “PRC Income Tax
Law”), which, until January 2008, generally subject to tax at a statutory
rate of 33% (30% state income tax plus 3% local income tax) on income reported
in the statutory financial statements after appropriate tax
adjustments.  On March 16, 2007, the National People’s Congress of
China approved the Corporate Income Tax Law of the People’s Republic of China
(the “New CIT Law”), effective January 1, 2008.  Under the New CIT
Law, the corporate income tax rate applicable to all Companies, including both
domestic and foreign-invested companies, will be 25%.  However, tax
concession granted to eligible companies prior to March 16, 2007 will be grand
fathered in.
  Henan is
registered and operates in the City of Zhengzhou, Henan Province,
PRC.  No provision for income taxes has been made as Henan had net
operating loss (“NOL”) carry-forwards for the year ended December 31, 2008 and
net operating loss (“NOL”) for the year ended December 31, 2007.  Henan?痵
statutory tax rate for relevant periods is 25% for the year ended December 31,
2008 and 33% for the year ended December 31, 2007.
  Armet is
registered and operates in the LianYunGang Economic and Technology Development
Zone, City of Lianyungang, Jiangsu Province, PRC, and is recognized as a
“Manufacturing Enterprise Located in Special Economic Zone”.  In
accordance with the relevant income tax laws, the profits of Armet, if any, are
fully exempt from income tax for 2008 and 2009, followed by a 50% exemption for
the following three calendar years from 2010 through 2012 (“tax
holidays”).  Armet is a development stage company as defined by
Statement of Financial Accounting Standards No. 7“Accounting and Reporting by
Development Stage Enterprises”(“SFAS No. 7”).  Armet’s
statutory tax rate for relevant periods is 25 % for the year ended December 31,
2008 and 15% for the period from January 9, 2007 (inception) through December
31, 2007.
  Deferred tax
assets
  At
December 31, 2008, the Company has available for income tax purposes net
operating loss (“NOL”) carry-forwards of $1,589,121 that may be used to offset
future taxable income through the year ending December 31, 2013.  No
tax benefit has been reported with respect to these net operating loss
carry-forwards in the accompanying consolidated financial statements since the
Company believes that the realization of its net deferred tax assets of
approximately $397,280 was not considered more likely than not and accordingly,
the potential tax benefits of the net loss carry-forwards are fully offset by a
valuation allowance of $397,280.
  Deferred
tax assets consist primarily of the tax effect of NOL
carry-forwards.  The Company has provided a full valuation allowance
on the deferred tax assets because of the uncertainty regarding its
realizibility.  The valuation allowance increased approximately
$24,929 and $53,272 for the years ended, December 31, 2008 and 2007,
respectively.
   - F-19
-
 CHINA
ARMCO METALS, INC. AND SUBSIDIARIES
 NOTES
TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2008 AND 2007—CONTINUED
  Components
of deferred tax assets as of December 31, 2008 and 2007 are as
follows:
  December
      31, 2008
                        
                        
                        December
      31, 2007Net
      deferred tax assets – Non-current:Expected
      income tax benefit from NOL carry-forwards
                        
                        $
                        397,280
                        
                        
                        
                        491,503Cumulative
      effect of statutory reduction of enacted income tax rate effective January
      1, 2008
                        
                        
                        -
                        
                        
                        
                        (119,152
                        )Expected
      income tax benefit from NOL carry-forwards, net of cumulative effect of
      statutory reduction of enacted income tax rate
                        
                        
                        397,280
                        
                        
                        
                        372,351Less
      valuation allowance
                        
                        
                        (397,280
                        )
                        
                        
                        (372,351
                        )Deferred
      tax assets, net of valuation allowance
                        
                        $
                        -
                        
                        
                        $
                        -
 
 Income taxes in the
consolidated statements ofincomeand comprehensive
income
  A
reconciliation of the Chinese statutory income tax rate and the effective income
tax rate as a percentage of income before income taxes is as
follows:
  For
      the Year EndedDecember
      31, 2008
                          
                          December
      31, 2007Chinese
      statutory income tax rate
                          
                          
                          25.0
                          %
                          
                          
                          33.0
                          %Increase
      (reduction) in income taxes resulting from:Net
      operating loss (“NOL”) carry-forwards
                          
                          
                          (25.0
                          )
                          
                          
                          (33.0
                          )Tax
      holiday
                          
                          
                          -
                          
                          
                          
                          -Effective
      income tax rate
                          
                          
                          0.0
                          %
                          
                          
                          0.0
                          %
 
  NOTE
12 – COMMITMENTS AND CONTINGENCIES
  Letters of
credit
  The
Company issues letters of credit in connection with the importation of ferrous
and non-ferrous ores.  Letters of credit at December 31, 2008 and 2007
consisted of the following:
  December
      31, 2008
                              
                              
                              December
      31, 2007ArmcoLetter
      of credit issued by a financial institution on behalf of the Company on
      October 15, 2007 with 5% credit amount tolerance, as amended, payable to
      an unrelated vendor, due January 20, 2008 and paid on February 14,
      2008.
                              
                              $
                              -
                              
                              
                              $
                              1,911,000HenanLetter
      of credit issued by a financial institution on behalf of the Company in
      the amount of €402,000 on November 22, 2007, payable to an unrelated
      vendor, collateralized by the pledged deposits of $185,711 (see Note 3),
      which was cancelled on April 21, 2008 with the pledged deposits returned
      on May 13, 2008.
                              
                              
                              -
                              
                              
                              
                              587,161Letter
      of credit issued by a financial institution on behalf of the Company on
      November 27, 2007, payable to an unrelated vendor, collateralized by the
      pledged deposits of $56,960 (see Note 3) due September 9,
      2008.
                              
                              
                              -
                              
                              
                              
                              140,000$
                              -
                              
                              
                              $
                              2,638,161
 
   - F-20
-
 CHINA
ARMCO METALS, INC. AND SUBSIDIARIES
 NOTES
TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2008 AND 2007—CONTINUED
  Foreign currency forward
contracts
  The
Company employs foreign currency forward contracts to convert unforeseeable
foreign currency exchange rates to fixed foreign currency exchange
rates.  Foreign currency forward contracts at December 31, 2008 and
2007 consisted of the following:
  December
      31, 2008
                              
                              
                              December
      31, 2007Foreign
      currency forward contract, signed with a financial institution on August
      1, 2007, collateralized by the pledged deposits of $130,274 (see Note 3)
      due and paid on August 1, 2008.
                              
                              $
                              -
                              
                              
                              $
                              128,854Foreign
      currency forward contract, signed with a financial institution on August
      2, 2007, collateralized by the pledged deposits of $181,873 (see Note 3)
      due and paid on August 2, 2008.
                              
                              
                              -
                              
                              
                              
                              179,890-$
                              -
                              
                              
                              $
                              308,744
 
  Uncommitted trade credit
facilities
  The
Company entered into uncommitted trade credit facilities with a financial
institution on February 14, 2006, as subsequently amended, for $4,000,000
(“Uncommitted trade credit facilities”), maturing November 30,
2009.  Uncommitted trade credit facilities were guaranteed by the
Company’s chairman, Chief Executive Officer and stockholder.  There
were no balances outstanding at December 31, 2008 or 2007.
  Entry into import service
agreement
  On April
11, 2007, Armet entered into an import service agreement (“Import Service
Agreement”) with an unrelated third party import service company expiring
through January 1, 2010. Pursuant to the import service agreement Armet will (i)
import recycling metal production equipment with two (2) million metric tons
annual processing capacity valued at $430,000 and (ii) pay 2% of the total value
imported for import services, all of which have been prepaid and included in
advance on purchases in the consolidated balance sheets.  The
importation of the recycling metal production equipment has not been completed
as of December 31, 2008 due to the delay in completion of the manufacturing
facility.
  Entry into operating lease
agreement
  On
October 1, 2008, the Company entered into a non-cancellable operating lease for
its commercial office space in California expiring September 30, 2009. 
Future minimum lease payments required under the non-cancelable operating lease
are $2,624.50 per month or $23,620 in aggregate.
  Entry into investor
relations consulting agreement
  On
October 1, 2008, the Company entered into an investor relations consulting
agreement expiring December 31, 2009.  Either party may terminate the
agreement any time during the term of the contract.  Future minimum
cash and share payments required under the agreement are (i) $8,500 per month or
$102,000 in aggregate in cash, (ii) 6,000 shares per quarter or 24,000 shares in
aggregate of the common stock of the Company, and (iii) additional $25,000 in
cash and 10,000 shares of the common stock of the Company to be earned if the
price of the common shares is $6.00 per share or above and trades a volume of at
least 50,000 shares per day or more based on the VWAP during any 20 day
consecutive period during October 1, 2009 through December 31, 2009 and the
Agreement is in effect.
  Entry into an employment
agreement
  On
December 18, 2008, the Company entered into an employment agreement (“Employment
Agreement”) with Chairman and Chief Executive Officer (“Employee”) for a term of
three (3) years commencing on January 1, 2009 (“Employment
Term”).  Pursuant to the Employment Agreement, Employee shall devote
substantially all his business time and efforts to the business of the Company;
provided, however, that it is understood and agreed that, while Employee may
devote time to other business matters in which he may have an interest, in the
event of a conflict, Employee’s first and primary responsibility shall be to the
performance of his duties for the Company.  In consideration with the
duties and responsibilities as described above Employee shall be entitled to the
compensation and benefits hereinafter described in subparagraphs (A) through (D)
(such compensation and benefits being hereinafter referred to as “ Compensation
Benefits”).
   - F-21
-
 CHINA
ARMCO METALS, INC. AND SUBSIDIARIES
 NOTES
TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2008 AND 2007—CONTINUED
  A. BASE
SALARY.  The Company shall pay Employee a base salary (the “Base
Salary”) of $73,000 per annum for the period commencing on January 1, 2009
and ending on December 31, 2009.
  B. COMPENSATION
ADJUSTMENT.  The Base Salary and Employee’s other compensation will be
reviewed by the Board of Directors of the Company (the “Board”) at least
annually and may be increased (but not decreased) from time to time as the Board
may determine.
  C. PARTICIPATION
IN BENEFIT PLANS.  During the Employment Term, Employee shall be
eligible to participate in all Employee benefit plans and arrangements now in
effect or which may hereafter be established, including, without limitation, all
life, group insurance and medical care plans and all disability, retirement and
other Employee benefit plans of the Company.  Should the Employee not want
to participate in the Company’s health plan, with Board approval, the company
will reimburse the Employee for the expense incurred in participating in another
plan.
  D. OTHER
PROVISIONS. During the Employment Term, Employee shall be entitled to 2 weeks
paid vacation per annum and an automobile allowance of $15 per month. Employee
shall be reimbursed.
  This
Employment Agreement shall terminate as a result of any of the following events:
(a) death, (b) disability, (c) voluntary resignation, or (d) termination by the
Company with Cause, where “Cause” shall mean: (i) final non-appealable
adjudication of Employee of a felony, which would have a material or adverse
effect on the business of the Company; or (ii) the determination of the Board
(other than Employee) that Employee has engaged in intentional misconduct or the
gross neglect of his duties, which has a continuing material adverse effect on
the business of the Company, or (e) termination by the Company for any reason
other than Cause. In the event that Employee’s employment is terminated pursuant
to Events (a), (b), or (e) above, the Company shall pay to Employee and or his
estate, (i) all of the Compensation Benefits Employee is entitled
to through the Date of Termination and (ii) all Incentive Compensation,
benefits and other compensation, if any, due and owing as of the Date of
Termination.
  NOTE
13 – CONCENTRATIONS AND CREDIT RISK
  Customers and Credit
Concentrations
  Credit
concentrations at December 31, 2008 and 2007 and customer concentrations for the
years then ended are as follows:
  Net
      Sales for the Year Ended
                                          
                                          
                                          Accounts
      receivable AtDecember
      31, 2008
                                          
                                          
                                          December
      31, 2007
                                          
                                          
                                          December
      31, 2008
                                          
                                          
                                          December
      31, 2007Customer
      A
                                          
                                          21.4
                                          %
                                          
                                          
                                          8.4
                                          %
                                          
                                          
                                          50.9
                                          %
                                          
                                          
                                          -
                                          %Customer
      B
                                          
                                          27.3
                                          %
                                          
                                          
                                          -
                                          %
                                          
                                          
                                          2.3
                                          %
                                          
                                          
                                          -
                                          %Customer
      C (Significant Business Party)
                                          
                                          33.8
                                          %
                                          
                                          
                                          26.8
                                          %
                                          
                                          
                                          23.8
                                          %
                                          
                                          
                                          -
                                          %Customer
      D
                                          
                                          3
                                          %
                                          
                                          
                                          27.5
                                          %
                                          
                                          
                                          -
                                          %
                                          
                                          
                                          60.4
                                          %Customer
      E
                                          
                                          -
                                          %
                                          
                                          
                                          29.4
                                          %
                                          
                                          
                                          -
                                          %
                                          
                                          
                                          39.6
                                          %Customer
      F
                                          
                                          6.8
                                          %
                                          
                                          
                                          -
                                          %
                                          
                                          
                                          21.9
                                          %
                                          
                                          
                                          -
                                          %92.3
                                          %
                                          
                                          
                                          92.1
                                          %
                                          
                                          
                                          98.9
                                          %
                                          
                                          
                                          100.0
                                          %
 
  A
reduction in sales from or loss of such customers would have a material adverse
effect on the Company’s results of operations and financial
condition.
   - F-22
-
 CHINA
ARMCO METALS, INC. AND SUBSIDIARIES
 NOTES
TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2008 AND 2007—CONTINUED
  Vendor
Concentrations
  Vendor
concentrations at December 31, 2008 and 2007 and for the years then ended are as
follows:
  Net
      Purchases for the Year Ended
                                            
                                            
                                            Accounts
      Payable AtDecember
      31, 2008
                                            
                                            
                                            December
      31, 2007
                                            
                                            
                                            December
      31, 2008
                                            
                                            
                                            December
      31, 2007Vendor
      I (Significant Business Party)
                                            
                                            20.0
                                            %
                                            
                                            
                                            10.8
                                            %
                                            
                                            
                                            59.3
                                            %
                                            
                                            
                                            -
                                            %Vendor
      II
                                            
                                            -
                                            %
                                            
                                            
                                            37.0
                                            %
                                            
                                            
                                            0.5
                                            %
                                            
                                            
                                            -
                                            %Vendor
      III
                                            
                                            30.7
                                            %
                                            
                                            
                                            -
                                            %
                                            
                                            
                                            32.2
                                            %
                                            
                                            
                                            -
                                            %Vendor
      IV
                                            
                                            15.3
                                            %
                                            
                                            
                                            -
                                            %
                                            
                                            
                                            -
                                            %
                                            
                                            
                                            17.6
                                            %Vendor
      V
                                            
                                            2.7
                                            %
                                            
                                            
                                            11.0
                                            %
                                            
                                            
                                            -
                                            %
                                            
                                            
                                            -
                                            %Vendor
      VI
                                            
                                            7.4
                                            %
                                            
                                            
                                            37.2
                                            %
                                            
                                            
                                            -
                                            %
                                            
                                            
                                            -
                                            %Vendor
      VII
                                            
                                            16.3
                                            %
                                            
                                            
                                            -
                                            %
                                            
                                            
                                            -
                                            %
                                            
                                            
                                            38.2
                                            %92.4
                                            %
                                            
                                            
                                            96.0
                                            %
                                            
                                            
                                            92.0
                                            %
                                            
                                            
                                            55.8
                                            %
 
  Significant
business
party
  The
Company sells to and purchases from a significant business party (“Significant
Business Party”) ferrous and non-ferrous ores and metals.  A reduction
in sales from or loss of the Significant Business Party would have a material
adverse effect on the Company?痵 results of operations and financial
condition.
  Credit
Risk
  Financial
instruments that potentially subject the Company to significant concentration of
credit risk consist primarily of cash and cash equivalents.  As of December
31, 2008, substantially all of the Company’s cash and cash equivalents were held
by major financial institutions located in the PRC, none of which are
insured.  However, the Company has not experienced losses on these
accounts and management believes that the Company is not exposed to significant
risks on such accounts.
  Foreign currency
risk
  The
Company is exposed to fluctuations in foreign currencies for transactions
denominated in currencies other than RMB, the functional currency due to the
fact the majority of the Company’s purchasing activities are transacted in
foreign currencies.  The Company had no foreign currency hedges in
place at December 31, 2008 to reduce such exposure.  The Company’s
previous forward foreign currency exchange contracts expired on August 2, 2008
and the Company’s realized losses on these foreign currency hedges for the year
ended December 31, 2008 and 2007 were $19,739 and $12,079, respectively, or
$31,818 in aggregate.
   NOTE
14 - FOREIGN OPERATIONS
 
 Operations
  Substantially
all of the Company’s operations are carried out and all of its assets are
located in the PRC.  Accordingly, the Company’s business, financial
condition and results of operations may be influenced by the political, economic
and legal environments in the PRC.  The Company’s business may be
influenced by changes in governmental policies with respect to laws and
regulations, anti-inflationary measures, currency fluctuation and remittances
and methods of taxation, among other things.
   - F-23
-
 CHINA
ARMCO METALS, INC. AND SUBSIDIARIES
 NOTES
TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2008 AND 2007—CONTINUED
  Dividends and
Reserves
  Under the
laws of the PRC, net income after taxation can only be distributed as dividends
after appropriation has been made for the following: (i) cumulative prior years’
losses, if any; (ii) allocations to the “Statutory Surplus Reserve” of at least
10% of net income after tax, as determined under PRC accounting rules and
regulations, until the fund amounts to 50% of the Company’s registered capital;
(iii) allocations of 5-10% of income after tax, as determined under PRC
accounting rules and regulations, to the Company’s “Statutory Common Welfare
Fund”, which is established for the purpose of providing employee facilities and
other collective benefits to employees in PRC; and (iv) allocations to any
discretionary surplus reserve, if approved by stockholders.
  As of
December 31, 2008, the Company had no Statutory Surplus Reserve and the
Statutory Common Welfare Fund established and segregated in retained
earnings.
 
 NOTE
15 – SUBSEQUENT EVENT
  Exercise of warrants and
issuance of common stock for cash
  On
January 30, 2009, the Company issued 5,000 shares of its common stock for cash
at $5.00 per share and received cash payment of $25,000 in connection with the
exercise of the warrant for 5,000 shares with an exercise price of $5.00 per
share by one investor and warrants holder on February 2, 2009.
 
  - F-24
-
  China
Armco Metals, Inc. and Subsidiaries
 Valuation
and Qualifying Accounts
 For the
Year Ended December 31, 2008 and 2007
 
 Balance
      at
                      
                      
                      Add
                      
                      
                      Deduct
                      
                      
                      Add
                      
                      
                      Balance
                        Atbeginning
      of
                      
                      
                      Charge
      to
                      
                      
                      bad
      debt
                      
                      
                      translation
                      
                      
                      End
                        ofperiod
                      
                      
                      Income
                      
                      
                      written
      off
                      
                      
                      adjustment
                      
                      
                      periodFor
      the Year Ended December 31, 2007:Allowance
      for doubtful accounts
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      -For
      the Year Ended December 31, 2008:Allowance
      for doubtful accounts
                      
                      $
                      -
                      
                      
                      $
                      79,212
                      
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      79,212
 
    - F-25
-