UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C.  20549




FORM
10-K


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


For the
fiscal year ended: June 30, 2009





OR





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


For the
transition period from __________ to ____________




Commission
File Number: 000-51908




SUTOR
TECHNOLOGY GROUP LIMITED


(Exact
name of registrant as specified in its charter)




Nevada
                87-0578370(State
      or other jurisdiction of
                  incorporation
      or organization)
                (I.R.S.
      Employer Identification Number)No
      8, Huaye Road, Dongbang Industrial Park
                  
                  Changshu,
      China, 215534(Address
      of principal executive office and zip code)(86)
      512-52680988(Registrant’s
      telephone number, including area code)





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




Title of Each Class:
                    
                    Name of Each Exchange on Which
      Registered:Common
      Stock, $.0001 par value
                    
                    The
      Nasdaq Stock Market LLC(Nasdaq
      Capital
Market)





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





Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.


Yes  ̈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  ̈No x





Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90
days.                  Yes
xNo  ̈





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).


Yes  ̈No x





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





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




Large
      accelerated filer  ̈
              Accelerated
      filer  ̈
              Non-accelerated
      filer  ̈
              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  ̈No x




At
December 31, 2008, the last business day of the registrant’s most recently
completed second fiscal quarter, the aggregate market value of shares held by
non-affiliates of the registrant (based upon the closing sale price of such
shares as reported on the Nasdaq Capital Market) was approximately $17.6
million. Shares of the registrant’s common stock held by the registrant’s
executive officers and directors have been excluded because such persons may be
deemed to be affiliates of the registrant. This determination of affiliate
status is not necessarily a conclusive determination for other
purposes.





As of
September 25, 2009, there were 37,955,602 shares of the Registrant’s common
stock outstanding.




DOCUMENTS
INCORPORATED BY REFERENCE




None










SUTOR
TECHNOLOGY GROUP LIMITED


FORM
10-K


For
the Fiscal Year Ended June 30, 2009





Number
                
                
                PagePART
      IItem
      1.
                Business
                
                2Item
      1A.
                Risk
      Factors
                
                10Item
      1B.
                Unresolved
      Staff Comments
                
                19Item
      2.
                Properties
                
                19Item
      3.
                Legal
      Proceedings
                
                20Item
      4.
                Submission
      of Matters to a Vote of Security Holders
                
                20PART
      IIItem
      5.
                Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities
                
                20Item
      6.
                Selected
      Financial Data
                
                21Item
      7.
                Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                
                21Item
      7A.
                Quantitative
      and Qualitative Disclosures about Market Risk
                
                33Item
      8.
                Financial
      Statements and Supplementary Data
                
                33Item
      9.
                Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure
                
                34Item
      9A.
                Controls
      and Procedures
                
                34Item
      9B.
                Other
      Information
                
                35PART
      IIIItem
      10.
                Directors,
      Executive Officers and Corporate Governance
                
                35Item
      11.
                Executive
      Compensation
                
                39Item
      12.
                Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
                
                40Item
      13.
                Certain
      Relationships and Related Transactions, and Director
      Independence
                
                41Item
      14.
                Principal
      Accounting Fees and Services
                
                42PART
      IVItem
      15.
                Exhibits,
      Financial Statement Schedules
                
                44





Use
of Terms





Except as
otherwise indicated by the context, all references in this annual report to: (i)
“Sutor Group,” the “Company,” “we,” “us” or “our” are to Sutor Technology Group
Limited, a Nevada corporation, and its direct and indirect subsidiaries; (ii)
“Sutor BVI” are to our subsidiary Sutor Steel Technology Co., Ltd., a British
Virgin Islands corporation, and/or its operating subsidiaries, as the case may
be; (iii) “Changshu Huaye” are to our subsidiary Changshu Huaye Steel Strip Co.,
Ltd., a corporation incorporated in the People’s Republic of China; (iv)
“Jiangsu Cold-Rolled” are to our subsidiary Jiangsu Cold-Rolled Technology Co.,
Ltd., a corporation incorporated in the People’s Republic of China; (v)
“Shanghai Huaye” are to Shanghai Huaye Iron & Steel Group Co., Ltd., a
corporation incorporated in the People’s Republic of China of which Lifang Chen,
our major shareholder and chief executive officer, and her husband Feng Gao are
100% owners, and its subsidiaries; (vi) “Securities Act” are to the Securities
Act of 1933, as amended; (vii) “Exchange Act” means the Securities Exchange Act
of 1934, as amended; (viii) “RMB” are to Renminbi, the legal currency of China;
(ix) “U.S. dollar,” “$” and “US$” are to the legal currency of the United
States; (x) “China” and “PRC” are to the People’s Republic of China; and (xi)
“BVI” are to the British Virgin Islands.





Forward-Looking Statements





Statements
contained in this annual report include “forward-looking statements” within the
meaning of such term in Section 27A of the Securities Act and Section 21E of the
Exchange Act. Forward-looking statements involve known and unknown risks,
uncertainties and other factors which could cause actual financial or operating
results, performances or achievements expressed or implied by such
forward-looking statements not to occur or be realized. Forward-looking
statements made in this annual report generally are based on our best estimates
of future results, performances or achievements, predicated upon current
conditions and the most recent results of the companies involved and their
respective industries. Forward-looking statements may be identified by the use
of forward-looking terminology such as “may,” “will,” “could,” “should,”
“project,” “expect,” “believe,” “estimate,” “anticipate,” “intend,” “continue,”
“potential,” “opportunity” or similar terms, variations of those terms or the
negative of those terms or other variations of those terms or comparable words
or expressions. Potential risks and uncertainties include, among other things,
such factors as:





·
            Our
      heavy reliance on a single
customer;


·
            Downturns
      in the steel industry;


·
            Competition
      and competitive factors in the markets in which we
  compete;


·
            Increases
      in our raw material costs;


·
            General
      economic and business conditions in China and in the local economies in
      which we regularly conduct business, which can affect demand for the
      Company’s products and services;
and


·
            Changes
      in laws, rules and regulations governing the business community in China
      in general and the steel industry in
particular.





Additional
disclosures regarding factors that could cause our results and performance to
differ from results or performance anticipated by this annual report are
discussed in Item 1A. “Risk Factors.” Readers are urged to carefully review and
consider the various disclosures made by us in this annual report and our other
filings with the Security and Exchange Commission (the “SEC”). These reports
attempt to advise investors and other interested parties of the risks and
factors that may affect our business, financial condition and results of
operations and prospects. The forward-looking statements made in this annual
report speak only as of the date hereof and we disclaim any obligation to
provide updates, revisions or amendments to any forward-looking statements to
reflect changes in our expectations or future events.


1




PART
I





ITEM 1. BUSINESS





Overview





We are
one of the leading Chinese private manufacturers of fine finished steel products
used by steel fabricators and other applications. We utilize a variety of
processes and technological methodologies to convert steel manufactured by third
parties into finished steel products. Our product offerings are focused on
higher margin, value-added finished steel products, specifically, hot-dip
galvanized steel (“HDG Steel”) and prepainted galvanized steel (“PPGI”), which
comprised approximately 31.7% and 42.4% of our total revenue in fiscal year
2009, respectively. In addition, we produce acid pickled steel (“AP Steel”) and
cold-rolled steel, which represent the less processed of our finished products.
A large portion of our AP Steel and cold-rolled steel are used for our
production of HDG Steel and PPGI products. Our vertical integration has allowed
us to maintain more stable margins for our HDG Steel and PPGI
products.





We sell
most of our products to customers who operate primarily in the solar energy,
appliances, automobile, construction, infrastructure, medical equipment and
water resource industries. Most of our customers are located in China, with
domestic sales accounting for 93.1% of our total revenue in fiscal year 2009.
Our primary export markets are Europe, Middle East, South America, the United
States, Southeast Asia and Hong Kong.





Through
our manufacturing facilities located in Changshu, China, we currently have three
HDG Steel production lines, one PPGI production line, one AP Steel production
line and one cold-rolled steel line. Our current annual designed production
capacity is approximately 700,000 metric tons (“MT”) for HDG Steel, 200,000 MT
for PPGI, 500,000 MT for AP Steel and 250,000 MT for cold-rolled
steel.





History
and Corporate Structure





We were
incorporated on May 1, 1997 in the State of Nevada under the name Bronze
Marketing, Inc. and changed our name to Sutor Technology Group Limited effective
March 6, 2007 as a result of our reverse acquisition of Sutor BVI in February
2007. From inception until December 31, 2002, we engaged in the business of
providing inventory financing to facilitate the marketing and sale of bronze
sculptures and other artwork. The business was not successful and we
discontinued our active business operations as of December 31, 2002. From
December 31, 2002 until the reverse acquisition of Sutor BVI on February 1,
2007, we engaged in no active business operations.





On
February 1, 2007, we acquired Sutor BVI through a share exchange transaction
pursuant to which the stockholders of Sutor BVI transferred all capital stock of
Sutor BVI to us in exchange for 85.2% ownership of our Company. Our acquisition
of Sutor BVI was accounted for as a recapitalization effected by a share
exchange, wherein Sutor BVI is considered the acquirer for accounting and
financial reporting purposes. The assets and liabilities of the acquired entity
have been brought forward at their book value and no goodwill has been
recognized.


2





The
following chart reflects our organizational structure as of the date of this
annual report:











Segment
Information





Our two
operating segments are categorized according to our operating
subsidiaries:





·
            Changshu
      Huaye which manufactures and sells HDG Steel and PPGI products;
      and


·
            Jiangsu
      Cold-Rolled which manufactures and sells HDG Steel, AP Steel and
      cold-rolled steel.





Changshu
Huaye and Jiangsu Cold-Rolled are located adjacent to each other in Changshu,
China and use largely the same management resources. For additional information
about each segment, see Item 7, “Management’s Discussion and Analysis of
Financial Condition and Result of Operations” and Note 11, “Segment Information”
to the consolidated financial statements included elsewhere in this annual
report.





Our
Products





Our
current products include HDG Steel, PPGI, AP Steel and cold-rolled steel. HDG of
cold-rolled steel and PPGI are primarily manufactured by Changshu Huaye and our
AP Steel products, cold-rolled steel are manufactured by Jiangsu Cold-Rolled.
Jiangsu Cold-Rolled added two new HDG Steel production lines and has
started to manufacture HDG of both cold-rolled steel and hot-rolled steel since
the end of September 2008. We were certified ISO 9001:2000 for our quality
management system in 2005, ISO 14001:2004 for our environmental management
system in 2008, and GD/T28001:2001 for our occupational health and safety
management system in 2008.


3




The
following table set forth sales and shipping information about our product mix
in each of the last three years.





(All
amounts, other than percentage, in millions of U.S. dollars)





YearEndedJune30,2007
                      
                      
                      2008
                      
                      
                      2009Revenue
                      
                      
                      Percentageof
                        Sales
                      
                      
                      Revenue
                      
                      
                      Percentage
                        ofSales
                      
                      
                      Revenue
                      
                      
                      Percentageof
                        SalesHDG
      Steel
                      
                      $
                      150.8
                      
                      
                      
                      49.7
                      %
                      
                      $
                      118.2
                      
                      
                      
                      28.3
                      %
                      
                      $
                      108.3
                      
                      
                      
                      31.7
                      %PPGI
                      
                      
                      96.9
                      
                      
                      
                      31.9
                      %
                      
                      
                      137.3
                      
                      
                      
                      32.8
                      %
                      
                      
                      144.8
                      
                      
                      
                      42.4
                      %AP
      Steel
                      
                      
                      41.1
                      
                      
                      
                      13.5
                      
                      
                      
                      33.9
                      
                      
                      
                      8.1
                      %
                      
                      
                      49.1
                      
                      
                      
                      14.4
                      %Cold-Rolled
      Steel
                      
                      
                      4.6
                      
                      
                      
                      1.5
                      
                      
                      
                      104.4
                      
                      
                      
                      25.0
                      %
                      
                      
                      30.3
                      
                      
                      
                      8.9
                      %Other
                      
                      
                      10.1
                      
                      
                      
                      3.3
                      %
                      
                      
                      24.3
                      
                      
                      
                      5.8
                      %
                      
                      
                      9.0
                      
                      
                      
                      2.6
                      %Total
                      
                      
                      303.4
                      
                      
                      
                      100
                      %
                      
                      
                      418.0
                      
                      
                      
                      100
                      %
                      
                      
                      341.5
                      
                      
                      
                      100
                      %





HDG
Steel





Using a
technology called hot-dip galvanizing, we manufacture corrosion-resistant and
zinc-coated HDG Steel in different dimensions and using different materials and
specifications requested by our customers. HDG Steel products are manufactured
from steel substrate of cold-rolled or hot-rolled picked coils by applying zinc
to the surface of the material to enhance its corrosion protection. HDG Steel
products are principally used in the electrical household appliance and
construction markets.





We
produce not only common industrial specifications, but also extreme
specifications that we believe only a few other large PRC state-owned steel
manufacturers can produce. The following table compares our technical
manufacturing capabilities for most of our products:





Width(mm)
                            
                            
                            Thickness(mm)
                            
                            
                            GalvanizedLayerWeight(g/m2)Our Specification
      Scope
                            
                            700-1250
                            
                            
                            0.18-1.5
                            
                            
                            70-280Industrial
      Common Specification Scope
                            
                            700-1250
                            
                            
                            0.3-1.2
                            
                            
                            100-180





We also
are technologically capable of manufacturing more extreme specifications of up
to 1300mm wide and 0.16mm thick HDG of cold-rolled steel. As a result, we
maintain a competitive advantage in extreme specification technology in terms of
thickness and the weight of the galvanized layer of our products. We have the
flexibility to adjust production specifications to meet changes in market
demand.





Sales of
HDG Steel products to third parties amounted to approximately 116,300 MT in
fiscal year 2009, representing approximately 31.7% of our total sales revenue.
The remaining HDG Steel products, which represent a majority of our HDG Steel
products, were used for our production of PPGI products. Currently, most of our
HDG Steel products are manufactured by Changshu Huaye which produces only HDG of
cold-rolled steel. Jiangsu Cold-Rolled added two new HDG Steel production lines
which are capable of galvanizing both hot-rolled and cold-rolled steel with both
zinc and aluminum. These two new production lines became operational at the end
of September 2008. The addition of the new production lines significantly
expanded our production capacity of HDG Steel, which increased designed
production capacity from 200,000 MT per year to 700,000 MT per
year.





With the
new production lines, we offer HDG of hot-rolled steel, which we believe is more
cost-efficient than production of HDG of cold-rolled steel because production of
HDG steel products occurs directly on hot-rolled steel and, therefore, avoids
the procedure of cold rolling hot-rolled steel. HDG of hot-rolled steel is
generally thicker than HDG of cold-rolled steel with a specification range of
1.5mm to 4.5mm in terms of thickness.


4





PPGI
Products





PPGI
products are typically made to order based on customer specifications. Our PPGI
products’ specification generally ranges from 700mm to 1250mm in width and from
0.2mm to 1.2mm in thickness. Our PPGI products are used mostly in solar energy,
appliances and construction materials. We produce our PPGI by color-coating on
HDG of cold-rolled steel and then coating them in various colors, including
ivory white, ocean blue, pink and any other color according to customer
requirements. Our PPGI production line is equipped with the latest twice baking
and coating technology, which together with indirect heating, enhances the color
coated layers adhesion to the galvanized zinc layer.





Sales of
PPGI products amounted to approximately 167,700 MT in fiscal year 2009,
representing approximately 42.4% of our total sales revenue. Through our
vertical integration strategy, we currently self-supply approximately 99.3% of
HDG of cold-rolled steel to our PPGI production.





AP
Steel





Our AP
Steel production line became operative in September 2006. Acid pickling is a
process that removes scales and oxides from the steel surface by pickling, cold
rolling and annealing. AP Steel products are used mostly as a raw material for
cold-rolled steel strip, HDG Steel, as well as components of automobile and
manufacturing equipment. AP steel products come in several different dimensions
and using different materials and different specifications.





Most of
our AP Steel products are used for our own production of HDG Steel and full-hard
cold-rolled steel. We also sell a small portion of our AP Steel products to the
market. In fiscal year 2009, our sales of AP Steel products to third parties
were approximately 92,400 MT, representing approximately 14.4% of our total
revenue.





Full-Hard,
Cold-rolled Steel Products





Our
manufacturing of full-hard, cold-rolled steel products commenced in January
2007. Full-hard cold-rolled steel strips are treated in an annealing process and
are used to produce HDG of cold-rolled steel. We produce full-hard cold-rolled
steel strips through a reverse cold rolling mill.





We use
most of the full-hard cold-rolled steel strips for our production of HDG of
cold-rolled steel. The remaining undergoes the annealing process and is sold to
the market. Our sales of full-hard cold-rolled steel products to third parties
amounted to approximately 44,900 MT in fiscal year 2009, representing
approximately 8.9% of our revenue. In addition, approximately 87% of cold-rolled
steel products were used for our own production.





Manufacturing





Our
manufacturing facilities are located in Changshu, China. We currently have three
HDG Steel production lines, one PPGI production line, one AP Steel production
line and one cold-rolled steel line. Our current annual designed production
capacity is approximately 700,000 MT for HDG Steel, 200,000 MT for PPGI, 500,000
MT for AP Steels and 250,000 MT for cold-rolled steel.





We
utilize modern automated production technology which is strictly maintained.
There are generally only 15 workers on a continuous cold-rolled galvanizing line
and 11 workers on the PPGI production line per shift. The chart below
demonstrates our production process.


5










Raw
Materials and Suppliers





The
principal raw materials used in producing our products are steel coil, zinc, oil
paint and acid. We source our raw materials from various suppliers, including
our affiliate Shanghai Huaye which supplied approximately 42.0% of our raw
materials in fiscal year 2009. We believe that our suppliers are sufficient to
meet our present needs.





Steel
coil accounted for approximately 90.0% of total production cost in fiscal year
2009. We generally purchase steel coil after receiving orders from customers and
are generally able to pass on increased cost to customers. We purchase steel
strips from Chinese companies, both state-owned enterprises and private
companies. State-owned enterprises can ensure consistent large supply, but do
not react quickly to the fluctuations in prevailing market prices. Private
companies normally react quickly to price changes, but are not as reliable as
state-owned enterprises in terms of consistent supply. By sourcing raw materials
from a combination of state-owned enterprises and private companies, we enjoy
both a reliable source of raw materials and competitive prices.





Zinc is
an important raw material for HDG of cold-rolled steel and accounted for
approximately 5.0% of our total production costs of HDG Steel in fiscal year
2009. We have established long-term relationships with several Chinese
suppliers. We compare the prevailing domestic prices and choose the lower price
and can generally pass price fluctuations onto customers. Zinc prices are
closely guided by the London Metal Exchange quotation, are the most volatile
among those of all of our raw materials.





Oil paint
accounted for approximately 8% of the total production cost of PPGI products in
fiscal year 2009. Currently, Nippon Paint (China) Co., Ltd. and Puli Chemical
Co., Ltd. at Changzhou are our largest suppliers of oil paint. We are one of
their largest customers and obtain what we believe are favorable pricing
terms.





Our
global sourcing network is designed to ensure the highest quality-to-price ratio
of the raw materials we purchase. Our internal specialists collect Chinese
domestic and global market information everyday and track domestic and global
market price fluctuations closely, which allows us to react rapidly to any price
change.


6





Customers





We sell
most of our steel products to customers who operate in the solar energy,
appliances, automobile, construction, infrastructure, medical equipment and
water resource industries.





Approximately
44.2% of our revenue was derived from Shanghai Huaye and its affiliates in
fiscal year 2009. We currently do not have a long-term written contract with
Shanghai Huaye and plan to negotiate the terms of each transaction based on then
current market condition. We believe such arrangement will afford us more
flexibility and allow us to obtain more favorable price based on the changing
market. We believe we have a good relationship with Shanghai Huaye and expect
Shanghai Huaye to remain as our major customer in the foreseeable
future.  We plan to further expand our sales channel and increase our
direct sale to end customers in the future. Other than Shanghai Huaye, none of
our customers accounted for more than 10% of our total revenue in fiscal year
2009.





Sales
and Marketing





China is
our most important market. Domestic sales represented approximately 93.1% of our
total revenue in fiscal year 2009. Within China, the biggest market for our
products is eastern China, which includes Shanghai and the Zhejiang and Jiangsu
provinces. Since September 2004, we have exported our products to Europe, Middle
East, South America, the United States, Southeast Asia and Hong Kong. Our
foreign sales accounted for approximately 10.2%, 3.9% and 6.9% of our total
revenue in fiscal years 2007, 2008 and 2009, respectively.





Our sales
network covers most provinces and regions in China. We are developing a
diversified sales network which allows us to effectively market products and
services to our customers. We sold approximately 55.8% of our products through
our own sales and marketing department in fiscal year 2009. Our sales and
marketing department consists of approximately 50 employees as of the date of
this annual report.





In
addition to direct sales efforts, we have relationships with 67 sales
agents to sell our products, 36 of which have a direct contractual arrangement
with us and the other 31 agents are affiliates of Shanghai Huaye. We entered
into a sales agent cooperation agreement with each of these 36 sales agents.
Pursuant to the agreement, we supply our products to each of the sales agents
and the sales agents sell and deliver our products for sales commissions ranging
from RMB 20 (approximately $2.9) per MT to RMB 120 (approximately $17.7) per MT.
The agreement also provides that the sale agent must place an order with the
quantity and specification of the products before the 15th of each month for the
following month and the parties will enter into a monthly sales contract based
on such order. In addition, we may change the price for our products every half
of month based on current market pricing and are entitled to a penalty fee of
RMB0.5 per MT per day if the agent fails to make the full payment for the
purchase before the delivery day.





Competition





Competition
within the steel industry, both in China and worldwide, is intense. We compete
with both large state-owned enterprises and smaller private companies. In
addition, we also face competition from international steel
manufacturers.





Even
though the demand for fine finished steel products has increased in recent
years, due to the over expansion of the total production capacity of HDG Steel
and PPGI products, supply for low-end HDG steel and PPGI products has outpaced
demand. Due to the high requirements for production technology and equipment, we
believe that demand for high-end HDG Steel and PPGI market remains strong.
Currently, only our Company and a few large state-owned enterprises are capable
of producing high-end HDG Steel and PPGI products in China.





Private
steel product manufacturers in China generally focus on low-end products. Many
of our competitors are much smaller than us and use older equipment and
production techniques. In contrast, our products are aimed at the high-end
markets so we attempt to manufacture them with superior quality and broader
range of specifications. We use advanced manufacturing equipment that we
have purchased from developed countries, such as France and Italy, and employ
engineers and researchers who are experienced with different production
techniques. This allows us to provide a broad array of products in terms of
thickness, zinc layer weight and width of steel coil, which helps us target
high-end customers whose manufacturing specifications are
extreme.


7





There are
several state-owned steel manufacturers that produce comparable products to our
products. As compared with those competitors, we differentiate ourselves by the
following:





·
            We
      satisfy customers’ orders with shorter lead times and guarantee lead times
      for urgent orders, even very small orders, in as short as one or two
      days;


·
            We
      have flexibility in sales arrangements and can take orders in a variety of
      sizes;


·
            We
      operate more efficiently than our state-owned competitors and have lower
      total labor costs, therefore, lower product prices;
  and


·
            We
      provide more customer-oriented
services.





We also
compete with international steel product manufacturers in the global market,
such as Mitel Corporation and Posco Steel. As compared to our competitors in
Europe, Korea and the United States, we believe we have lower production costs
and can offer more competitive pricing. In addition, competitors in developing
countries lag behind due to low product quality and limited product
specification ranges. We began exporting our products in September 2004 and our
products are now sold to Europe, Middle East, South America, the United States,
Southeast Asia and Hong Kong. Our export sales accounted for approximately 6.9%
of our total sales for fiscal year 2009.





Our
operating subsidiaries, Changshu Huaye and Jiangsu Cold-Rolled, are both located
in Changshu, which provides us a transportation cost advantage. Changshu is
situated in the eastern coastal part of China, the largest market for coated
steel products in China. In addition, our affiliate Shanghai Huaye has a
logistic center in Changshu port, which provides us convenient and low cost
transportation for both raw materials and finished products.





Intellectual
Property





Our
success depends, in part, on our ability to maintain and protect our proprietary
technology and to conduct our business without infringing on the proprietary
rights of others. We rely primarily on a combination of patents, trademarks and
trade secrets, as well as employee and third-party confidentiality agreements,
to safeguard our intellectual property. As of June 30, 2009, we held 4 patents
and had 47 patent applications pending.





All of
our products are sold with the trademark of “,”
which is known by Chinese and international clients. In August 2005, Shanghai
Huaye agreed to transfer the trademark of “” to us
without consideration. Such transfer was approved by the Trademark office of the
State Administration for Industry and Commerce of China in August 2006. As a
result, we have all the legal rights for the trademark, the term of which
expires in July 2015.





All our
key employees, especially engineers, have signed confidentiality and
non-competition agreements with us. In addition, all our employees are obligated
to protect our confidential information. Where appropriate for our business
strategy, we will continue to take steps to protect our intellectual property
rights.





Employees





As of
June 30, 2009, we had approximately 450 employees, 420 of which are full-time
employees. Approximately 250 are employees of Changshu Huaye and approximately
200 are employees of Jiangsu Cold-Rolled. We believe that we maintain a good
working relationship with our employees and we have not experienced any
significant labor disputes or any difficulty in recruiting staff for our
operations.





Our
employees are not represented by a labor organization or covered by a collective
bargaining agreement. We have not experienced any work stoppages.





We are
required under PRC law to make contributions to the employee benefit plans at
specified percentages of the after-tax profit. In addition, we are required by
the PRC law to cover employees in China with various type of social insurance.
We believe that we are in material compliance with the relevant PRC
laws.


8





Backlog





Our
backlog at June 30, 2009 was approximately $20 million, compared with backlog of
approximately $50 million at June 30, 2008. Backlog includes orders confirmed
for products scheduled to be shipped within 90 days to customers with approved
credit status. Because of the generally short cycle between order and shipment
and occasional customer changes in delivery schedules or cancellation of orders,
we do not believe that our backlog, as of any particular date, is necessarily
indicative of actual net sales for any future period.





Regulation





As a
producer of steel products in China, we are regulated by the national and local
laws of the PRC.





There is
no private ownership of land in China and all land ownership is held by the
government of the PRC, its agencies and collectives. Land use rights can be
obtained from the government for a period of up to 70 years, and are typically
renewable.  Land use rights can be transferred upon approval by the
land administrative authorities of the PRC (State Land Administration Bureau)
upon payment of the required land transfer fee. We have received the necessary
land use right certificates for the properties described under “Item 2 -
Properties.” See “Item 2 - Properties” for more details.





We are
also subject to various governmental regulations related to environmental
protection. The major environmental regulations applicable to us include: the
Environmental Protection Law of the PRC, the Law of PRC on the Prevention and
Control of Water Pollution, Implementation Rules of the Law of PRC on the
Prevention and Control of Water Pollution, the Law of PRC on the Prevention and
Control of Air Pollution, Implementation Rules of the Law of PRC on the
Prevention and Control of Air Pollution, the Law of PRC on the Prevention and
Control of Solid Waste Pollution, and the Law of PRC on the Prevention and
Control of Noise Pollution.





In
addition, we are also subject to the PRC’s foreign currency regulations. The PRC
government has control over RMB reserves through, among other things, direct
regulation of the conversion of RMB into other foreign currencies. Although
foreign currencies which are required for “current account” transactions can be
bought freely at authorized Chinese banks, the proper procedural requirements
prescribed by Chinese law must be met. At the same time, Chinese companies are
also required to sell their foreign exchange earnings to authorized Chinese
banks and the purchase of foreign currencies for capital account transactions
still requires prior approval of the Chinese government.





We
believe that we are in material compliance with all registrations and
requirements for the issuance and maintenance of all licenses required by the
governing bodies, and that all license fees and filings are
current.





Environmental
Matters





Our
manufacturing facilities are subject to various pollution control regulations
with respect to noise, water and air pollution and the disposal of waste and
hazardous materials. We are also subject to periodic inspections by local
environmental protection authorities. Our operating subsidiaries have received
certifications from the relevant PRC government agencies in charge of
environmental protection indicating that their business operations are in
material compliance with the relevant PRC environmental laws and regulations. We
are not currently subject to any pending actions alleging any violations of
applicable PRC environmental laws.





Seasonality





Our
operating results and operating cash flows historically have not been subject to
seasonal variations. This pattern may change, however, as a result of new market
opportunities or new product introductions.





Available
Information





Our
internet website is at www.sutorcn.com. Our
Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on
Form 8-K, including exhibits, and amendments to those reports filed or furnished
pursuant to Sections 13(a) and 15(d) of the Exchange Act, are available free of
charge on our website as soon as reasonably practicable after such reports are
electronically filed with, or furnished to, the SEC. Copies of these reports may
also be obtained free of charge by sending written requests to our Secretary,
Sutor Technology Group Limited, No 8, Huaye Road, Dongbang Industrial Park
Changshu, China, 215534. The information posted on our web site is not part of
this or any other report we file with or furnish with the SEC. Investors can
also read and copy any materials filed by us with the SEC at the SEC’s Public
Reference Room which is located at 100 F Street, NE, Washington, DC 20549.
Information about the operation of the Public Reference Room can be obtained by
calling the SEC at 1-800-SEC-0330. Our filings can also be accessed at the
SEC’s internet website: www.sec.gov.


9





ITEM
1A.   RISK FACTORS





RISKS RELATED TO OUR
BUSINESS





Our
revenues are highly concentrated in a single customer, Shanghai Huaye, and our
business will be harmed if Shanghai Huaye reduces its orders from
us.





Approximately
44.2% of our revenue was derived from Shanghai Huaye and its affiliates in
fiscal year 2009, which acts as a distributor of our products as well as one of
our suppliers.  We do not have a long term written contract with
Shanghai Huaye. If we cease to do business with Shanghai Huaye at current levels
and are unable to generate additional sales with new and existing customers that
purchase a similar amount of our products, our revenue and net income would
decline considerably.





Any
decrease in the availability, or increase in the cost, of raw materials could
materially affect our earnings.





Our
operations depend heavily on the availability of various raw materials and
energy resources, including steel coil, zinc, oil paint, electricity and natural
gas. Steel coil has historically made up approximately 90% of our total cost of
sales. The availability of raw materials and energy resources may decrease and
their prices may fluctuate greatly. We purchase a large portion of our raw
materials from our affiliate Shanghai Huaye and we have long-term relationships
with several other suppliers. However, if Shanghai Huaye or any other important
suppliers are unable or unwilling to provide us with raw materials on terms
favorable to us, we may be unable to produce certain products. This could result
in a decrease in profit and damage to our reputation in our industry. In the
event our raw material and energy costs increase, we may not be able to pass
these higher costs on to our customers in full or at all. Any increase in the
prices for raw materials or energy resources could materially increase our costs
and therefore lower our earnings.





Our
industry is highly fragmented and competitive, and increased competition could
reduce our operating income.





The steel
manufacturing and processing business is highly fragmented and competitive. We
compete with a number of other steel manufacturers and processors in China, on a
region-by-region basis, and with foreign steel manufacturers on a world wide
basis. Our goal is to market our products to customers who demand the highest
quality products and precision in the end product so we compete primarily on the
precision and range of achievable tolerances, the quality of our products and
the raw materials used in our products. We compete with companies of various
sizes, some of which have more established brand names and relationships in
certain markets we serve than we do. Increased competition could force us to
lower our prices or offer services at a higher cost to us, which could reduce
our margins and operating income.





A
downturn or negative changes in the highly volatile steel industry will harm our
business and profitability.





The steel
industry as a whole is cyclical and pricing can be volatile as a result of
general economic conditions, energy costs, labor costs, competition, import
duties, tariffs and currency exchange rates. These macroeconomic factors have
historically resulted in wide fluctuations in the steel industry both in China
and globally. In our case, future economic downturns, stagnant economies or
currency fluctuations in China or globally could decrease the demand for
products or increase the amount of imports of steel into China, which could
negatively impact our sales, margins and profitability.


10




The
global economic crisis could further impair the steel industry thereby limiting
demand for our products and affecting the overall availability and cost of
external financing for our operations.




The
continuation or intensification of the global economic crisis and turmoil in the
global financial markets may adversely impact our business, the businesses of
our customers from whom we generate revenues and our potential sources of
capital financing.  Our products are primarily sold to customers who
operate in the solar energy, appliances, automobile, construction,
infrastructure, medical equipment and water resource industries.  The
global economic crisis harmed most industries in which our customers
operate.  Our sales and business operations are dependent on the
financial health of the industries in which our customers operate and could
suffer if our customers experience, or continue to experience, a downturn in
their business.  In addition, the lack of availability of credit could
lead to a further weakening of the Chinese and global economies and make capital
financing of our operations more expensive for us or impossible
altogether.  Presently, it is unclear whether and to what extent the
economic stimulus measures and other actions taken or contemplated by the
Chinese government and other governments throughout the world will mitigate the
effects of the crisis on the automotive industry and other industries that
affect our business.  These conditions have not presently impaired our
ability to access credit markets and finance our operations.  However,
the impact of the current crisis on our ability to obtain capital financing in
the future, and the cost and terms of same, is unclear.  Furthermore,
deteriorating economic conditions including business layoffs, downsizing,
industry slowdowns and other similar factors that affect our customers could
have further negative consequences for the automotive industry and result in
lower sales, price reductions in our products and declining profit margins. The
economic situation also could harm our current or future lenders or customers,
causing them to fail to meet their obligations to us. No assurances can be given
that the effects of the current crisis will not damage on our business,
financial condition and results of operations.




Management
has determined that there is a material weakness in our internal controls over
financial reporting which even if quickly remedied, could weaken the market’s
confidence in our financial statements and lead to fluctuations in our stock
price.





As
directed by Section 404 of the Sarbanes-Oxley Act of 2002, the SEC adopted rules
requiring public companies to include a report of management on the company’s
internal controls over financial reporting in their annual reports, including
Form 10-K. In addition, the independent registered public accounting firm
auditing a company’s financial statements must also attest to and report on the
operating effectiveness of our internal controls. We became subject to the
requirement to provide management report on the company’s controls over
financial reporting commencing with our fiscal year ending June 30, 2008 and a
report of our management for the 2009 fiscal year is included under Item 9A of
this annual report. The auditor attestation is not required until our annual
report for the fiscal year ending June 30, 2010 assuming our filing status
remains as a smaller reporting company. This process will be expensive and time
consuming, and will require significant attention of management. The portion of
this process completed thus far has revealed material weaknesses in internal
controls that will require remediation. See “Item 9A. Control and Procedures.”
The remediation process may also be expensive and time consuming, and even
though the management is committed to improving its internal controls,
management can give no assurance that the remediation effort will be completed
on time or be effective. In addition, management can give no assurance that
additional material weaknesses in internal controls will not be discovered.
Management also can give no assurance that the process of evaluation and the
auditor’s attestation will be completed on time. The disclosure of a material
weakness, even if quickly remedied, could weaken the market’s confidence in our
financial statements and lead to fluctuations in our stock price, especially if
a restatement of financial statements for past periods is required. In addition,
if we are unable to adequately design our internal control systems, or prepare
an “internal control report” to the satisfaction of our auditors, our auditors
may issue a qualified opinion on our financial statements.





We
may be unable to fund the substantial ongoing capital and maintenance
expenditures that our operations require.





Our
operations are capital intensive and our business strategy may require
additional substantial capital investment. We require capital for building new
production lines, acquiring new equipment, maintaining the condition of our
existing equipment and complying with environmental laws and regulations. We
plan to fund our capital expenditures from operating cash flow and our credit
facilities and may require additional debt or equity financing. We cannot assure
you, however, that financing will be available or, if financing is available, it
may result in increased interest and amortization expense, increased leverage,
dilution and decreased income available to fund further expansion. In addition,
future debt financings may limit our ability to withstand competitive pressures
and render us more vulnerable to economic downturns. If we are unable to fund
our capital requirements, we may be unable to implement our business plan, and
our financial performance may suffer.


11





Our
level of indebtedness may make it more difficult for us to fulfill all of our
debt obligations and may reduce the amount of cash available for maintaining and
growing our operations, which could have an adverse effect on our
revenues.





Our total
debt under existing loans to the Company as of June 30, 2009 was $117.3 million.
This substantial indebtedness could impair our financial condition and our
ability to fulfill all of our debt obligations, especially during a downturn in
our business, in the industry in which we operate or in the general economy. Our
indebtedness and the incurrence of any new indebtedness could (i) make it more
difficult for us to satisfy our existing obligations, which could in turn result
in an event of default on such obligations, (ii) require us to seek other
sources of capital to finance cash used in operating activities, thereby
reducing the availability of cash for working capital, capital expenditures,
acquisitions, general corporate purposes or other purposes, (iii) impair our
ability to obtain additional financing in the future for working capital,
capital expenditures, acquisitions, general corporate purposes or other
purposes; (iv) diminish our ability to withstand a downturn in our business, the
industry in which we operate or the economy generally, (v) limit our flexibility
in planning for, or reacting to, changes in our business and the industry in
which we operate, or (vi) place us at a competitive disadvantage compared to
competitors that have proportionately less debt. If we are unable to meet our
debt service obligations, we could be forced to restructure or refinance our
indebtedness, seek additional equity capital or sell assets.





We may be
unable to obtain financing or sell assets on satisfactory terms, or at all,
which could cause us to default on our debt service obligations and be subject
to foreclosure on such loans. Additionally, we could incur additional
indebtedness in the future and, if new debt is added to our current debt levels,
the risks above could intensify.





Unexpected
equipment failures may damage our business due to production curtailments or
shutdowns.





Our
manufacturing processes are extremely specialized and depend on critical pieces
of equipment, such as air knife machines, welding tools and apparatus,
color-coating machines, roll mills, ABB roll and tension knives. This machinery
is highly specialized and cannot be repaired or replaced without significant
expense and time delay. On occasion, our equipment may be out of service as a
result of unanticipated failures which may result in material plant shutdowns or
periods of reduced production. Interruptions in production capabilities will
inevitably increase production costs and reduce our sales and earnings. In
addition to equipment failures, our facilities are also subject to the risk of
catastrophic loss due to unanticipated events such as fires, explosions or
adverse weather conditions. Furthermore, any interruption in production
capability may require us to make large capital expenditures to remedy the
situation, which could have a negative effect on our profitability and cash
flows. Although we have business interruption insurance, we cannot provide any
assurance that the insurance will cover all losses that we experience as a
result of the equipment failures. In addition, longer-term business disruption
could result in a loss of customers. If this were to occur, our future sales
levels, and therefore our profitability, could be adversely
affected.





Our
revenue will decrease if there is less demand for construction materials or
electrical household appliances.





Our
products often serve as key components in construction materials and electrical
household appliances. Therefore, we are subject to the general changes in
economic conditions affecting the construction and household appliance segments
of the economy. Demand for our products is typically affected by a number of
economic factors, including, but not limited to, consumer interest rates,
consumer confidence, retail trends, sales of existing homes, and the level of
mortgage financing. If there is a decline in economic activity in China and the
other markets in which we operate or a decrease of sales of construction
materials and electrical household appliances, demand for our products and our
revenue will likewise decrease.





Environmental
regulations impose substantial costs and limitations on our
operations.





We are
subject to various national and local environmental laws and regulations in
China concerning issues such as air emissions, wastewater discharges, and solid
waste management and disposal. These laws and regulations can restrict or limit
our operations and expose us to liability and penalties for non-compliance.
While we believe that our facilities are in material compliance with all
applicable environmental laws and regulations, the risks of substantial
unanticipated costs and liabilities related to compliance with these laws and
regulations are an inherent part of our business. It is possible that future
conditions may develop, arise or be discovered that create new environmental
compliance or remediation liabilities and costs. While we believe that we can
comply with existing environmental legislation and regulatory requirements and
that the costs of compliance have been included within budgeted cost estimates,
compliance may prove to be more limiting and costly than
anticipated.


12


If
our customers and/or the ultimate consumers of products that use our products
successfully assert product liability claims against us due to defects in our
products, our operating results may suffer and our reputation may be
harmed.





Our
products are widely applied in the manufacturing of many products, including
electrical household appliances, medical instruments and large industrial
equipment. Significant property damage, personal injuries and even death can
result from malfunctioning products. If our products are not properly
manufactured or installed and/or if people are injured as a result of our
products, we could be subject to claims for damages based on theories of product
liability and other legal theories in some jurisdictions in which our products
are sold. The costs and resources to defend such claims could be substantial
and, if such claims are successful, we could be responsible for paying some or
all of the damages. We do not have product liability insurance. The publicity
surrounding these sorts of claims is also likely to damage our reputation,
regardless of whether such claims are successful. Any of these consequences
resulting from defects in our products would hurt our operating results and
stockholder value.





We
might fail to adequately protect our intellectual property and third parties may
claim that our products infringe upon their intellectual property.





As part
of our business strategy, we intend to accelerate our investment in new
technologies in an effort to strengthen and differentiate our product portfolio
and make our manufacturing processes more efficient. As a result, we believe
that the protection of our intellectual property will become increasingly
important to our business. Currently, we have one patent application pending. We
expect to rely on a combination of patents, trade secrets, trademarks and
copyrights to provide protection in this regard, but this protection might be
inadequate. For example, our pending or future patent applications might not be
approved or, if allowed, they might not be of sufficient strength or scope.
Conversely, third parties might assert that our technologies infringe their
proprietary rights. In either case, litigation could result in substantial costs
and diversion of our resources, and whether or not we are ultimately successful,
the litigation could hurt our business and financial condition.





Expansion
of our business may strain our management and operational infrastructure and
impede our ability to meet any increased demand for our fine finished steel
products.





Our
business plan is to grow our operations by meeting the anticipated growth in
demand for existing products and by introducing new product offerings. Our
subsidiary, Jiangsu Cold-Rolled, has recently completed construction of several
new production lines and has been put into operation, but lacks a proven
operational history. Growth in our business may place a significant strain on
our personnel, management, financial systems and other resources. Our business
growth also presents numerous risks and challenges, including:





·
            our
      ability to successfully and rapidly expand sales to potential customers in
      response to potentially increasing
demand;


·
            the
      costs associated with such growth, which are difficult to quantify, but
      could be significant; and


·
            rapid
      technological change.





To
accommodate this growth and compete effectively, we may need to obtain
additional funding to improve information systems, procedures and controls and
expand, train, motivate and manage existing and additional employees. Funding
may not be available in a sufficient amount or on favorable terms, if at all. If
we are not able to manage these activities and implement these strategies
successfully to expand to meet any increased demand, our operating results could
suffer.





Our
current Chief Executive Officer and Chief Technology Officer have limited
experience in their positions and may not perform at the level which we demand
and expect.





Our
current Chief Executive Officer, Lifang Chen, and our current Chief Technology
Officer, Xun Zhang, have recently been appointed to such positions. Ms. Chen was
appointed as our Chief Executive Officer in May 2008 and Mr. Zhang was appointed
as our Chief Technology Officer in July 2007. While we believe Ms. Chen and Mr.
Zhang will provide excellent management and leadership for our company, neither
Ms. Chen nor Mr. Zhang has served in these positions in the past for a company
comparable to ours, so their experience is limited and they may not perform to
the standards we expect and demand.


13


We
depend heavily on key personnel, and turnover of key employees and senior
management could harm our business.





Our
future business and results of operations depend in significant part upon the
continued contributions of our key technical and senior management personnel,
including Lifang Chen, our Chief Executive Officer, Yongfei Jiang, our Chief
Financial Officer and Xun Zhang, our Chief Technology Officer. They also depend
in significant part upon our ability to attract and retain additional qualified
management, technical, marketing and sales and support personnel for our
operations. If we lose a key employee, if a key employee fails to perform in his
or her current position, or if we are not able to attract and retain skilled
employees as needed, our business could suffer. Significant turnover in our
senior management could significantly deplete our institutional knowledge held
by our existing senior management team. We depend on the skills and abilities of
these key employees in managing the manufacturing, technical, marketing and
sales aspects of our business, any part of which could be harmed by turnover in
the future.





Ms.
Lifang Chen’s association with Shanghai Huaye could pose a conflict of
interest.





Ms.
Lifang Chen, our chairman and beneficial owner of 79.93% of our common stock,
also beneficially owns 100% of Shanghai Huaye, which is a major distributor of
our products and provider of our raw materials. As a result, conflicts of
interest may arise from time to time. We will attempt to resolve any such
conflicts of interest in our favor. Our officers and directors are accountable
to us and our shareholders as fiduciaries, which requires that such officers and
directors exercise good faith and integrity in handling our
affairs.





We
may be exposed to liabilities under the Foreign Corrupt Practices Act, and any
determination that we violated the Foreign Corrupt Practices Act could have a
material adverse effect on our business.





We are
subject to the Foreign Corrupt Practice Act, or FCPA, and other laws that
prohibit improper payments or offers of payments to foreign governments and
their officials and political parties by U.S. persons and issuers as defined by
the statute for the purpose of obtaining or retaining business. We have
operations, agreements with third parties and make sales in China, which may
experience corruption. Our activities in China create the risk of unauthorized
payments or offers of payments by one of the employees, consultants, sales
agents or distributors of our company, because these parties are not always
subject to our control. It is our policy to implement safeguards to discourage
these practices by our employees. Also, our existing safeguards and any future
improvements may prove to be less than effective, and the employees,
consultants, sales agents or distributors of our Company may engage in conduct
for which we might be held responsible. Violations of the FCPA may result in
severe criminal or civil sanctions, and we may be subject to other liabilities,
which could negatively affect our business, operating results and financial
condition. In addition, the government may seek to hold our Company liable for
successor liability FCPA violations committed by companies in which we invest or
that we acquire.





RISKS
RELATED TO DOING BUSINESS IN CHINA





Adverse
changes in political and economic policies of the PRC government could impede
the overall economic growth of China, which could reduce the demand for our
products and damage our business.





We
conduct substantially all of our operations and generate most of our revenue in
China. Accordingly, our business, financial condition, results of operations and
prospects are affected significantly by economic, political and legal
developments in China. The PRC economy differs from the economies of most
developed countries in many respects, including:





·
            a
      higher level of government
involvement;


·
            a
      early stage of development of the market-oriented sector of the
      economy;


·
            a
      rapid growth rate;


·
            a
      higher level of control over foreign exchange;
  and


·
            the
      allocation of resources.





As the
PRC economy has been transitioning from a planned economy to a more
market-oriented economy, the PRC government has implemented various measures to
encourage economic growth and guide the allocation of resources. While these
measures may benefit the overall PRC economy, they may also have a negative
effect on us.


14





Although
the PRC government has in recent years implemented measures emphasizing the
utilization of market forces for economic reform, the PRC government continues
to exercise significant control over economic growth in China through the
allocation of resources, controlling the payment of foreign currency-denominated
obligations, setting monetary policy and imposing policies that impact
particular industries or companies in different ways.





Any
adverse change in economic conditions or government policies in China could have
a material adverse effect on the overall economic growth in China, which in turn
could lead to a reduction in demand for our services and consequently have a
material adverse effect on our business and prospects.





Uncertainties
with respect to the PRC legal system could limit the legal protections available
to you and us.





We
conduct substantially all of our business through our operating subsidiary in
the PRC. Our operating subsidiaries are generally subject to laws and
regulations applicable to foreign investments in China and, in particular, laws
applicable to foreign-invested enterprises. The PRC legal system is based on
written statutes, and prior court decisions may be cited for reference but have
limited precedential value. Since 1979, a series of new PRC laws and regulations
have significantly enhanced the protections afforded to various forms of foreign
investments in China. However, since the PRC legal system continues to rapidly
evolve, the interpretations of many laws, regulations and rules are not always
uniform and enforcement of these laws, regulations and rules involve
uncertainties, which may limit legal protections available to you and us. In
addition, any litigation in China may be protracted and result in substantial
costs and diversion of resources and management attention. In addition, all of
our executive officers and all of our directors are residents of China and not
of the United States, and substantially all the assets of these persons are
located outside the United States. As a result, it could be difficult for
investors to affect service of process in the United States or to enforce a
judgment obtained in the United States against our Chinese operations and
subsidiaries.





If
we are found to have failed to comply with applicable laws, we may incur
additional expenditures or be subject to significant fines and
penalties.





Our
operations are subject to PRC laws and regulations applicable to us. However,
many PRC laws and regulations are uncertain in their scope, and the
implementation of such laws and regulations in different localities could have
significant differences. In certain instances, local implementation rules and/or
the actual implementation are not necessarily consistent with the regulations at
the national level. Although we strive to comply with all the applicable PRC
laws and regulations, we cannot assure you that the relevant PRC government
authorities will not later determine that we have not been in compliance with
certain laws or regulations.





In
addition, our facilities and products are subject to many laws and regulations.
Our failure to comply with these and other applicable laws and regulations in
China could subject us to administrative penalties and injunctive relief, as
well as civil remedies, including fines, injunctions and recalls of our
products. It is possible that changes to such laws or more rigorous enforcement
of such laws or with respect to our current or past practices could have a
material adverse effect on our business, operating results and financial
condition. Further, additional environmental, health or safety issues relating
to matters that are not currently known to management may result in
unanticipated liabilities and expenditures.





The
PRC government exerts substantial influence over the manner in which we must
conduct our business activities.





The PRC
government has exercised and continues to exercise substantial control over
virtually every sector of the Chinese economy through regulation and state
ownership. Our ability to operate in China may be harmed by changes in its laws
and regulations, including those relating to taxation, import and export
tariffs, environmental regulations, land use rights, property and other matters.
We believe that our operations in China are in material compliance with all
applicable legal and regulatory requirements. However, the central or local
governments of the jurisdictions in which we operate may impose new, stricter
regulations or interpretations of existing regulations that would require
additional expenditures and efforts on our part to ensure our compliance with
such regulations or interpretations.





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 China or
particular regions thereof and could require us to divest ourselves of any
interest we then hold in Chinese properties or joint ventures.


15


Restrictions
on currency exchange may limit our ability to receive and use our sales revenue
effectively.





All our
sales revenue and expenses are denominated in RMB. Under PRC law, RMB is
currently convertible under the “current account,” which includes dividends and
trade and service-related foreign exchange transactions, but not under the
“capital account,” which includes foreign direct investment and loans.
Currently, our PRC operating subsidiary may purchase foreign currencies for
settlement of current account transactions, including payments of dividends to
us, without the approval of the State Administration of Foreign Exchange, or
SAFE, by complying with certain procedural requirements. However, the relevant
PRC government authorities may limit or eliminate our ability to purchase
foreign currencies in the future. Since a significant amount of our future
revenue will be denominated in RMB, any existing and future restrictions on
currency exchange may limit our ability to utilize revenue generated in RMB to
fund our business activities outside China that are denominated in foreign
currencies.





Foreign
exchange transactions by PRC operating subsidiaries under the capital account
continue to be subject to significant foreign exchange controls and require the
approval of or need to register with PRC government authorities, including SAFE.
In particular, if our PRC operating subsidiaries borrow foreign currency through
loans from us or other foreign lenders, these loans must be registered with
SAFE, and if we finance the subsidiaries by means of additional capital
contributions, these capital contributions must be approved by certain
government authorities, including the Ministry of Commerce, or MOFCOM, or their
respective local counterparts. These limitations could affect their ability to
obtain foreign exchange through debt or equity financing.





Fluctuations
in exchange rates could adversely affect our business and the value of our
securities.





The value
of our common stock will be indirectly affected by the foreign exchange rate
between U.S. dollars and RMB and between those currencies and other currencies
in which our sales may be denominated. In addition, appreciation or depreciation
in the value of the RMB relative to the U.S. dollar would affect our financial
results reported in U.S. dollar terms without giving effect to any underlying
change in our business or results of operations. Fluctuations in the exchange
rate will also affect the relative value of any dividend we issue that will be
exchanged into U.S. dollars as well as earnings from, and the value of, any U.S.
dollar-denominated investments we make in the future.





Since
July 2005, the RMB has no longer been pegged to the U.S. dollar. Although the
People’s Bank of China regularly intervenes in the foreign exchange market to
prevent significant short-term fluctuations in the exchange rate, the RMB may
appreciate or depreciate significantly in value against the U.S. dollar in the
medium to long term. Moreover, it is possible that in the future PRC authorities
may lift restrictions on fluctuations in the RMB exchange rate and lessen
intervention in the foreign exchange market.





Very
limited hedging transactions are available in China to reduce our exposure to
exchange rate fluctuations. To date, we have not entered into any hedging
transactions. While we may enter into hedging transactions in the future, the
availability and effectiveness of these transactions may be limited, and we may
not be able to successfully hedge our exposure at all. In addition, our foreign
currency exchange losses may be magnified by PRC exchange control regulations
that restrict our ability to convert RMB into foreign currencies.





Currently,
some of our raw materials and major equipment are imported. In the event that
the U.S. dollars appreciate against RMB, our costs will increase. If we cannot
pass the resulting cost increases on to our customers, our profitability and
operating results will suffer. In addition, since our sales to international
customers are growing rapidly, we are increasingly subject to the risk of
foreign currency depreciation.


16


Restrictions
under PRC law on our PRC subsidiaries’ ability to make dividends and other
distributions could materially and adversely affect our ability to grow, make
investments or acquisitions that could benefit our business, pay dividends to
you, and otherwise fund and conduct our businesses.





Substantially
all of our revenues are earned by our PRC subsidiaries. However, PRC regulations
restrict the ability of our PRC subsidiaries to make dividends and other
payments to their offshore parent company. PRC legal restrictions permit
payments of dividend by our PRC subsidiaries only out of their accumulated
after-tax profits, if any, determined in accordance with PRC accounting
standards and regulations. Each of our PRC subsidiaries is also required under
PRC laws and regulations to allocate at least 10% of our annual after-tax
profits determined in accordance with PRC GAAP to a statutory general reserve
fund until the amounts in said fund reaches 50% of our registered capital.
Allocations to these statutory reserve funds can only be used for specific
purposes and are not transferable to us in the form of loans, advances or cash
dividends. Any limitations on the ability of our PRC subsidiaries to transfer
funds to us could materially and adversely limit our ability to grow, make
investments or acquisitions that could be beneficial to our business, pay
dividends and otherwise fund and conduct our business.





Under
the New EIT Law, we may be classified as “resident enterprises” of China, which
may subject us to PRC income tax on our taxable global income.





China
passed a new Enterprise Income Tax Law (the “New EIT Law”), and its
implementation regulations, both of which became effective on January 1, 2008.
Under the New EIT Law, an enterprise established outside of China with “de facto
management bodies” within China is considered a “resident enterprise,” meaning
that it can be treated in a manner similar to a Chinese domestic enterprise for
enterprise income tax purposes. The implementing rules of the New EIT Law define
de facto management as “substantial and overall management and control over the
production and operations, personnel, accounting, and properties” of the
enterprise. On April 22, 2009, the State Administration of Taxation issued the
Notice Concerning Relevant Issues Regarding Cognizance of Chinese Investment
Controlled Enterprises Incorporated Offshore as Resident Enterprises pursuant to
Criteria of de facto Management Bodies, or the Notice, further interpreting the
application of the New EIT Law and its implementation with respect to
non-Chinese enterprises or group controlled offshore entities. Pursuant to the
Notice, an enterprise incorporated in an offshore jurisdiction and controlled by
a Chinese enterprise or group will be classified as a “non-domestically
incorporated resident enterprise” if (i) its senior management in charge of
daily operations reside or perform their duties mainly in China; (ii) its
financial or personnel decisions are made or approved by bodies or persons in
China; (iii) substantial assets and properties, accounting books, corporate
chops, board and shareholder minutes are kept in China; and (iv) at least half
of its directors with voting rights or senior management often resident in
China. A resident enterprise would be generally subject to the uniform 25%
enterprise income tax rate as to its worldwide income. Substantially all of our
management is currently based in China. Therefore, we may be treated as a
Chinese resident enterprise for enterprise income tax purposes. The tax
consequences of such treatment are currently unclear, as they will depend on how
local tax authorities apply or enforce the New EIT Law or the implementation
regulations.





In
addition, under the New EIT Law and implementation regulations, PRC income tax
at the rate of 10% is applicable to dividends payable to investors that are
“non-resident enterprises” (and that do not have an establishment or place of
business in the PRC, or that have such establishment or place of business but
the relevant income is not effectively connected with the establishment or place
of business) to the extent that such dividends have their source within the PRC
unless there is an applicable tax treaty between the PRC and the jurisdiction in
which an overseas holder resides which reduces or exempts the relevant tax.
Similarly, any gain realized on the transfer of shares by such investors is also
subject to the 10% PRC income tax if such gain is regarded as income derived
from sources within the PRC. If we are considered a PRC “resident enterprise”,
it is unclear whether the dividends we pay with respect to our shares, or the
gain you may realize from the transfer of our shares, would be treated as income
derived from sources within the PRC and be subject to PRC tax. If we are
required under the New EIT Law to withhold PRC income tax on our dividends
payable to our foreign shareholders, or if you are required to pay PRC income
tax on the transfer of your shares, the value of your investment in our shares
may be materially and adversely affected.





You
mayhave difficulty enforcing judgments against us.





We are a
Nevada holding company and most of our assets are located outside of the United
States. Almost all of our operations are conducted in the PRC. In addition, most
of our directors and officers are nationals and residents of countries other
than the United States. A substantial portion of the assets of these persons is
located outside the United States. As a result, it may be difficult for you to
effect service of process within the United States upon these persons. It may
also be difficult for you to enforce in U.S. courts judgments on the civil
liability provisions of the U.S. federal securities laws against us and our
officers and directors, most of whom are not residents in the United States and
the substantial majority of whose assets are located outside of the United
States. In addition, there is uncertainty as to whether the courts of the PRC
would recognize or enforce judgments of U.S. courts. Although the recognition
and enforcement of foreign judgments are generally provided for under the PRC
Civil Procedures Law. Courts in China may recognize and enforce foreign
judgments in accordance with the requirements of the PRC Civil Procedures Law
based on treaties between China and the country where the judgment is made or on
reciprocity between jurisdictions. China does not have any treaties or other
arrangements that provide for the reciprocal recognition and enforcement of
foreign judgments with the United States. In addition, according to the PRC
Civil Procedures Law, courts in the PRC will not enforce a foreign judgment
against us or our directors and officers if they decide that the judgment
violates basic principles of PRC law or national sovereignty, security or the
public interest. So it is uncertain whether a PRC court would enforce a judgment
rendered by a court in the United States.


17





RISKS
RELATED TO THE MARKET FOR OUR STOCK





Certain
of our stockholders hold a significant percentage of our outstanding voting
securities.





Ms.
Lifang Chen, our Chairman, is the beneficial owner of approximately 79.93% of
our outstanding voting securities. As a result, she possesses significant
influence and can elect a majority of our board of directors and authorize or
prevent proposed significant corporate transactions. Her ownership and control
may also have the effect of delaying or preventing a future change in control,
impeding a merger, consolidation, takeover or other business combination or
discourage a potential acquirer from making a tender offer.





Although
publicly traded, the trading market in our common stock has been substantially
less liquid than the average trading market for a stock quoted on the Nasdaq
Stock Market and this low trading volume may adversely affect the price of our
common stock.





Our
common stock started trading on the Nasdaq Capital Market under the symbol
“SUTR” in February 2008. The trading volume of our common stock has been
comparatively low to other companies listed on Nasdaq. Limited trading volume
will subject our shares of common stock to greater price volatility and may make
it difficult for you to sell your shares of common stock at a price that is
attractive to you.





Certain
provisions of our Articles of Incorporation may make it more difficult for a
third party to effect a change- in-control.





Our
articles of incorporation authorize the board of directors to issue up to
1,000,000 shares of preferred stock. The preferred stock may be issued in one or
more series, the terms of which may be determined at the time of issuance by the
board of directors without further action by the stockholders. These terms may
include voting rights including the right to vote as a series on particular
matters, preferences as to dividends and liquidation, conversion rights and
redemption rights provisions. The issuance of any preferred stock could diminish
the rights of holders of our common stock, and therefore could reduce the value
of such common stock. In addition, specific rights granted to future holders of
preferred stock could be used to restrict our ability to merge with, or sell
assets to, a third party. The ability of the board of directors to issue
preferred stock could make it more difficult, delay, discourage, prevent or make
it more costly to acquire or effect a change-in-control, which in turn could
prevent the stockholders from recognizing a gain in the event that a favorable
offer is extended and could materially and negatively affect the market price of
our common stock.





The
market price of our common stock is volatile, leading to the possibility of its
value being depressed at a time when you want to sell your
holdings.





The
market price of our common stock is volatile, and this volatility may continue.
Numerous factors, many of which are beyond our control, may cause the market
price of our common stock to fluctuate significantly. These factors
include:





·
            our
      earnings releases, actual or anticipated changes in our earnings,
      fluctuations in our operating results or our failure to meet the
      expectations of financial market analysts and
  investors;


·
            changes
      in financial estimates by us or by any securities analysts who might cover
      our stock;


·
            speculation
      about our business in the press or the investment
    community;


·
            significant
      developments relating to our relationships with our customers or
      suppliers;


·
            stock
      market price and volume fluctuations of other publicly traded companies
      and, in particular, those that are in the steel
  industries;


·
            customer
      demand for our products;


·
            investor
      perceptions of the steel industries in general and our company in
      particular;


18


·
            the
      operating and stock performance of comparable
  companies;


·
            general
      economic conditions and trends;


·
            major
      catastrophic events;


·
            announcements
      by us or our competitors of new products, significant acquisitions,
      strategic partnerships or
divestitures;


·
            changes
      in accounting standards, policies, guidance, interpretation or
      principles;


·
            loss
      of external funding sources;


·
            sales
      of our common stock, including sales by our directors, officers or
      significant stockholders; and


·
            additions
      or departures of key personnel.





Securities
class action litigation is often instituted against companies following periods
of volatility in their stock price. This type of litigation could result in
substantial costs to us and divert our management’s attention and resources.
Moreover, securities markets may from time to time experience significant price
and volume fluctuations for reasons unrelated to operating performance of
particular companies. For example, in July 2008, the securities markets in the
United States, China and other jurisdictions experienced the largest decline in
share prices since September 2001. These market fluctuations may adversely
affect the price of our common stock and other interests in our company at a
time when you want to sell your interest in us.





We
do not intend to pay dividends for the foreseeable future.





For the
foreseeable future, we intend to retain any earnings to finance the development
and expansion of our business, and we do not anticipate paying any cash
dividends on our common stock. Accordingly, investors must be prepared to rely
on sales of their common stock after price appreciation to earn an investment
return, which may never occur. Investors seeking cash dividends should not
purchase our common stock. Any determination to pay dividends in the future will
be made at the discretion of our board of directors and will depend on our
results of operations, financial condition, contractual restrictions,
restrictions imposed by applicable law and other factors our board deems
relevant.





ITEM
1B. UNRESOLVED STAFF COMMENTS





None.





ITEM 2. PROPERTIES





Our
Facilities





We have
two principal facilities: Changshu Huaye and Jiangsu Cold-Rolled. Both are
located in Dongbang Industrial park, Changshu, China. Changshu Huaye was
established in January 2003 and started operation in June 2004, with a designed
annual production capacity of 300,000 MT of HDG of cold-rolled steel and 200,000
MT of PPGI. Changshu Huaye operated at full capacity in fiscal year 2009.
Jiangsu Cold-Rolled was established in August 2003 and its AP Steel production
line started operation in September 2006 with a designed annual production
capacity of 500,000 MT. The cold-rolled steel production line started operation
in January 2007 and has a designed annual production capacity of 250,000 MT. In
fiscal year 2009, the capacity utilization rates for the AP Steel production
line and cold-rolled steel production line were approximately 65% and 100%,
respectively. Jiangsu Cold-Rolled constructed two new HDG Steel production lines
with designed annual manufacturing capacity of 400,000 MT which became
operational at the end of September 2008. Up to June 2009, their capacity
utilization rate is 45.9%. The new HDG Steel production lines are capable of
galvanizing both hot-rolled and cold-rolled steel with both zinc and aluminum,
allowing us to better meet the needs of our customers and minimizing any excess
capacity strains on our current HDG Steel production lines.





There is
no private land ownership in China. Individuals and companies are permitted to
acquire land use right for special purposes. Changshu Huaye and Jiangsu
Cold-rolled currently have land use rights to six parcels of land with
approximately 356,152 square meters in aggregate, consisting of manufacturing
facilities, office buildings and land reserved for future expansion. The land
use rights for these properties will expire in 2054. This period may be renewed
at the expiration of the initial and any subsequent terms. Granted land use
rights are transferable and may be used as security for borrowings and other
obligations. All six parcels are located in Dongbang Town, Changshu, China. We
have fully paid the land use fees.


19


Changshu
Huaye and Jiangsu Cold-Rolled also own 31 buildings with approximately 356,152
square meters. We are in the process of obtaining ownership certificates for
eight other buildings with approximately 21,000 square meters. Some of our real
property is subject to lien to secure certain bank loans.





We
believe that all our properties have been adequately maintained, are generally
in good condition, and are suitable and adequate for our business.





ITEM
3. LEGAL PROCEEDINGS





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





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





On June
16, 2009, the Company held an annual meeting at which a majority of the
Company’s shareholders elected five directors, approved the Sutor Technology
Group Limited 2009 Equity Incentive Plan and the ratification of Hansen Barnett
& Maxwell, P.C. as the Company’s independent accountants for fiscal year
ended June 30, 2009.




The
following table sets forth the matters voted upon at the annual meeting and the
results of the voting on each matter voted upon:




Matter
      Voted Upon
                        
                        Votes
      For
                        
                        
                        Withheld
                        
                        
                        Votes
                          Against
                        
                        
                        Abstentions
                        
                        
                        Broker
                          Non-VotesElection
      of Lifang Chen to the Company’s Board of Directors
                        
                        
                        30,366,410
                        
                        
                        
                        0
                        
                        
                        
                        0
                        
                        
                        
                        0
                        
                        
                        
                        0Election
      of Yongfei Jiang to the Company’s Board of Directors
                        
                        
                        30,366,410
                        
                        
                        
                        0
                        
                        
                        
                        0
                        
                        
                        
                        0
                        
                        
                        
                        0Election
      of A. Carl Mudd to the Company’s Board of Directors
                        
                        
                        30,366,410
                        
                        
                        
                        0
                        
                        
                        
                        0
                        
                        
                        
                        0
                        
                        
                        
                        0Election
      of Guoyou Shao to the Company’s Board of Directors
                        
                        
                        30,366,410
                        
                        
                        
                        0
                        
                        
                        
                        0
                        
                        
                        
                        0
                        
                        
                        
                        0Election
      of Xinchuang Li to the Company’s Board of Directors
                        
                        
                        30,366,410
                        
                        
                        
                        0
                        
                        
                        
                        0
                        
                        
                        
                        0
                        
                        
                        
                        0Approval
      of the Company’s 2009 Equity Incentive Plan
                        
                        
                        30,366,410
                        
                        
                        
                        0
                        
                        
                        
                        0
                        
                        
                        
                        0
                        
                        
                        
                        0Ratification
      of the appointment of Hansen Barnett & Maxwell, P.C. as the
      Company’s independent accountants for fiscal year ended June 30,
      2009
                        
                        
                        30,366,410
                        
                        
                        
                        0
                        
                        
                        
                        0
                        
                        
                        
                        0
                        
                        
                        
                        0




Each of
the above matters was approved by the stockholders at the annual
meeting.





PART
II





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





Market
for Our Common Stock





Our
common stock is traded on the Nasdaq Capital Market under the symbol “SUTR”. The
CUSIP number is 869362 10 3.


20


The
following table sets forth, for the periods indicated, the high and low closing
prices of our common stock. These prices reflect inter-dealer prices, without
retail mark-up, mark-down or commission, and may not represent actual
transactions.





Closing
      Prices (1)High
                  
                  
                  LowFiscal Year
      Ended June 30, 20091st
      Fiscal Quarter (7/1/08-9/30/08)
                  
                  $
                  7.27
                  
                  
                  $
                  2.902nd
      Fiscal Quarter (10/1/08-12/31/08)
                  
                  
                  3.30
                  
                  
                  
                  1.313rd
      Fiscal Quarter (1/1/09-3/31/09)
                  
                  
                  2.64
                  
                  
                  
                  0.914th
      Fiscal Quarter (4/1/09-6/30/09)
                  
                  
                  4.89
                  
                  
                  
                  1.41Fiscal Year
      Ended June 30, 20081st
      Fiscal Quarter (7/1/07-9/30/07)
                  
                  $
                  6.20
                  
                  
                  $
                  3.002nd
      Fiscal Quarter (10/1/07-12/31/07)
                  
                  
                  7.00
                  
                  
                  
                  3.953rd
      Fiscal Quarter (1/1/08-3/31/08)
                  
                  
                  5.70
                  
                  
                  
                  3.624th
      Fiscal Quarter (4/1/08 -6/30/08)
                  
                  
                  9.00
                  
                  
                  
                  4.88




(1)
            The
      above tables set forth the range of high and low closing prices per share
      of our common stock as reported bywww.quotemedia.com
      for the periods indicated.





Approximate
Number of Holders of Our Common Stock





On
September 24, 2009 there were approximately 17 stockholders of record of our
common stock.  This number excludes the shares of our common stock owned by
stockholders holding stock under nominee security position
listings.





Dividend
Policy





We have
never declared dividends or paid cash dividends. 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 near future.





Securities
Authorized for Issuance Under Equity Compensation Plans





Our
shareholders approved the Company’s 2009 Equity Incentive Plan in the Annual
Meeting held on June 16, 2009. No awards have been made under the 2009 Equity
Incentive Plan as of September 25, 2009.





ITEM
6. SELECTED FINANCIAL DATA





Not
Applicable.





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





Overview





We are a
leading private manufacturer of fine finished steel products in China. We
utilize a variety of processes and technological methodologies to convert steel
manufactured by third parties into fine finished products. We focus
predominantly on two high-end, value-added finished steel product categories:
HDG Steel products and PPGI products which comprised 31.7% and 42.4% of our
total revenue in fiscal year 2009, respectively. We also produce AP Steel
products and cold-rolled steel, which are our less processed finished products.
We use our own AP Steel Products and cold-rolled steel in the production of our
HDG Steel and PPGI products. This vertical integration of our operations has
allowed us to maintain more stable margins for our HDG Steel and PPGI
products.


21





We
operate in the highly competitive steel industry and face strong competition
from numerous PRC and international companies. Our business is affected by a
number of factors, including, but not limited to, cost to manufacture products,
financial stability of our customers and suppliers, economic conditions, ability
to develop new products, political climate, local and national laws and
regulations and foreign currency exchange fluctuations. As part of our growing
strategy, we continually seek to broaden our market reach by introducing new
production lines and improve our profit margin by vertical integration. In
fiscal year 2009, our subsidiary Jiangsu Cold-Rolled added two new HDG Steel
production lines which are capable of galvanizing both hot-rolled and
cold-rolled steel with both zinc and aluminum. We expect the addition of the new
production lines will help our revenue growth in the future.





We have
several strategic priorities designed to create long-term sustainable growth for
our company and value for our shareholders, including vertical integration,
developing new products, increasing production capacity, and strengthening of
our research and development capabilities.





Revenue





Our
revenue is generated from sales of our HDG Steel, PPGI, AP Steel and cold-rolled
steel products. Our revenue has historically been affected by sales volume,
sales price of our products and our product mix.





Our
operations consist of two business segments: Changshu Huaye and Jiangsu
Cold-rolled, which are our two principal manufacturing facilities. Changshu
Huaye currently manufactures HDG Steel and PPGI products. In fiscal years 2009
and 2008, Changshu Huaye generated revenue of $237.8 million and $260.5 million
which represented 69.6% and 62.3% of our total revenue, respectively. Jiangsu
Cold-rolled currently manufactures AP Steel, cold-rolled steel, and HDG Steel.
Jiangsu Cold-Rolled generated revenue of $103.7 million and $157.5 million in
fiscal years 2009 and 2008, representing 30.4% and 37.7% of our total revenue,
respectively.





A
substantial portion of our products are sold through our affiliate Shanghai
Huaye. Approximately 44.2% of our revenue was derived from Shanghai Huaye and
its affiliates in fiscal year 2009. We plan to further diversify our customer
base to enhance profitability.





Cost
of Revenue





Cost of
revenue includes direct costs to manufacture products, including the cost of raw
materials, labor, overhead, energy cost, handling charges, and other expenses
associated with the manufacture and delivery of product.





Direct
costs of manufacturing are generally highest when we first introduce a new
product due to higher start-up costs associated and higher raw material costs.
As production volume increases, we typically improve manufacturing efficiencies
and are able to strengthen our purchasing power by buying raw materials in
greater quantities. Our new HDG production lines, which started operation at the
end of September 2008, had a relatively high cost of production in fiscal year
2009. As these two production lines start to operate at normal levels, we expect
our manufacturing efficiency will improve in the future.





Gross
Profit and Gross Margin





Gross
profit is equal to the difference between our revenue and the cost of revenue.
Gross margin is equal to gross profit divided by revenue. In fiscal year 2009,
the gross margins of Changshu Huaye and Jiangsu Cold-Rolled were 12.1% and 4.0%,
respectively. Gross margins for domestic and international sales were
approximately 9.3% and 13.9%, respectively. Changes in our gross margins are
primarily driven by changes in our product mix, economies of scale, and our
vertical integration strategy.





To gain
market penetration, we price our products at levels that we believe are
competitive. We continually strive to improve manufacturing efficiencies and
reduce our production costs in order to offer products of comparable quality to
our Chinese state-owned competitors and international competitors at lower
prices. General economic conditions, the cost of raw materials and supply and
demand of fine finished steel products within our markets influence sales
prices. Our high-end, value-added products, such as the PPGI products, generally
tend to have higher profit margins.


22


In
January 2007, we implemented a vertical integration strategy where we use our
own AP Steel and cold-rolled steel products as raw materials for HDG Steel
products and HDG Steel products as raw materials for PPGI products. We believe
this vertical integration of our operations will allow us to maintain more
stable margins for our HDG Steel and PPGI products.





Operating
Expenses





Our
operating expenses consist of selling expense and general and administrative
expenses.





General
and Administrative Expenses





General
and administrative expenses consist primarily of compensation and benefits for
our general management, finance and administrative staff, professional and
advisory fees, bad debts reserves, and other expenses incurred in connection
with general corporate purposes. We expect most components of our general and
administrative expenses will increase as our business grows and as we incur
increased costs as a public company.





Selling
Expenses





Selling
expenses consist primarily of compensation and benefits for our sales and
marketing staff, sales commissions, the cost of advertising, promotional and
travel activities, transportation expenses, after-sales support services and
other sales related costs.





Our
selling expenses are largely affected by the amount of international sales and
sales to unrelated parties. The transportation costs for international sales are
generally higher than domestic sales. Our export sales accounted for 6.9% of our
revenue in fiscal year 2009 as compared to 3.9% in fiscal year 2008. In
addition, when we sell products to Shanghai Huaye and its affiliates, Shanghai
Huaye generally arranges and bears the cost of the transportation. In contrast,
when we sell products to customers other than Shanghai Huaye, we generally bear
the transportation costs, but we are able to charge a higher price.





Provision
for Income Taxes





United
States





Sutor
Technology Group Limited is subject to United States federal income tax at a tax
rate of 34%. No provision for income taxes in the United States has been made as
Sutor Technology Group Limited had no U.S. taxable income in fiscal year
2009.





BVI





Sutor BVI
was incorporated in the BVI and, under the current laws of the BVI, is not
subject to income taxes.





PRC





On March
16, 2007, the National People’s Congress of China passed the New EIT Law, and on
December 6, 2007, the State Council of China passed the Implementing Rules for
the EIT Law (“Implementing Rules”) which took effect on January 1, 2008. The New
EIT Law and Implementing Rules impose a unified EIT of 25.0% on all
domestic-invested enterprises and FIEs, unless they qualify under certain
limited exceptions. Therefore, nearly all FIEs are subject to the new tax rate
alongside other domestic businesses rather than benefiting from the old FIE tax
laws, and its associated preferential tax treatments, beginning January 1,
2008.





Despite
these changes, the EIT Law gives the FIEs established before March 16, 2007
(“Old FIEs”) a five-year grandfather period during which they can continue to
enjoy their existing preferential tax treatments. During this five-year
grandfather period, the Old FIEs which enjoyed tax rates lower than 25% under
the original EIT Law shall gradually increase their EIT rate by 2% per year
until the tax rate reaches 25%. In addition, the Old FIEs that are eligible for
the “two-year exemption and three-year half reduction” or “five-year exemption
and five-year half-reduction” under the original EIT Law, are allowed to remain
to enjoy their preference until these holidays expire. The discontinuation of
any such special or preferential tax treatment or other incentives would have an
adverse effect on any organization’s business, fiscal condition and current
operations in China.


23


In
addition to the changes to the current tax structure, under the EIT Law, an
enterprise established outside of China with “de facto management bodies” within
China is considered a resident enterprise and will normally be subject to an EIT
of 25.0% on its global income. The Implementing Rules define the term “de facto
management bodies” as “an establishment that exercises, in substance, overall
management and control over the production, business, personnel, accounting,
etc., of a Chinese enterprise.” If the PRC tax authorities subsequently
determine that the Company should be classified as a resident enterprise, then
the organization’s global income will be subject to PRC income tax of
25.0%.
 
 Our
subsidiary Changshu Huaye was subject to an EIT rate of 12.5% for calendar year
2008 and is and will be subject to an EIT rate of 25% for calendar year 2009 and
beyond. Our subsidiary Jiangsu Cold-Rolled is subject to an EIT rate of 12.5%
for 2009, 2010 and 2011.
 
 Reportable
Operating Segments
 
 We have
two reportable operating segments which are categorized based on manufacturing
facility – Changshu Huaye and Jiangsu Cold-Rolled. Changshu Huaye manufactures
and sells HDG Steel and PPGI products. Jiangsu Cold-Rolled manufactures and
sells AP Steel, Cold-Rolled Steel and HDG Steel.
 
 Changshu
Huaye and Jiangsu Cold-Rolled are adjacent to each other and use largely the
same management resources. See Note 11, “Segment Information” to the
consolidated financial statements included elsewhere in this annual
report.
 
 Results
of Operations
 
 The
following table sets forth key components of our results of operations for the
periods indicated, both in dollars and as a percentage of our
revenue.
 
 (All
amounts, other than percentages, in thousand of U.S. dollars)
 
 2009
                                
                                
                                2008Amount
                                
                                
                                As a Percentage
                                  of Revenue
                                
                                
                                Amount
                                
                                
                                As a Percentage
                                  of RevenueRevenue:Revenue
      from unrelated parties
                                
                                $
                                190,507
                                
                                
                                
                                55.8
                                %
                                
                                $
                                237,494
                                
                                
                                
                                56.8
                                %Revenue
      from related parties
                                
                                
                                150,978
                                
                                
                                
                                44.2
                                %
                                
                                
                                180,536
                                
                                
                                
                                43.2
                                %Total
                                
                                
                                341,485
                                
                                
                                
                                100.0
                                %
                                
                                
                                418,030
                                
                                
                                
                                100.0
                                %Cost of Revenue:Cost of revenue:
                                
                                
                                142,559
                                
                                
                                
                                52.5
                                %
                                
                                
                                266,149
                                
                                
                                
                                63.7
                                %Purchases
      from related parties
                                
                                
                                166,119
                                
                                
                                
                                37.9
                                %
                                
                                
                                106,961
                                
                                
                                
                                25.6
                                %Total
                                
                                
                                308,678
                                
                                
                                
                                90.4
                                %
                                
                                
                                373,110
                                
                                
                                
                                89.3
                                %Gross
      Profit
                                
                                
                                32,807
                                
                                
                                
                                9.6
                                %
                                
                                
                                44,920
                                
                                
                                
                                10.7
                                %Operating
      ExpensesSelling
      expense
                                
                                
                                3,129
                                
                                
                                
                                0.9
                                %
                                
                                
                                2,238
                                
                                
                                
                                0.5
                                %General
      and administrative expense
                                
                                
                                3,959
                                
                                
                                
                                1.2
                                %
                                
                                
                                3,750
                                
                                
                                
                                0.9
                                %Total
      Operating Expenses
                                
                                
                                7,088
                                
                                
                                
                                2.1
                                %
                                
                                
                                5,988
                                
                                
                                
                                1.4
                                %Income
      from Operations
                                
                                
                                25,719
                                
                                
                                
                                7.5
                                %
                                
                                
                                38,932
                                
                                
                                
                                9.3
                                %Other Income
      (Expense)Interest
      income
                                
                                
                                1,386
                                
                                
                                
                                0.4
                                %
                                
                                
                                943
                                
                                
                                
                                0.2
                                %Other
      income
                                
                                
                                149
                                
                                
                                
                                0
                                %
                                
                                
                                188
                                
                                
                                
                                0.1
                                %Interest
      expense
                                
                                
                                (5,886
                                )
                                
                                
                                (1.7
                                )
      %
                                
                                
                                (6,253
                                )
                                
                                
                                (1.5
                                )
      %Other
      expense
                                
                                
                                (403
                                )
                                
                                
                                (0.1
                                )
      %
                                
                                
                                (756
                                )
                                
                                
                                (0.2
                                )
      %Total
      Other Expense
                                
                                
                                (4,754
                                )
                                
                                
                                (1.4
                                )
      %
                                
                                
                                (5,878
                                )
                                
                                
                                (1.4
                                )
      %Income
      Before Taxes and Minority Interest
                                
                                
                                20,965
                                
                                
                                
                                6.1
                                %
                                
                                
                                33,054
                                
                                
                                
                                7.9
                                %Provision
      for income taxes
                                
                                
                                (2,331
                                )
                                
                                
                                (0.6
                                )
      %
                                
                                
                                (1,918
                                )
                                
                                
                                (0.4
                                )
      %Net
      Income
                                
                                $
                                18,634
                                
                                
                                
                                5.5
                                %
                                
                                $
                                31,136
                                
                                
                                
                                7.5
                                %
 
 24
 
 The
following table sets forth revenue by geography and the percentage of our total
revenue and total revenue by business segments for fiscal years 2009 and
2008.
 
 (All
amounts, other than percentages, in thousand of U.S. dollars)
 
 2009
                            
                            
                            2008Revenue
                            
                            
                            AsaPercentage
                              ofRevenue
                            
                            
                            Revenue
                            
                            
                            AsaPercentage
                              ofRevenueGeographic
      Data:China
                            
                            $
                            318,000
                            
                            
                            
                            93.1
                            %
                            
                            $
                            401,872
                            
                            
                            
                            96.1
                            %Hong
      Kong
                            
                            
                            2,135
                            
                            
                            
                            0.6
                            %
                            
                            
                            471
                            
                            
                            
                            0.1
                            %Other
      Countries
                            
                            
                            21,350
                            
                            
                            
                            6.3
                            %
                            
                            
                            15,687
                            
                            
                            
                            3.8
                            %Total
      revenue
                            
                            
                            341,485
                            
                            
                            
                            100
                            %
                            
                            
                            418,030
                            
                            
                            
                            100
                            %Segment
      Data:Changshu
      Huaye
                            
                            $
                            237,800
                            
                            
                            
                            69.6
                            %
                            
                            
                            260,528
                            
                            
                            
                            62.3
                            %Jiangsu
      Cold-Rolled
                            
                            
                            103,685
                            
                            
                            
                            30.4
                            %
                            
                            
                            157,502
                            
                            
                            
                            37.7
                            %Total
      revenue
                            
                            
                            341,485
                            
                            
                            
                            100
                            %
                            
                            
                            418,030
                            
                            
                            
                            100
                            %
 
 Comparison
of Years ended June 30, 2009 and June 30, 2008.
 
 Revenue.
Our revenue decreased $76.5 million, or 18.3%, to $341.5 million in fiscal year
2009 from $418.0 million in fiscal year 2008. The global economic crisis had a
negative impact on the steel industry generally, leading to a decline of the
price of our main raw material steel which caused the per unit sales price of
our products and our revenue to decrease. In response to the global economic
crisis, we also made a strategic decision to further reduce our per unit sales
price in certain instances to both maintain our market share and attract new
customers.
 
 On a
geographic basis, revenue generated from outside of China was $23.5 million, or
6.9% of total revenue for fiscal year 2009, as compared to $16.2 million, or
3.9% of total revenue for fiscal year 2008. The percentage increase was mainly
due to increased sales into the Middle East market and sales of our newly
developed anti-septic and fingerprint resistant steel products, which were well
received by the international market.
 
 25
 On a
segment basis, our subsidiary Jiangsu Cold-Rolled experienced a decline in
revenue for fiscal year 2009. After eliminating inter-company sales, Jiangsu
Cold-Rolled’s revenues were $103.7 million in fiscal year 2009. As part of our
vertical integration strategy, we used most of Jiangsu Cold-Rolled’s products as
raw materials in the operations of our subsidiary, Changshu Huaye. Changshu
Huaye’s revenues were $237.8 million in fiscal year 2009, a decrease of $22.7
million, or 8.7%, from $260.5 million in fiscal year 2008. Changshu Huaye sold
less HDG Steel products to third parties in fiscal year 2009 as compared to 2008
as more of our own HDG Steel products was used in the production of PPGI
products in fiscal year 2009 to reduce production costs.
 
 In terms
of sales to related parties as compared with sales to unrelated parties, our
direct sales to unrelated parties in fiscal year 2009 decreased $47 million, or
19.8% to $190.5 million from $237.5 million in fiscal year 2008. Our Sales to
Shanghai Huaye and its affiliates in fiscal year 2009 were $151.0 million, a
decrease of $29.6 million, or 16.4% as compared to $180.5 in fiscal year 2008.
Through our relationship with Shanghai Huaye, we gained access to Shanghai
Huaye’s sales network and expanded our market share and brand
value.
 
 Cost of
Revenue.  Our cost of revenue decreased $64.4 million, or 17.3%
to $308.7 million in fiscal year 2009 from $373.1 million in fiscal year 2008.
As a percentage of revenue, the cost of revenue increased to 90.4% in
fiscal year 2009 from 89.3% in fiscal year 2008. Even though our cost of revenue
decreased on a dollar basis, we implemented a strategic decision to reduce the
per unit sale price which led to the modest increase in cost as a percentage of
revenue. We believe the successful implementation of such strategy allowed us to
remain profitable in fiscal year 2009 despite the challenging economy. In
addition, we received a larger proportion of smaller orders in fiscal year 2009
as compared to fiscal year 2008 which impaired our ability to realize economies
of scale.
 
 Gross
Profit . Our gross profit decreased $12.1 million to $32.8 million
in fiscal year 2009 from $44.9 million in fiscal year 2008. Gross profit as a
percentage of revenue (gross margin) was 9.6% in fiscal year 2009, as compared
to 10.8% in fiscal year 2008. Such decrease in our gross margin was mainly due
to lower per unit sales price and higher production costs for the reasons as
stated in the paragraph immediately above.
 
 Gross
margins for Changshu Huaye decreased to 12.1% in fiscal year 2009 from 14.7% in
fiscal year 2008. Gross margins for Jiangsu Cold-Rolled decreased to 4.0% in
fiscal year 2009 from 4.3% in fiscal year 2008. Such decrease was mainly due to
the reasons stated above.
 
 Total Operating
Expenses. Our total operating expenses increased $1.1 million to $7.1
million in fiscal year 2009 from $6.0 million in fiscal year 2008. As a
percentage of revenue, our total operating expenses increased to 2.1% in fiscal
year 2009 from 1.4% in fiscal year 2008.
 
 General and Administrative
Expenses.  Our general and administrative expenses
increased $0.2 million to $3.9 million in fiscal year 2009 from $3.7
million in fiscal year 2008. As a percentage of revenue, general and
administrative expenses increased to 1.2% in fiscal year 2009 from 0.9% in
fiscal year 2008. We incurred more general and administrative expenses in fiscal
year 2009 in connection with the two new HDG Steel production lines which became
operative at the end of September, 2008.
 
 Selling Expenses. Our selling
expenses increased $0.9 million to $3.1 million in fiscal year 2009 from $2.2
million in fiscal year 2008. As a percentage of revenue, our selling expenses
increased to 0.9% in fiscal year 2009 from 0.5% in fiscal year 2008. As part of
our sales promotion efforts, we agreed to pay transportation costs for some of
our customers. In addition, our international sales increased in fiscal year
2009 as compared to last year which also contributed to higher transportation
expenses.
 
 Interest
Expense. Our
interest expense decreased $0.4 million to $5.9 million in fiscal year 2009,
from $6.3 million in fiscal year 2008. As a percentage of revenue, our interest
expenses increased to 1.7% in fiscal year 2009, from 1.5% in fiscal year 2008.
The amount decrease was mainly due to the lower interest rate. In December 2008,
the People’s Bank of China reduced the interest rate for one-year loan by 0.27%
to 5.31% from 5.58%.
 
 26
 
 Provision for
Income Taxes. We incurred income tax expense of $2.3 million and $1.9
million in fiscal years 2009 and 2008, respectively.  Such increase
was primarily attributable to the increased tax rate applicable to Changshu
Huaye. Changshu Huaye’s tax holiday expired at the end of calendar year 2008,
and as a result, it became subject to an EIT rate of 25% in calendar year 2009,
as compared to 12.5% in calendar year 2008.
 Net
Income. Net income, without including the foreign currency translation
adjustment, decreased $12.5 million, or 40.2%, to $18.6 million in fiscal year
2009 from $31.1 million in fiscal year 2008, as a result of the factors
described above.
 
 Liquidity
and Capital Resources
 
 Our major
sources of liquidity for the 2009 and 2008 financial years were borrowings
through short-term bank and private loans. Our operating activities provided
$28.0 million of cash in fiscal year 2009. External sources of cash flows have
been required and will likely continue to be required. At June 30, 2009, our
total indebtedness to non-related parties under existing short-term loans was
$104.3 million, our short-term notes payable to related parties was $9.9
million, and our long-term notes payable to non-related parties was $2.9
million, our long-term notes payable to related parties totaled $0.2
million.
 
 Short-term
bank and private loans are likely to continue to be our key sources of liquidity
for the foreseeable future, although in the future we may decide to raise
additional capital by issuing shares of our capital stock in an equity
financing.
 
 Our
liquidity and working capital may be affected by a material decrease in cash
flow due to factors such as the continued use of cash in operating activities
resulting from a decrease in sales due to the current global economic crisis,
increased competition, decreases in the availability, or increases in the cost,
of raw materials, unexpected equipment failures, or regulatory changes. Please
see section entitled “ Risk Factors ” for a more complete description of
risks affecting our business, liquidity, working capital and financial
results.
 
 A portion
of our operations is funded through short-term bank loans. As these loans become
due, we may repay them in full at maturity or elect to refinance them. We are
exposed to a variety of risks associated with short-term borrowings including
adverse fluctuations in fixed interest rates for short-term borrowings and
unfavorable increases in variable interest rates, potential inability to service
our short term indebtedness through cash flow from operations and the overall
reduction of credit in the current economic environment.
 
 Our
liquidity and working capital may also be affected by the substantial amount of
our outstanding short-term loans, which represent our primary source of
financing in China. Depending on the level of cash used in our operating
activities and the level of our indebtedness, (i) it may become more difficult
for us to satisfy our existing or future liabilities or obligations, which could
in turn result in an event of default on such obligations, (ii) we may have to
dedicate a substantial portion of our cash flows from borrowings to our
operating activities and to debt service payments, thereby reducing the
availability of cash for working capital and capital expenditures,
acquisitions, general corporate purposes or other purposes, (iii) our ability to
obtain additional financing in the future for working capital, capital
expenditures, acquisitions, general corporate purposes or other purposes may
become impaired, (iv) our ability to withstand a downturn in our business, the
industry in which we operate or the economy generally may be diminished, (v) we
may experience limited flexibility in planning for, or reacting to, changes in
our business and the industry in which we operate (vi) we may find ourselves at
a competitive disadvantage compared to competitors that have proportionately
less debt. If we are unable to meet our debt service obligations, we could be
forced to restructure or refinance our indebtedness, seek additional equity
capital or sell assets. We may be unable to obtain financing or sell assets on
satisfactory terms, or at all, which could cause us to default on our debt
service obligations and be subject to foreclosure on such loans. Additionally,
we could incur additional indebtedness in the future and, if new debt is added
to our current debt levels, the risks above could intensify.
 
 As some
of our loans become due, we may elect to refinance, rather than repay, the
indebtedness. However, there is no assurance that additional financing will
become available on terms acceptable to us. We believe that we will have the
ability to refinance our indebtedness when and if we elect to do so. While we
currently are not in a position to know the terms of such refinancing, we expect
to refinance our indebtedness at prevailing market rates and on prevailing
market terms.
 
 As of
June 30, 2009, we had cash and cash equivalents (excluding restricted cash) of
$10.5 million and restricted cash of $51.8 million. The following table provides
detailed information about our net cash flow for all financial statement periods
presented in this annual report.
 
 27
 
 Cash
Flow
 (all
amounts in thousands of U.S. dollars)
 
 For the Fiscal Year Ended June 30,2009
                    
                    
                    2008Net
      cash provided by (used in) operating activities
                    
                    $
                    28,032
                    
                    
                    $
                    (34,969
                    )Net
      cash (used in) investing activities
                    
                    
                    (7,681
                    )
                    
                    
                    (37,770
                    )Net
      cash (used in) provided by financing activities
                    
                    
                    (21,685
                    )
                    
                    
                    74,572Net
      cash flow
                    
                    $
                    (1,295
                    )
                    
                    $
                    2,973
 
 Operating
Activities:
 
 Net cash
provided by operating activities was $28.0 million in fiscal year 2009, an
increase of $63.0 million from the $35.0 million net cash used in operating
activities in fiscal year 2008. Such increase of net cash provided by operating
activities was primarily attributable to having $53.8 million less of an
increase in the net related party receivables and payables, a decrease in the
change of inventory of $37.6 million off-set by a decline in net income of
$12.5 million and an increase of trade receivables compared to a decrease in the
prior year amounting to $11.6 million.
 
 Investing
Activities:
 
 Our main
uses of cash for investing activities are payments relating to the acquisition
of property, plant and equipment and restricted cash pledged as deposits for
bankers’ acceptance bills.
 
 Net cash
used in investing activities in fiscal year 2009 was $7.7 million, which is a
decrease of $30.1 million from net cash used in investing activities of $37.8
million in fiscal year 2008. Such decrease of net cash used in investing
activities was mainly due to a $34.9 million decrease in the change of
restricted cash compared to the prior year which resulted from our payment of
$117.4 million notes payables upon their maturities.
 
 Financing
Activities:
 
 Net cash
used in financing activities in fiscal year 2009 totaled $21.7 million as
compared to $74.6 million provided by financing activities in fiscal year 2008.
The decrease of cash provided by financing activities was mainly attributable to
the net change of proceeds from new loans and payments on those notes of $90.9
million.
 
 We
believe we currently maintain a good business relationship with many banks. As
of June 30, 2009, the amount, maturity date and term of each of our bank loans
were as follows.
 
 28
  (All
amounts in million of U.S. dollars)
 Banks
                                                                                                                          
                                                                                                                          Amounts*
                                                                                                                          
                                                                                                                          Starting
      Date
                                                                                                                          
                                                                                                                          Maturity
      Date
                                                                                                                          
                                                                                                                          Guarantor**Changshu
      Rural Commercial Bank
                                                                                                                          
                                                                                                                          $
                                                                                                                          1.75
                                                                                                                          
                                                                                                                          February
      11, 2009
                                                                                                                          
                                                                                                                          August
      6, 2009
                                                                                                                          
                                                                                                                          noneBank
      of China, Changshu Branch
                                                                                                                          
                                                                                                                          
                                                                                                                          1.75
                                                                                                                          
                                                                                                                          February
      13, 2009
                                                                                                                          
                                                                                                                          August
      13, 2009
                                                                                                                          
                                                                                                                          Shanghai
      HuayeChangshu
      Rural Commercial Bank
                                                                                                                          
                                                                                                                          
                                                                                                                          3.36
                                                                                                                          
                                                                                                                          March
      25, 2009
                                                                                                                          
                                                                                                                          September
      23, 2009
                                                                                                                          
                                                                                                                          NoneChina
      Industry and Commerce Bank, Changshu Branch
                                                                                                                          
                                                                                                                          
                                                                                                                          1.46
                                                                                                                          
                                                                                                                          April
      15, 2009
                                                                                                                          
                                                                                                                          April
      13, 2010
                                                                                                                          
                                                                                                                          NoneChangshu
      Rural Commercial Bank
                                                                                                                          
                                                                                                                          
                                                                                                                          3.21
                                                                                                                          
                                                                                                                          May
      7, 2009
                                                                                                                          
                                                                                                                          November
      6, 2009
                                                                                                                          
                                                                                                                          NoneChina
      Industry and Commerce Bank, Changshu Branch
                                                                                                                          
                                                                                                                          
                                                                                                                          1.46
                                                                                                                          
                                                                                                                          May
      18, 2009
                                                                                                                          
                                                                                                                          May
      18, 2010
                                                                                                                          
                                                                                                                          NoneChina
      Industry and Commerce Bank, Changshu Branch
                                                                                                                          
                                                                                                                          
                                                                                                                          1.46
                                                                                                                          
                                                                                                                          May
      27, 2009
                                                                                                                          
                                                                                                                          May
      24, 2010
                                                                                                                          
                                                                                                                          NoneThe
      Agricultural Bank of China, Changshu Branch
                                                                                                                          
                                                                                                                          
                                                                                                                          7.30
                                                                                                                          
                                                                                                                          May
      31, 2009
                                                                                                                          
                                                                                                                          May
      27, 2010
                                                                                                                          
                                                                                                                          Shanghai
      Huaye/Jiangsu Cold RolledCommunication
      Bank, changshu Branch
                                                                                                                          
                                                                                                                          
                                                                                                                          2.92
                                                                                                                          
                                                                                                                          June
      29, 2009
                                                                                                                          
                                                                                                                          June
      25, 2010
                                                                                                                          
                                                                                                                          Shanghai
      HuayeChina
      Industry and Commerce Bank, Changshu Branch
                                                                                                                          
                                                                                                                          
                                                                                                                          1.46
                                                                                                                          
                                                                                                                          December
      29, 2008
                                                                                                                          
                                                                                                                          December
      28, 2009
                                                                                                                          
                                                                                                                          Changshu
      HuayeThe
      Agricultural Bank of China, Changshu Branch
                                                                                                                          
                                                                                                                          
                                                                                                                          1.90
                                                                                                                          
                                                                                                                          February
      5, 2009
                                                                                                                          
                                                                                                                          August
      4, 2009
                                                                                                                          
                                                                                                                          noneThe
      Agricultural Bank of China, Changshu Branch
                                                                                                                          
                                                                                                                          
                                                                                                                          7.30
                                                                                                                          
                                                                                                                          February
      23, 2009
                                                                                                                          
                                                                                                                          August
      22, 2009
                                                                                                                          
                                                                                                                          Shanghai
      Huaye/Changshu HuayeChina
      Industry and Commerce Bank, Changshu Branch
                                                                                                                          
                                                                                                                          
                                                                                                                          2.92
                                                                                                                          
                                                                                                                          February
      27, 2009
                                                                                                                          
                                                                                                                          February
      26, 2010
                                                                                                                          
                                                                                                                          Changshu
      HuayeThe
      Agricultural Bank of China, Changshu Branch
                                                                                                                          
                                                                                                                          
                                                                                                                          4.53
                                                                                                                          
                                                                                                                          March
      3, 2009
                                                                                                                          
                                                                                                                          July
      16, 2009
                                                                                                                          
                                                                                                                          Shanghai
      Huaye/Changshu HuayeThe
      Agricultural Bank of China, Changshu Branch
                                                                                                                          
                                                                                                                          
                                                                                                                          5.84
                                                                                                                          
                                                                                                                          March
      27, 2009
                                                                                                                          
                                                                                                                          September
      26, 2009
                                                                                                                          
                                                                                                                          Shanghai
      Huaye/Changshu HuayeThe
      Agricultural Bank of China, Changshu Branch
                                                                                                                          
                                                                                                                          
                                                                                                                          5.84
                                                                                                                          
                                                                                                                          March
      28, 2009
                                                                                                                          
                                                                                                                          September
      27, 2009
                                                                                                                          
                                                                                                                          Shanghai
      Huaye/Changshu HuayeThe
      Agricultural Bank of China, Changshu Branch
                                                                                                                          
                                                                                                                          
                                                                                                                          5.84
                                                                                                                          
                                                                                                                          April
      2, 2009
                                                                                                                          
                                                                                                                          September
      30, 2009
                                                                                                                          
                                                                                                                          Shanghai
      Huaye/Changshu HuayeThe
      Agricultural Bank of China, Changshu Branch
                                                                                                                          
                                                                                                                          
                                                                                                                          9.64
                                                                                                                          
                                                                                                                          May
      15, 2009
                                                                                                                          
                                                                                                                          November
      14, 2009
                                                                                                                          
                                                                                                                          NoneThe
      Agricultural Bank of China, Changshu Branch
                                                                                                                          
                                                                                                                          
                                                                                                                          1.46
                                                                                                                          
                                                                                                                          May
      19, 2009
                                                                                                                          
                                                                                                                          November
      18, 2009
                                                                                                                          
                                                                                                                          NoneThe
      Agricultural Bank of China, Changshu Branch
                                                                                                                          
                                                                                                                          
                                                                                                                          1.46
                                                                                                                          
                                                                                                                          May
      21, 2009
                                                                                                                          
                                                                                                                          November
      20, 2009
                                                                                                                          
                                                                                                                          NoneThe
      Agricultural Bank of China, Changshu Branch
                                                                                                                          
                                                                                                                          
                                                                                                                          4.38
                                                                                                                          
                                                                                                                          May
      27, 2009
                                                                                                                          
                                                                                                                          November
      26, 2009
                                                                                                                          
                                                                                                                          NoneChina
      Industry and Commerce Bank, Changshu Branch
                                                                                                                          
                                                                                                                          
                                                                                                                          2.92
                                                                                                                          
                                                                                                                          May
      25, 2009
                                                                                                                          
                                                                                                                          April
      29, 2010
                                                                                                                          
                                                                                                                          Changshu
      HuayeThe
      Agricultural Bank of China, Changshu Branch
                                                                                                                          
                                                                                                                          
                                                                                                                          2.63
                                                                                                                          
                                                                                                                          May
      27, 2009
                                                                                                                          
                                                                                                                          August
      27, 2009
                                                                                                                          
                                                                                                                          NoneThe
      Agricultural Bank of China, Changshu Branch
                                                                                                                          
                                                                                                                          
                                                                                                                          2.05
                                                                                                                          
                                                                                                                          February
      17, 2009
                                                                                                                          
                                                                                                                          August
      17, 2009
                                                                                                                          
                                                                                                                          Shanghai
      HuayeBank
      of China, Changshu Branch
                                                                                                                          
                                                                                                                          
                                                                                                                          5.26
                                                                                                                          
                                                                                                                          February
      17, 2009
                                                                                                                          
                                                                                                                          August
      17, 2009
                                                                                                                          
                                                                                                                          Shanghai
      HuayeThe
      Agricultural Bank of China, Changshu Branch
                                                                                                                          
                                                                                                                          
                                                                                                                          3.80
                                                                                                                          
                                                                                                                          February
      26, 2009
                                                                                                                          
                                                                                                                          August
      26, 2009
                                                                                                                          
                                                                                                                          Shanghai
      HuayeChangshu
      Rural Commercial Bank
                                                                                                                          
                                                                                                                          
                                                                                                                          2.34
                                                                                                                          
                                                                                                                          March
      3, 2009
                                                                                                                          
                                                                                                                          September
      3, 2009
                                                                                                                          
                                                                                                                          NoneThe
      Agricultural Bank of China, Changshu Branch
                                                                                                                          
                                                                                                                          
                                                                                                                          1.46
                                                                                                                          
                                                                                                                          February
      23, 2009
                                                                                                                          
                                                                                                                          August
      23, 2009
                                                                                                                          
                                                                                                                          NoneBank
      of China, Changshu Branch
                                                                                                                          
                                                                                                                          
                                                                                                                          2.19
                                                                                                                          
                                                                                                                          February
      24, 2009
                                                                                                                          
                                                                                                                          August
      24, 2009
                                                                                                                          
                                                                                                                          NoneThe
      Agricultural Bank of China, Changshu Branch
                                                                                                                          
                                                                                                                          
                                                                                                                          4.38
                                                                                                                          
                                                                                                                          May
      12, 2009
                                                                                                                          
                                                                                                                          November
      12, 2009
                                                                                                                          
                                                                                                                          Shanghai
      Huaye/Jiangsu Cold RolledChen
      Lifang
                                                                                                                          
                                                                                                                          
                                                                                                                          1.57
                                                                                                                          
                                                                                                                          May
      15, 2008
                                                                                                                          
                                                                                                                          Non
      fixed Date
                                                                                                                          
                                                                                                                          NoneChen
      Lifang
                                                                                                                          
                                                                                                                          
                                                                                                                          7.20
                                                                                                                          
                                                                                                                          December
      20, 2007
                                                                                                                          
                                                                                                                          December
      20, 2009
                                                                                                                          
                                                                                                                          NoneLin
      Guihua
                                                                                                                          
                                                                                                                          
                                                                                                                          2.86
                                                                                                                          
                                                                                                                          November
      20, 2008
                                                                                                                          
                                                                                                                          November
      20, 2011
                                                                                                                          
                                                                                                                          NoneChen
      Lifang
                                                                                                                          
                                                                                                                          
                                                                                                                          0.10
                                                                                                                          
                                                                                                                          March
      11, 2009
                                                                                                                          
                                                                                                                          March
      11, 2012
                                                                                                                          
                                                                                                                          NoneChen
      Lifang
                                                                                                                          
                                                                                                                          
                                                                                                                          0.15
                                                                                                                          
                                                                                                                          April
      29, 2009
                                                                                                                          
                                                                                                                          April
      29, 2012
                                                                                                                          
                                                                                                                          NoneChen
      Lifang
                                                                                                                          
                                                                                                                          
                                                                                                                          0.05
                                                                                                                          
                                                                                                                          March
      28, 2007
                                                                                                                          
                                                                                                                          Non
      fixed Date
                                                                                                                          
                                                                                                                          NoneChen
      Lifang
                                                                                                                          
                                                                                                                          
                                                                                                                          0.10
                                                                                                                          
                                                                                                                          May
      8, 2007
                                                                                                                          
                                                                                                                          Non
      fixed Date
                                                                                                                          
                                                                                                                          NoneChen
      Lifang
                                                                                                                          
                                                                                                                          
                                                                                                                          0.03
                                                                                                                          
                                                                                                                          June
      15, 2007
                                                                                                                          
                                                                                                                          Non
      fixed Date
                                                                                                                          
                                                                                                                          NoneChen
      Lifang
                                                                                                                          
                                                                                                                          
                                                                                                                          0.05
                                                                                                                          
                                                                                                                          August
      7, 2007
                                                                                                                          
                                                                                                                          Non
      fixed Date
                                                                                                                          
                                                                                                                          NoneChen
      Lifang
                                                                                                                          
                                                                                                                          
                                                                                                                          0.07
                                                                                                                          
                                                                                                                          September
      17, 2007
                                                                                                                          
                                                                                                                          Non
      fixed Date
                                                                                                                          
                                                                                                                          NoneChen
      Lifang
                                                                                                                          
                                                                                                                          
                                                                                                                          0.10
                                                                                                                          
                                                                                                                          September
      27, 2007
                                                                                                                          
                                                                                                                          Non
      fixed Date
                                                                                                                          
                                                                                                                          NoneChen
      Lifang
                                                                                                                          
                                                                                                                          
                                                                                                                          0.10
                                                                                                                          
                                                                                                                          December
      10, 2007
                                                                                                                          
                                                                                                                          Non
      fixed Date
                                                                                                                          
                                                                                                                          NoneChen
      Lifang
                                                                                                                          
                                                                                                                          
                                                                                                                          0.20
                                                                                                                          
                                                                                                                          February
      25, 2007
                                                                                                                          
                                                                                                                          Non
      fixed Date
                                                                                                                          
                                                                                                                          NoneChen
      Lifang
                                                                                                                          
                                                                                                                          
                                                                                                                          0.10
                                                                                                                          
                                                                                                                          April
      9, 2008
                                                                                                                          
                                                                                                                          Non
      fixed Date
                                                                                                                          
                                                                                                                          NoneChen
      Lifang
                                                                                                                          
                                                                                                                          
                                                                                                                          0.10
                                                                                                                          
                                                                                                                          April
      18, 2008
                                                                                                                          
                                                                                                                          Non
      fixed Date
                                                                                                                          
                                                                                                                          NoneChen
      Lifang
                                                                                                                          
                                                                                                                          
                                                                                                                          0.10
                                                                                                                          
                                                                                                                          August
      28, 2008
                                                                                                                          
                                                                                                                          Non
      fixed Date
                                                                                                                          
                                                                                                                          NoneChen
      Lifang
                                                                                                                          
                                                                                                                          
                                                                                                                          0.05
                                                                                                                          
                                                                                                                          September
      12, 2008
                                                                                                                          
                                                                                                                          Non
      fixed Date
                                                                                                                          
                                                                                                                          NoneChen
      Lifang
                                                                                                                          
                                                                                                                          
                                                                                                                          0.08
                                                                                                                          
                                                                                                                          October
      20, 2008
                                                                                                                          
                                                                                                                          Non
      fixed Date
                                                                                                                          
                                                                                                                          NoneTotal
                                                                                                                          
                                                                                                                          $
                                                                                                                          117.32
 
 29
  *
 Calculated on the basis that $1 = RMB 6.8448
 ** We do
not pay any consideration to Shanghai Huaye or its affiliated companies, which
are controlled by our CEO and her spouse, for the guarantees of our
loans.
 
 The loan
agreements with banks contain debt covenants that require the Company to
maintain certain inventory levels. The Company was in compliance with these debt
covenants at June 30, 2009.
 
 Our
material capital expenditure requirements for fiscal year 2010 are expected to
be approximately $20.0 million, which will be used for updating and expansion of
our production lines, equipment and facilities. In addition, we expect that an
additional $20.0 million of working capital will be needed to maintain our
business operations in the next twelve months which will be raised through bank
loans. In the coming 12 months, we have approximately $104.3 million in bank
loans that will mature. Among $9.9 million related party loans, only $7.20
million will mature in the following 12 months. We plan to replace these loans
with new bank loans in approximately the same aggregate amounts.
 
 We
believe that our currently available working capital after receiving the credit
facilities referred to above and the expected additional credit facility should
be adequate to sustain our operations at our current levels through at least the
next twelve months. However, depending on our future needs and changes and
trends in the capital markets affecting our shares and the Company, we may
determine to seek additional equity or debt financing in the private or public
markets.
 
 Critical
Accounting Policies
 
 The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires our management to make
assumptions, estimates and judgments that affect the amounts reported in the
financial statements, including the notes thereto, and related disclosures of
commitments and contingencies, if any. We consider our critical accounting
policies to be those that require the more significant judgments and estimates
in the preparation of financial statements, including the
following:
 
 ·
              Functional Currency and
      Translating Financial Statements - The consolidated financial
      statements have been prepared in accordance with accounting principles
      generally accepted in the United States of America. The functional
      currency of the Company is the Chinese Yuan Renminbi (“RMB”); however, the
      consolidated financial statements have been expressed in United States
      Dollars (“USD”). The consolidated balance sheets have been translated into
      USD at the exchange rates prevailing at each balance sheet date. The
      consolidated statements of operations and cash flows have been translated
      using the weighted-average exchange rates prevailing during the periods of
      each statement. Transactions in the Company’s equity securities have been
      recorded at the exchange rate existing at the time of the
      transaction.
 
 ·
              Principles of
      Consolidation - The operations of Changshu Huaye and Jiangsu
      Cold-Rolled have been included in the accompanying consolidated financial
      statements for all periods presented. The accounts and transactions of
      Sutor Steel Technology Co., Ltd. have been included from its formation on
      August 15, 2006. The accounts and transactions of Sutor Technology Group
      Limited have been included from February 1, 2007. All significant
      intercompany accounts and transactions have been eliminated in
      consolidation.
 
 ·
              Restricted Cash - The
      Company has entered into agreements to pay suppliers, which require the
      Company to maintain cash balances as security for notes payable to the
      suppliers. These secured cash balances are presented in the consolidated
      balance sheets as restricted cash.
 
 ·
              Advances to Suppliers and from
      Customers- The Company, as is common practice in the PRC, will
      often make advance payments to its suppliers for materials, or receive
      advance payments from its customers. The Company had net advances to
      suppliers of $23,955,493 and $28,035,815 at June 30, 2009 and 2008,
      respectively. The Company also had advances from its customers in the
      amount of $17,845,426 and $16,871,618 at June 30, 2009 and 2008,
      respectively.
  30
  ·
              Revenue Recognition -
      The Company recognizes revenues from the sale of products when they are
      realized and earned. The Company considers revenue realized or realizable
      and earned when (1) it has persuasive evidence of an arrangement, (2)
      delivery has occurred, (3) the sales price is fixed or determinable, and
      (4) collectibility is reasonably assured. Revenues are not recognized
      until products have been shipped to the client, risk of loss has
      transferred to the client and client acceptance has been obtained, client
      acceptance provisions have lapsed, or the Company has objective evidence
      that the criteria specified in client acceptance provisions have been
      satisfied.
 
 As
discussed in Note 7, the Company sells product to affiliates, who in turn sell
the product to various other third party customers. The price, terms and
conditions on the sales to affiliates are the same as those to third parties.
Revenue is considered realized or realizable and earned when the affiliates ship
the product to third party customers. A fee of 0.5% of the sale is paid to the
affiliate for handling the product. These handling fees have been classified as
selling expenses in the statement of operations.
 
 ·
              Cost of Revenue - Cost
      of products sold includes wages, materials, handling charges, and other
      expenses associated with the manufacture and delivery of
      product.
 
 ·
              Basic and Diluted Earnings per
      Common Share - The computation of basic earnings per common share
      is based on income divided by the weighted-average number of common shares
      outstanding after giving effect of using the if-converted method for
      qualified participating securities during each period presented where the
      qualified participating securities are dilutive. Diluted earnings per
      common share are calculated by dividing income assuming dilution by the
      weighted-average number of common shares and potential dilutive shares of
      common stock issuable upon conversion of non-participating shares. The
      Company does not have any non-participating potentially dilutive
      securities. The calculations of basic and diluted income per share were as
      follows:
  For the Years Ended June 30,2009
                                  
                                  
                                  2008
                                  
                                  
                                  2007Net
      income
                                  
                                  $
                                  18,634,225
                                  
                                  
                                  $
                                  31,135,970
                                  
                                  
                                  $
                                  20,520,391Weighted-average
      common shares outstanding
                                  
                                  
                                  37,955,602
                                  
                                  
                                  
                                  37,955,602
                                  
                                  
                                  
                                  4,181,750Effect
      of participating convertible Series B Preferred Stock
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  30,418,273Weighted-Average
      Basic and Dilutive Common Shares Outstanding
                                  
                                  
                                  37,955,602
                                  
                                  
                                  
                                  37,955,602
                                  
                                  
                                  
                                  34,600,023Basic
      and Diluted Earnings per Common Share
                                  
                                  $
                                  0.49
                                  
                                  
                                  $
                                  0.82
                                  
                                  
                                  $
                                  0.59
  The
following table discloses the metrics by which we determine our allowance for
doubtful accounts in respect of our accounts receivable:
 
 Term
      of Outstanding Accounts Receivable
                            
                            Percentage
      of Account Receivable Included in Allowance
                              for
      Doubtful Accounts1-30
      days
                            
                            
                            0.031-90
      days
                            
                            
                            7.591-180
      days
                            
                            
                            15.0181-360
      days
                            
                            
                            30.01-2
      years
                            
                            
                            60.0Over
      2 years
                            
                            
                            100.0
 
 Recently issued accounting
pronouncements
 
 In
September 2006, the Financial Accounting Standards Board (FASB) issued
SFAS No. 157, Fair
Value Measurements, which defines fair value, establishes a framework for
measuring fair value in generally accepted accounting principles and expands
disclosures about fair value measurements. SFAS No. 157 was effective for
fiscal years beginning after November 15, 2007, and interim periods within
those fiscal years. In February 2008, the FASB issued FASB Staff Position (FSP
FIN) No. 157-2 which extended the effective date for certain nonfinancial assets
and nonfinancial liabilities to fiscal years beginning after November 15,
2008.  The adoption of the portions of SFAS No. 157 that were not
postponed by (FSP FIN) No. 157-2 did not have an effect on our consolidated
financial statements. The Company does not expect the adoption of the postponed
portions of SFAS No. 157 to have a material impact on our consolidated
financial statements.
 
 31
  In
December 2007, the FASB issued SFAS No. 141(R), Business Combinations, and
SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements. SFAS No. 141(R) requires an
acquirer to measure the identifiable assets acquired, the liabilities assumed
and any non-controlling interest in the acquiree at their fair values on the
acquisition date, with goodwill being the excess value over the net identifiable
assets acquired. SFAS No. 160 clarifies that a non-controlling interest in
a subsidiary should be reported as equity in the consolidated financial
statements, consolidated net income shall be adjusted to include the net income
attributed to the non-controlling interest and consolidated comprehensive income
shall be adjusted to include the comprehensive income attributed to the
non-controlling interest. The calculation of earnings per share will continue to
be based on income amounts attributable to the parent. SFAS
No. 141(R) and SFAS No. 160 are effective for financial
statements issued for fiscal years beginning after December 15, 2008. Early
adoption is prohibited. SFAS No. 141(R) and SFAS No. 160 are not expected to
have a material impact on our results of operations or financial
position.
 
 In
December 2007, the FASB ratified Emerging Issues Task Force (EITF)
Issue No. 07-1, Accounting for Collaborative
Arrangements(EITF 07-1). EITF 07-1 defines collaborative
arrangements and establishes reporting requirements for transactions between
participants in a collaborative arrangement and between participants in the
arrangement and third parties. EITF 07-1 also establishes the appropriate income
statement presentation and classification for joint operating activities and
payments between participants, as well as the sufficiency of the disclosures
related to these arrangements. EITF 07-1 is effective for fiscal years
beginning after December 15, 2008. The Company does not expect the adoption
of EITF 07-1 to have a material impact on our consolidated financial
statements.
 
 In April
2008, the FASB issued FSP FAS 142-3, Determination of the Useful Life of
Intangible Assets(FSB FAS 142-3). FSP FAS 142-3 amends the
factors that should be considered in developing renewal or extension assumptions
used to determine the useful life of a recognized intangible asset under SFAS
No. 142, Goodwill and Other
Intangible Assets. The intent of this FSP is to improve the consistency
between the useful life of a recognized intangible asset under FAS 142 and the
period of expected cash flows used to measure the fair value of the asset under
SFAS No. 141(R) and other generally accepted accounting principles. FSP FAS
142-3 is effective for fiscal years, and interim periods within those fiscal
years, beginning after December 15, 2008. The Company does not expect the
adoption of FSP FAS 142-3 to have a material impact on our consolidated
financial statements.
 
 In May
2008, the FASB issued SFAS 162, The Hierarchy of Generally Accepted
Accounting Principles.  SFAS No. 162 identifies the sources of
accounting principles and provides entities with a framework for selecting the
principles used in preparation of financial statements that are presented in
conformity with GAAP.  The current GAAP hierarchy has been criticized
because it is directed to the auditor rather than the entity, it is complex, and
it ranks FASB Statements of Financial Accounting Concepts, which are subject to
the same level of due process as FASB Statements of Financial Accounting
Standards, below industry practices that are widely recognized as generally
accepted but that are not subject to due process.  The Board believes
the GAAP hierarchy should be directed to entities because it is the entity (not
its auditors) that is responsible for selecting accounting principles for
financial statements that are presented in conformity with GAAP.  The
adoption of FASB 162 is not expected to have a material impact on the Company’s
financial statements.
 
 In
September 2008, the FASB issued FSP FAS 133-1 and FIN 45-4, Disclosures about Credit Derivatives
and Certain Guarantees: An Amendment of FASB Statement No. 133 and FASB
Interpretation No. 45; and Clarification of the Effective Date of FASB Statement
No. 161 (FSP FAS 133-1 and FIN 45-4). FSP FAS 133-1 and FIN 45-4 amends
and enhances disclosure requirements for sellers of credit derivatives and
financial guarantees. It also clarifies that the disclosure requirements of SFAS
No. 161 are effective for quarterly periods beginning after November 15, 2008,
and fiscal years that include those periods. FSP FAS 133-1 and FIN 45-4 is
effective for fiscal years ending after November 15, 2008. The adoption of FSP
FAS 133-1 and FIN 45-4 has not had a material impact on the Company’s financial
statements.
 
 In
December 2008, the FASB issued FASB Staff Position FAS 140-4 and FIN 46(R)-8,
Disclosures by Public Entities
(Enterprises) about Transfers of Financial Assets and Interests in Variable
Interest Entities ("FSP FAS 140-4 and FIN 46(R)-8"). FSP FAS 140-4 and
FIN 46(R)-8 amends SFAS 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities and FIN
46(R), FASB Interpretation No.
46 (R), Consolidation of Variable Interest Entities, an interpretation of
Accounting Research Bulletin No. 51, to require public entities to
provide additional disclosures about transfers of financial assets and their
involvement with variable interest entities. FSP FAS 140-4 and FIN 46(R)-8 is
effective for fiscal years ending after December 15, 2008. The adoption of FSP
FAS 140-4 and FIN 46(R)-8 has not had a material impact on the Company’s
financial statements.
 
 32
  In April
2009, the FASB issued FSP FAS 107-1 and APB 28-1 Interim Disclosures about Fair Value
of Financial Instruments. FSP FAS 107-1 and APB 28-1 relate to fair value
disclosures for any financial instruments that are not currently reflected on
the balance sheet of companies at fair value. Prior to issuing this FSP, fair
values for these assets and liabilities were only disclosed once a year. The FSP
now requires these disclosures on a quarterly basis, providing qualitative and
quantitative information about fair value estimates for all those financial
instruments not measured on the balance sheet at fair value.  FSP FAS
107-1 and APB 28-1 is effective for interim reporting periods ending after June
15, 2009, with early adoption permitted for periods ending after March 15,
2009.  The adoption of FSP FAS 107-1 and APB 28-1 is not expected to
have a material impact on the Company’s financial statements.
 
 In May
2009, the FASB issued Statement of Financial Accounting Standards No. 165,
“Subsequent Events”
(SFAS 165). Under SFAS 165, requires companies to evaluate events and
transactions that occur after the balance sheet date but before the date the
financial statements are issued, or available to be issued in the case of
non-public entities. SFAS 165 requires entities to recognize in the
financial statements the effect of all events or transactions that provide
additional evidence of conditions that existed at the balance sheet date,
including the estimates inherent in the financial preparation process. Entities
shall not recognize the impact of events or transactions that provide evidence
about conditions that did not exist at the balance sheet date but arose after
that date. SFAS 165, also requires entities to disclose the date through
which subsequent events have been evaluated. SFAS 165 is effective for
interim and annual reporting periods ending after June 15, 2009. The
Company adopted the provisions of SFAS 165 for the year ended June 30,
2009, as required, the adoption did not have a material impact on the Company’s
financial statements.  The Company evaluated events subsequent to the
balance sheet date through September 23, 2009.
  On
January 1, 2009 the Company adopted EITF Issue No. 08-5, Issuer’s Accounting for Liabilities
Measured at Fair Value With a Third-Party Credit Enhancement (EITF 08-5).
EITF 08-5 provides guidance for measuring liabilities issued with an attached
third-party credit enhancement (such as a guarantee). It clarifies that the
issuer of a liability with a third-party credit enhancement (such as a
guarantee) should not include the effect of the credit enhancement in the fair
value measurement of the liability. There was no effect on the Company’s
consolidated financial statements upon adoption of EITF 08-5.
  In June
2009, the FASB issued SFAS No. 168, The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting
Principles or SFAS No. 168. SFAS No. 168 will become the single
source of authoritative nongovernmental U.S. GAAP, superseding existing FASB,
American Institute of Certified Public Accountants (AICPA), Emerging Issues Task
Force (EITF), and related accounting literature. SFAS No. 168 reorganizes the
thousands of GAAP pronouncements into roughly 90 accounting topics and displays
them using a consistent structure. Also included is relevant SEC guidance
organized using the same topical structure in separate sections. SFAS No. 168
will be effective for financial statements issued for reporting periods ending
after September 15, 2009. This will have an impact on the Company’s financial
disclosures since all future references to authoritative accounting literature
will be references in accordance with SFAS No. 168.
 
 Seasonality
 
 Our
operating results and operating cash flows historically have not been subject to
seasonal variations. This pattern may change, however, as a result of new market
opportunities or new product introductions.
 
 Off-Balance
Sheet Arrangements
 
 We do not
have any off-balance arrangements.
 
 ITEM
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
 Not
applicable.
 
 ITEM
8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
 The full
text of our audited consolidated financial statements as of June 30, 2009 and
2008 begins on page F-1 of this report.
 
 33
  ITEM
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
 
 None.
 
 ITEM
9A. CONTROLS AND PROCEDURES.
 
 (a)   Evaluation
of Disclosure Controls and Procedures
 
 Our
management, with the participation of our chief executive officer and chief
financial officer, Ms. Lifang Chen and Yongfei Jiang, respectively, evaluated
the effectiveness of our disclosure controls and procedures. The term
“disclosure controls and procedures,” as defined in Rules 13a-15(e) and
15d-15(e) under the Exchange Act, means controls and other procedures of a
company that are designed to ensure that information required to be disclosed by
a company in the reports, such as this report, that it files or submits under
the Exchange Act is recorded, processed, summarized and reported, within
the time periods specified in the SEC’s rules and forms. Disclosure controls and
procedures include, without limitation, controls and procedures designed to
ensure that information required to be disclosed by a company in the
reports that it files or submits under the Exchange Act is accumulated and
communicated to the company’s management, including its principal executive and
principal financial officers, as appropriate to allow timely
decisions regarding required disclosure. Based on that evaluation, Ms. Chen
and Mr. Jiang concluded that because of the material weakness in internal
control over financial reporting described below, our disclosure controls and
procedures were not effective as of June 30, 2009.
 
 (b)
Management’s annual report on internal control over financial
reporting
 
 Management
is responsible for establishing and maintaining adequate internal control over
financial reporting for the Company. Internal control over financial reporting
refers to the process designed by, or under the supervision of, our chief
executive officer and chief financial officer, and effected by our Board of
Directors, management and other personnel, to provide reasonable assurance
regarding the reliability of our financial reporting and the preparation of
financial statements for external purposes in accordance with U.S. GAAP, and
includes those policies and procedures that:
 
 ·
              pertain
      to the maintenance of records that in reasonable detail accurately and
      fairly reflect the transactions and dispositions of our
      assets;
 ·
              provide
      reasonable assurance that transactions are recorded as necessary to permit
      preparation of financial statements in accordance with U.S. GAAP, and that
      our receipts and expenditures are being made only in accordance with the
      authorization of our management and directors;
  and
 ·
              provide
      reasonable assurance regarding prevention or timely detection of
      unauthorized acquisition, use or disposition of our assets that could have
      a material effect on the financial
statements.
 
 Management
conducted an evaluation of the effectiveness of our internal control over
financial reporting as of June 30, 2009 based on the framework set forth in the
report entitled Internal Control - Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission. Based on the evaluation,
management concluded that our internal control over financial reporting as of
June 30, 2009 was not effective. Management identified the following material
weaknesses as of June 30, 2009:
 
 ·
              Weakness
      relating to the Company’s ability to correctly make necessary adjustments
      to its financial statements in accordance with U.S. GAAP in order to avoid
      the need for further
adjustments.
 
 Material
audit adjustments, which resulted from the difference between Chinese generally
accepted accounting principles and U.S. GAAP, were made to adjust the allowance
for bad debts for advances to suppliers and other receivables, adjust the timing
of revenue recognition and record unrecorded liabilities.  The audit
adjustments were material to the financial statements.
 
 Although
our accounting staff is professional and experienced in accounting requirements
and procedures generally accepted in the PRC, management has determined that
they require additional training and assistance in U.S. GAAP. Since December 31,
2008, the Company has hired an individual with U.S. GAAP experience, however,
the Company is still actively searching for additional personnel who are
experienced in U.S. GAAP and can assist the Company in remediating the
aforementioned weakness.
 
 34
  Our
management is not aware that the material weakness in our internal control over
financial reporting causes them to believe that any material inaccuracies or
errors existed in our financial statement as of June 30, 2009.  The
reportable conditions and other areas of our internal control over financial
reporting identified by us as needing improvement have not resulted in a
material restatement of our financial statements. Nor are we aware of any
instance where such reportable conditions or other identified areas of weakness
have resulted in a material misstatement of omission in any report we have filed
with or submitted to the Commission.
  Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. 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 and procedures may deteriorate.
 
 Management
remains committed to improving its internal control over financial reporting and
will continue to work to put effective controls in place. The Company, under the
supervision of the Audit Committee, has implemented annual budgets for the
Company. The Company plans to improve its annual budget process in an effort to
maximize revenues and potentially reduce operating expenses.
 
 This
annual report does not include an attestation report of our registered public
accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by our registered public
accounting firm pursuant to temporary rules of the SEC that permit the Company
to provide only management’s report in this annual report.
 
 (c)
Changes in internal control over financial reporting
 
 There
were no changes in our internal controls over financial reporting during the
fourth quarter of our fiscal year ended June 30, 2009, that have materially
affected, or are 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
GOVERNANCE.
 
 Directors
and Executive Officers
  The
following sets forth the name and position of each of our current executive
officers and directors.
  Name
                      
                      Age
                      
                      PositionLifang
      Chen
                      
                      38
                      
                      Chairman
      of the Board of Directors, Chief Executive Officer and
      PresidentYongfei
      Jiang
                      
                      32
                      
                      Director,
      Chief Financial Officer, Treasurer and SecretaryXun
      Zhang
                      
                      39
                      
                      Chief
      Technology OfficerA.
      Carl Mudd
                      
                      65
                      
                      DirectorGuoyou
      Shao
                      
                      60
                      
                      DirectorXinchuang
      Li
                      
                      46
                      
                      Director
 
 35




Lifang Chen.  Ms.
Chen became our Chairman on February 1, 2007 and our Chief Executive Officer and
President in May 2008. She has been the Chairman of our subsidiary Sutor BVI
since August 2007. Since June 2001, Ms. Chen has served as the Vice President of
Shanghai Huaye. From September 1993 to May 2001, Ms. Chen served as the director
of the civil administrative bureau of Xiaoshan District, Hangzhou City. She has
extensive experience in enterprise management and fine finished steel industry
and received a doctorate degree in Business Management from Century University
of America in 2004.
 
 Yongfei Jiang.  Mr.
Jiang became a Director in June 2009 and has been our Chief Financial Officer,
Treasurer and Secretary since February 1, 2007. He also has been the Chief
Financial Officer of Changshu Huaye since 2005. From 2002 to 2005, Mr. Jiang
served as the finance manager of Guangzhou Huaye Trading Co., Ltd., a subsidiary
of Shanghai Huaye, where he was responsible for the financial and capital
management. From 1999 to 2002, Mr. Jiang was the finance manager at Zhejiang
Guotai Seal Material Co. Ltd., an equipment manufacturer. Mr. Jiang has nine
years of experience in corporate accounting and finance. He has a MBA from Hong
Kong Industrial and Commercial College.
 
 Xun Zhang.  Mr.
Zhang became our Chief Technology Officer on June 18, 2007. Prior to his
appointment as our Chief Technology Officer, Mr. Zhang had worked as our Chief
Project Engineer since April 2005. He was responsible for the bidding, design
examination, assembling and testing of the acid pickling, acid regeneration and
cold-rolled steel production lines of our subsidiary Jiangsu Cold-Rolled. He was
also responsible for the drafting of technical procedure of various production
lines and staff training. From 1995 to 2005, he worked as the Deputy Chief
Engineer at the project department of Baoshan Iron & Steel Co., Ltd. Mr.
Zhang has a bachelor’s degree in engineering from Huanzhong University of
Science and Technology.
 
 A. Carl Mudd.  Mr.
Mudd has been a Director since February 2008. Mr. Mudd has extensive operational
and financial management experience in domestic and international,
multi-location, manufacturing, distribution and retail businesses, both publicly
held and privately owned. He has spent the past 15 years consulting with and
mentoring CEOs and Boards of Directors of major companies on global strategy,
business processes and international operations, including six years based in
Hong Kong with clients in the PRC, Hong Kong, Sri Lanka and Singapore. Mr. Mudd
is currently the Chairman of the Audit Committee of Shengda Tech, Inc., a NASDAQ
listed publicly traded manufacturer and supplier of nano precipitated carbonated
calcium for tires, plastics, paints and papers in China. He is also a Statutory Director of the
National Association of Corporate Directors-North Texas Chapter.Mr. Mudd
is a Certified Public Accountant, holds a Bachelor’s of Business Administration
- Accounting, from St. Edward’s University and holds a Certificate of Director
Education by The NACD Corporate Directors Institute.
 
 Guoyou
Shao.  Mr. Shao has been a Director since February 2008. Since April
2003, Mr. Shao has served as Board Chairman of Fortis Haitong Investment
Management Co., Ltd., one of the first sino-foreign joint ventures specializing
in fund management to gain approval in China Prior to this, Mr. Shao served as
Manager of the Investor Relations Department of Haitong Securities Co. Ltd.
since July 1998. Mr. Shao has extensive securities investment and asset
management experience and holds a Master’s degree in Business Administration
from Hong Kong Science Management Institute.
  Xinchuang
Li.  Mr. Li has been a Director in February 2008. Since 2008,
Mr. Li has served as the Executive Director of China Metallurgical Industry
Planning & Research Institute (CMIPRI) in Beijing. From 2002 to 2008, Mr. Li
served as the Vice Director and Chief Engineer of CMIPRI. From 1998 to 2002, Mr.
Li served as the Vice-Chief Engineer of CMIPRI. Mr. Li has significant
experience in the operations of companies engaged in steel production with a
particular focus and specialization in the operations, planning and strategic
focus of companies operating in the Chinese steel industry. Mr. Li holds a
Master’s degree in Business Administration from Fordham University and Beijing
University.
 
 There are
no agreements or understandings for any of our executive officers or director to
resign at the request of another person and no officer or director is acting on
behalf of nor will any of them act at the direction of any other
person.
 
 Directors
are elected until their successors are duly elected and
qualified.
  36
 
 Board
Composition and Committees
  Our board
of directors is comprised of Lifang Chen, Yongfei Jiang, A. Carl Mudd, Guoyou
Shao and Xinchuang Li.
 
 Messrs.
A. Carl Mudd, Guoyou Shao, and Xinchuang Li each serves on our board of
directors as an “independent director” as defined by Rule 4200(a)(15) of the
Marketplace Rules of The Nasdaq Stock Market, Inc., or the “Nasdaq Marketplace
Rules.” The board of directors has determined that A. Carl Mudd possesses the
accounting or related financial management experience that qualifies him as
financially sophisticated within the meaning of Rule 4350(d)(2)(A) of the Nasdaq
Marketplace Rules and that he is an “audit committee financial expert” as
defined by the rules and regulations of the SEC.
 
 Our board
of directors currently has three standing committees which perform various
duties on behalf of and report to the board of directors: (i) audit committee,
(ii) compensation committee and (iii) governance and nominating committee. Each
of the three standing committees is comprised entirely of independent directors.
From time to time, the board of directors may establish other
committees.
 
 Audit
Committee
 
 Our board
of directors established an audit committee in February 2008. Our audit
committee consists of three members: A. Carl Mudd, Guoyou Shao, and Xinchuang
Li, each of whom is “independent” as that term is defined under the Nasdaq
Marketplace Rules. Our audit committee oversees our accounting and financial
reporting processes and the audits of the financial statements of our company.
Mr. Mudd serves as our audit committee chairman and financial expert as that
term is defined by the applicable SEC rules.
 
 Our audit
committee is responsible for, among other things:
 
 ·
              selecting
      our independent auditors and pre-approving all auditing and non-auditing
      services permitted to be performed by our independent
      auditors;
 ·
              reviewing
      with our independent auditors any audit problems or difficulties and
      management’s response;
 ·
              reviewing
      and approving all proposed related-party transactions, as defined in Item
      404 of Regulation S-K under the Securities Act of 1933, as
      amended;
 ·
              discussing
      the annual audited financial statements with management and our
      independent auditors;
 ·
              reviewing
      major issues as to the adequacy of our internal controls and any special
      audit steps adopted in light of significant internal control
      deficiencies;
 ·
              annually
      reviewing and reassessing the adequacy of our audit committee
      charter;
 ·
              such
      other matters that are specifically delegated to our audit committee by
      our board of directors from time to
time;
 ·
              meeting
      separately and periodically with management and our internal and
      independent auditors; and
 ·
              reporting
      regularly to the full board of
directors.
 
 Compensation
Committee
 
 Our board
of directors established a compensation committee in February 2008. Our
compensation committee consists of three members: A. Carl Mudd, Guoyou Shao, and
Xinchuang Li, each of whom is “independent” as that term is defined under the
Nasdaq Marketplace Rules. Mr. Shao serves as the chairman of our compensation
committee. Our compensation committee assists the board of directors in
reviewing and approving the compensation structure of our directors and
executive officers, including all forms of compensation to be provided to our
directors and executive officers. Our Chief Executive Officer may not be present
at any meeting of our compensation committee during which her compensation is
deliberated.
 
 Our
compensation committee is responsible for, among other things:
 
 ·
              approving
      and overseeing the compensation package for our executive
      officers;
 ·
              reviewing
      and approving corporate goals and objectives relevant to the compensation
      of our Chief Executive Officer;
 ·
              evaluating
      the performance of our Chief Executive Officer in light of those goals and
      objectives, and setting the compensation level of our Chief Executive
      Officer based on this evaluation;
and
  37
 
 ·
              reviewing
      periodically and making recommendations to the board of directors
      regarding any long-term incentive compensation or equity plans, programs
      or similar arrangements, annual bonuses, employee pension and welfare
      benefit plans.
  Governance and Nominating
Committee
 
 Our board
of directors established a governance and nominating committee in February 2008.
Our governance and nominating committee consists of three members: A. Carl Mudd,
Guoyou Shao, and Xinchuang Li, each of whom is “independent” as that term is
defined under the Nasdaq Marketplace Rules. Mr. Li serves as the chairman to our
governance and nominating committee. The governance and nominating committee
assists the board of directors in identifying individuals qualified to become
our directors and in determining the composition of the board of directors and
its committees.
 
 ·
              Our
      governance and nominating committee is responsible for, among other
      things:
 ·
              identifying
      and recommending to the board of directors nominees for election or
      re-election to the board of directors, or for appointment to fill any
      vacancy;
 ·
              reviewing
      annually with the board of directors the current composition of the board
      of directors in light of the characteristics of independence, age, skills,
      experience and availability of service to us;
  and
 ·
              identifying
      and recommending to the board of directors the directors to serve as
      members of the committees.
 
 We
recognize that transactions between us and any of our directors or executive
officers can present potential or actual conflicts of interest and create the
appearance that our decisions are based on considerations other than the best
interests of our stockholders.
 
 Family
Relationships
 
 There are
no family relationships among our directors or officers.
 
 Involvement
in Certain Legal Proceedings
 
 To the
best of our knowledge, none of our directors or executive officers has 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 “CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE,” 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.
 
 Section
16(A) Beneficial Ownership Reporting Compliance
 
 Under
U.S. securities laws, directors, certain executive officers and persons holding
more than 10% of our common stock must report their initial ownership of the
common stock, and any changes in that ownership, to the SEC.  The SEC has
designated specific due dates for these reports. In fiscal year 2009, the Form 3
for Xun Zhang was filed late due to administrative oversight.
 
 Code
of Ethics
  On
January 31, 2007, our board of directors adopted a new code of ethics that
applies to all of our directors, officers and employees, including our principal
executive officer, principal financial officer and principal accounting officer.
The new code replaces our prior code of ethics that applied only to our
principal executive officer, principal financial officer, principal accounting
officer or controller and any person who performed similar functions, and
addresses, among other things, honesty and ethical conduct, conflicts of
interest, compliance with laws, regulations and policies, including disclosure
requirements under the federal securities laws, confidentiality, trading on
inside information, and reporting of violations of the code.  A copy of the
Code of Ethics has been filed as Exhibit 14 to our current report on Form 8-K,
filed on February 2, 2007.
  38
 
 ITEM
      11.
              EXECUTIVE
      COMPENSATION.
 
 The
following table sets forth information concerning all compensation awarded to,
earned by or paid to our Chief Executive Officer for services during the last
two fiscal years in all capacities to us, our subsidiaries and predecessors. No
other executive officer received compensation of $100,000 or more for the year
ended June 30, 2009.
 
 Name and Principal
                                  Position
                                
                                Year
                                
                                Salary
                                  ($)
                                
                                Bonus
                                  ($)
                                
                                Stock
                                  Awards
                                  ($)
                                
                                Total
                                  ($)Lifang
      Chen, CEO
                                
                                2009
                                
                                
                                100,000
                                
                                -
                                
                                
                                -
                                
                                100,0002008
                                
                                
                                -
                                
                                -
                                
                                
                                -
                                
                                -
  Employment
Contracts
 
 Currently,
we do not have an employment agreement with our CEO, Ms. Lifang
Chen.
 
 Retirement
Benefits
 
 Currently,
we do not provide any employees, including our named executive officers any
company sponsored retirement benefits other than a state pension scheme in which
all of our employees in China participate.
 
 Payment
Upon Termination or Change-in Control
  The
Company does not have change-in-control arrangements with any of its executive
officers, and the Company is not obligated to pay severance or other enhanced
benefits to executive officers upon termination of their
employment.
 
 Director
Compensation – 2009
 
 The
following table sets forth information concerning all compensation paid to our
non-employee directors for services rendered in all capacities for the year
ended June 30, 2009.
  Name
                              
                              Fees Earned or
                                Paid in Cash ($)
                              
                              Total Compensation ($)A.
      Carl Mudd
                              
                              
                              69,000
                              
                              69,000Guoyou
      Shao
                              
                              
                              15,384
                              
                              15,384Xinchuang
      Li
                              
                              
                              15,384
                              
                              15,384
 
 We have
entered into agreements with each of the independent directors. Under the terms
of the agreements, Mr. Mudd is entitled to $65,000, Mr. Shao is entitled to RMB
120,000 (approximately $17,143) and Mr. Li is entitled to RMB 120,000
(approximately $17,143) as annual compensation for their service as independent
directors, and as chairpersons of various board committees, as applicable. Mr.
Mudd’s compensation is greater because he has greater responsibilities as the
Audit Committee Chairman. Under the terms of the agreements, the independent
directors are entitled to indemnification for expenses, judgments, fines,
penalties or other amounts actually and reasonably incurred by the independent
directors in connection with any proceeding if the independent director acted in
good faith and in our best interests. The Company also reimburses our directors
for reasonable travel expenses related to attendance at board and committee
meetings.
 
 Additionally,
we entered into Indemnification Agreements with each of Messrs. Mudd, Shao and
Li.  Under the terms of these Indemnification Agreements, the Company
agreed to indemnify the independent directors against expenses, judgments,
fines, penalties or other amounts actually and reasonably incurred by the
independent directors in connection with any proceeding (other than a Proceeding
by or in the right of the Company) if the independent director acted in good
faith and in the best interests of the Company, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe the
independent director’s conduct was unlawful.  The Company also agreed
to pay any such expenses to an independent director in advance of the final
disposition of any such proceeding if the director agrees to repay such amount
to the extent it is ultimately determined they are not entitled to
indemnification; provided, however, that the Company is not obligated to make
any such advance payment if the board of directors determines, in its sole
discretion, that it does not appear that such director has met the standards of
conduct which make it permissible under applicable law to indemnify such
director, and that the advancement of expenses would not be in the best
interests of the Company and its stockholders.
  39
  Limitation
of Liability and Indemnification of Officers and Directors
 
 Our
bylaws provide for the indemnification of our present and prior directors and
officers or any person who may have served at our request as a director or
officer of another corporation in which we own shares of capital stock or of
which we are a creditor, against expenses actually and necessarily incurred by
them in connection with the defense of any actions, suits or proceedings in
which they, or any of them, are made parties, or a party, by reason of being or
having been director(s) or officer(s) of us or of such other corporation, in the
absence of negligence or misconduct in the performance of their duties. This
indemnification policy could result in substantial expenditure by us, which we
may be unable to recoup.
 
 Insofar
as indemnification by us for liabilities arising under the Securities Exchange
Act of 1934, as amended, may be permitted to our directors, officers and
controlling persons pursuant to provisions of the Articles of Incorporation and
Bylaws, or otherwise, we have been advised that in the opinion of the SEC, such
indemnification is against public policy and is, therefore, unenforceable. In
the event that a claim for indemnification by such director, officer or
controlling person of us in the successful defense of any action, suit or
proceeding is asserted by such director, officer or controlling person in
connection with the securities being offered, 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 such indemnification by
us is against public policy as expressed in the Act and will be governed by the
final adjudication of such issue.
 
 Additionally,
we entered into Indemnification Agreements with each of Messrs. Mudd, Shao and
Li, our independent directors. Under the terms of these Indemnification
Agreements, the Company agreed to indemnify the independent directors against
expenses, judgments, fines, penalties or other amounts actually and reasonably
incurred by the independent directors in connection with any proceeding if the
independent director acted in good faith and in the best interests of the
Company as permitted under applicable state law.
 
 At the
present time, there is no pending litigation or proceeding involving a director,
officer, employee or other agent of ours in which indemnification would be
required or permitted. We are not aware of any threatened litigation or
proceeding which may result in a claim for such indemnification.
 
 ITEM
      12.
                SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
      STOCKHOLDER MATTERS.
 
 The
following table sets forth information regarding beneficial ownership of our
common stock as of September 25, 2009 (i) by each person who is known by us to
beneficially own more than 5% of our common stock; (ii) by each of our officers
and directors; and (iii) by all of our officers and directors as a
group.
 
 Unless
otherwise specified, the address of each of the persons set forth below is in
care of Sutor Technology Group Limited, No. 8, Huaye Road, Dongbang Industrial
Park Changshu, China, 215534.
 
 Title of Class
                              
                              Name & Address of
                                Beneficial Owner
                              
                              Office, If Any
                              
                              Amount & Nature
                                ofBeneficial
                                Ownership1
                              
                              
                              Percent of
                                Class2Common Stock
                              
                              Lifang Chen
                              
                              Chairman
      and CEO
                              
                              
                              30,338,050
                              3
                              
                              
                              79.9
                              %Common
      Stock
                              
                              Yongfei
      Jiang
                              
                              CFO
                              
                              
                              0
                              
                              
                              
                              *Common
      Stock
                              
                              Xun
      Zhang
                              
                              CTO
                              
                              
                              0
                              
                              
                              
                              *Common
      Stock
                              
                              A.
      Carl Mudd
                              
                              Director
                              
                              
                              9,450
                              
                              
                              
                              *Common
      Stock
                              
                              Guoyou
      Shao
                              
                              Director
                              
                              
                              0
                              
                              
                              
                              *Common
      Stock
                              
                              Xinchuang
      Li
                              
                              Director
                              
                              
                              0
                              
                              
                              
                              *All
      Officers and Directors as a group (6 persons named above)
                              
                              
                              
                              
                              
                              
                              30,347,500
                              
                              
                              
                              80
                              %Common
      Stock
                              
                              Total
      Raise Investments Ltd.
                              
                              5%
      Security Holder
                              
                              
                              30,338,050
                              4
                              
                              
                              79.9
                              %Common
      Stock
                              
                              Total
      Shares Owned by Persons Named above
                              
                              
                              
                              
                              30,347,500
                              
                              
                              
                              80
                              %
 * Less
than 1%
  40
  1.
Beneficial ownership is determined in accordance with the rules of the SEC and
generally includes voting or investment power with respect to
securities.
 
 2. A
total of 37,955,602 shares of our common stock are considered to be outstanding
pursuant to SEC Rule 13d-3(d)(1) as of September 25, 2009. For each beneficial
owner above, any options exercisable within 60 days have been included in the
denominator.
 
 3.
Includes 30,338,050 shares of common stock owned by Total Raise Investments
Ltd., a British Virgin Islands company wholly owned by Ms. Chen. Ms. Chen
disclaims beneficial ownership of such shares except to the extent of her
pecuniary interest therein.
  4. Ms.
Chen is the sole owner and director of Total Raise Investments Ltd.
  Changes in
Control
  There are
no arrangements known to us, including any pledge by any person of our
securities, the operation of which may at a subsequent date result in a change
in control of the Company.
  ITEM
      13.
                CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
      INDEPENDENCE.
 
 The
following includes a summary of transactions since the beginning of fiscal year
2009, 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 the Company’s total assets at the end of the
fiscal years ended June 30, 2008 and 2009 ($2,994,719), 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.
  ·
              We
      sell our products to and buy raw materials from various companies which
      are beneficially owned or controlled by our CEO and President Ms. Lifang
      Chen. The amounts charged for products to our Company by such related
      party are under the same pricing, terms and conditions as those charged to
      third parties. These transactions are set forth
  below:
  Amount of TransactionRelated Party
                            
                            Nature of Transaction
                            
                            Fiscal 2009
                            
                            
                            Fiscal 2008Changshu
      Diemate Steel Processing Co. Ltd.
                            
                            Sale
      of products by Sutor
                            
                            $
                            70,168
                            
                            
                            $
                            1,453,409Guangzhou
      Huaye Steel Processing Co. Ltd.
                            
                            Sale
      of products by Sutor
                            
                            
                            264,410
                            
                            
                            
                            3,022,387Hangzhou
      Nanye Material Co. Ltd.
                            
                            Sale
      of products by Sutor
                            
                            
                            -
                            
                            
                            
                            668,702Hangzhou
      Xiaoshan Southern Industry Co., Ltd.
                            
                            Sale
      of products by Sutor
                            
                            
                            397,727
                            
                            
                            
                            -Ningbo
      Huaye Steel Processing Co., Ltd.
                            
                            Sale
      of products by Sutor
                            
                            
                            15,631
                            
                            
                            
                            1,690,847Shanghai
      Huaye Steel Processing Co., Ltd.
                            
                            Sale
      of products by Sutor
                            
                            
                            6,457,867
                            
                            
                            
                            12,477,142Shanghai
      Huaye Steel Group Co., Ltd.
                            
                            Sale
      of products by Sutor
                            
                            
                            142,092,727
                            
                            
                            
                            159,050,906Wuxi
      Haide Steel Processing Co., Ltd.
                            
                            Sale
      of products by Sutor
                            
                            
                            177,459
                            
                            
                            
                            997,836Shanghai
      Pukesheng Steel Trade Co., Ltd
                            
                            Sale
      of products by Sutor
                            
                            
                            1,487,213
                            
                            
                            
                            -Zhejiang
      Nanye Metal Cutting & Delivery Co., Ltd.
                            
                            Sale
      of products by Sutor
                            
                            
                            15,719
                            
                            
                            
                            1,492,766
  41
  ·
              On
      December 20, 2007, Ms. Chen loaned our Company $7.1 million which has a
      term of 24 months and carries an annual interest rate of 5%. On May 15,
      2008, Ms. Chen loaned our Company $1.3 million which had a term of one
      year and carried no interest. On July 1, 2008, Ms. Chen loaned our Company
      $2.59 million which had a term of one year and carried no interest. On
      March 11, 2009, Ms. Chen loaned our Company $0.10 million which has a term
      of 36 months and carries an annual interest rate of 3.6%. On April 29,
      2009, Ms. Chen loaned our Company $0.15 million which has a term of 36
      months and carry an annual interest rate of 5.0%. In addition, from 2007
      and 2009, Ms. Chen made several other loans in the aggregate amount of
      $1.13 million to our Company. These loans are due on demand and bear no
      interest.  All loans mentioned above are used for working
      capital purpose. Please see details under the section “Liquidity and
      Capital Resources” under Item 7.
 
 ·
              Some
      of our notes payables are guaranteed by Shanghai Huaye and its affiliates,
      as disclosed under the section “Liquidity and Capital Resources” under
      Item 7. We did not pay any stated or unstated consideration to Shanghai
      Huaye or its affiliates for their guarantees of our note
      payables.
 
 ·
              On
      November 8, 2008, Ms. Chen and our Company entered into a lease agreement
      under which our Company rented 12F, Building B, World Trade Center, NO.45,
      North Haiyu Road, Changshu City from Ms. Chen as our Company’s office. The
      size of the premise is approximately 1,200 square meters. The lease has a
      three year term and the monthly rent is RMB 120,000 (approximately
      $17,500).
 
 Except as
set forth in our discussion above, 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.
 
 Director
Independence
 
 A. Carl
Mudd, Guoyou Shao, and Xinchuang Li each serves on our board of directors as an
“independent director” as defined by Rule 4200(a)(15) of the Marketplace Rules
of The Nasdaq Stock Market, Inc., or the “Nasdaq Marketplace Rules.” Our board
of directors currently has three standing committees which perform various
duties on behalf of and report to the board of directors: (i) audit committee,
(ii) compensation committee and (iii) governance and nominating committee. Each
of the three standing committees is comprised entirely of these three
independent directors.
 
 ITEM
      14.
              PRINCIPAL
      ACCOUNTANT FEES AND SERVICES.
 
 The
following is a summary of the fees billed to the Company by Hansen Barnett &
Maxwell, P.C. for professional services rendered for the fiscal years ended June
30, 2009 and 2008:
 
 (in
thousands of U.S. dollars)
 June 30,
                          2009
                        
                        
                        June 30,
                          2008Audit
      fees (1)
                        
                        $
                        268.6
                        
                        
                        $
                        202.0Audit-related
      fees (2)
                        
                        
                        39.6
                        
                        
                        
                        32.7Tax
      fees
                        
                        
                        
                        
                        
                        
                        -All
      other fees
                        
                        
                        
                        
                        
                        
                        -Total
                        
                        
                        308.2
                        
                        
                        
                        234.7
 
 (1)
                Consists
      of fees billed for the audit of our annual financial statements, review of
      financial statements included in our Quarterly Reports on Form 10-Q and
      services that are normally provided by the accountant in connection with
      statutory and regulatory filings or
engagements.
 
 (2)
                Consists
      of assurance and related services that are reasonably related to the
      performance of the audit and reviews of our financial statements and are
      not included in “audit fees” in this table. The services provided by our
      accountants within this category consisted of advice relating to SEC
      matters and employee benefit
matters.
  42
 
 Pre-Approval
Policies and Procedures
 
 Under the
Sarbanes-Oxley Act of 2002, all audit and non-audit services performed by our
auditors must be approved in advance by our Board to assure that such services
do not impair the auditors’ independence from us. In accordance with its
policies and procedures, our Board pre-approved the audit service performed by
Hansen Barnett & Maxwell, P.C. for our consolidated financial statements as
of and for the year ended June 30, 2009.
 43
  PART
IV
 
 ITEM
      15.
              EXHIBITS,
      FINANCIAL STATEMENTS SCHEDULES.
 
 (a)    The
following documents are filed as part of this report:
 
 (1)    Financial
Statement are set forth beginning on page F-1 of the Report
 
 Report
      of Independent Registered Public Accounting Firm
                  F-2Consolidated
      Balance Sheets
                  F-3Consolidated
      Statement of Operations and Comprehensive Income
                  F-4Consolidated
      Statement of Stockholders’ Equity
                  F-5Consolidated
      Statement of Cash Flows
                  F-6Notes
      to Consolidated Financial Statements
                  F-7
 
 (2)    Financial
Statement Schedules: All Schedules are omitted because the information called
for is not applicable, is not required, or because the financial information is
set forth in the financial statements or notes thereto.
 
 (3)    Exhibits:
See the Exhibits immediately following the signature page of this Annual Report
on Form 10-K.
  44
  SIGNATURES
 
 Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Company has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
 
 SUTOR
      TECHNOLOGY GROUP LIMITEDBy:
                    /s/ Lifang ChenLifang
      ChenChief
      Executive OfficerDate:
      September 25,
2009
 
 Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Company in the capacities
and on the dates indicated.
 
 Each
person whose signature appears below hereby authorizes Lifang Chen and Yongfei
Jiang as attorneys-in-fact to sign on his behalf, individually, and in each
capacity stated below, and to file all amendments and/or supplements to this
annual report on Form 10-K.
 
 Signature
              
              Capacity
              
              Date/s/ Lifang Chen
              
              Chief
      Executive Officer (Principal Executive
              
              September
      25, 2009,Lifang
      Chen
              
              Officer)/s/ Yongfei Jiang
              
              Chief
      Financial Officer and director (Principal
              
              September
      25, 2009Yongfei
      Jiang
              
              Financial
      Officer and Principal Accounting Officer)/s/ A. Carl MuddA.
      Carl Mudd
              
              Director
              
              September
      25, 2009/s/ Guoyou ShaoGuoyou
      Shao
              
              Director
              
              September
      25, 2009/s/ Xinchuang LiXinchuang
      Li
              
              Director
              
              September
      25, 2009
  45
  EXHIBITS
 
 Exhibit
                No.
              
              Description2.1
              
              Share
      Exchange Agreement, dated September 3, 2007, among BTHC III, Inc., Sutor
      Steel Technology Co., Ltd. and its stockholders. [Incorporated by
      reference to Exhibit 10.1 to the registrant’s current report on Form 8-K
      filed on November 8, 2007]2.2
              
              Amendment
      No. 1 to Share Exchange Agreement, dated February 1, 2007, among the
      registrant, Sutor Steel Technology Co., Ltd. and its stockholders.
      [Incorporated by reference to Exhibit 2.2 to the registrant’s current
      report on Form 8-K filed on February 2, 2007]3.1
              
              Articles
      of Incorporation of the registrant as filed with the Secretary of State of
      Nevada, as amended to date. [Incorporated by reference to Exhibit 3.1 to
      the registrant’s quarterly report on Form 10Q-SB filed on November 3,
      2007, in commission file number 333-83351]3.2
              
              Amended
      and Restated Bylaws of the registrant. [Incorporated by reference to
      Exhibit 3.2 to the registrant’s registration statement on Form SB-2 filed
      on July 21, 1999, in commission file number 333-83351].4.1
              
              Certificate
      of Designation of Series B Voting Convertible Preferred Stock.
      [Incorporated by reference to Exhibit 4.1 to the registrant’s current
      report on Form 8-K filed on February 2, 2007]4.2
              
              Form
      of Registration Rights Agreement, dated February 1, 2007. [Incorporated by
      reference to Exhibit 4.2 to the registrant’s current report on Form 8-K
      filed on February 2, 2007]10.1
              
              Assignment
      Agreement, dated November 7, 2007, by and among the registrant, BTHC III,
      Inc., Sutor Steel Technology Co., Ltd. and its stockholders. [Incorporated
      by reference to Exhibit 10.2 to the registrant’s current report on Form
      8-K filed on November 8, 2007]10.2
              
              Form
      of the Securities Purchase Agreement, dated February 1, 2007.
      [Incorporated by reference to Exhibit 10.2 to the registrant’s current
      report on Form 8-K filed on February 2, 2007]10.3
              
              Make
      Good Escrow Agreement, dated February 1, 2007, by and among the
      registrant, Roth Capital Partners, LLC, Ms. Lifang Chen and Wells Fargo
      Bank, National Association. [Incorporated by reference to Exhibit 10.3 to
      the registrant’s current report on Form 8-K filed on February 2,
      2007]10.4
              
              Closing
      Escrow Agreement, dated January 25, 2007, by and among the registrant,
      Roth Capital Partners, LLC and Thelen Reid Brown Raysman & Steiner
      LLP. [Incorporated by reference to Exhibit 10.4 to the registrant’s
      current report on Form 8-K filed on February 2, 2007]10.5
              
              Equity
      Transfer Agreement, dated August 18, 2006, by and among Shanghai Huaye
      Iron & Steel Group Co., Ltd., Huaye (Hong Kong) International Group
      Limited and Sutor Steel Technology Co., Ltd. regarding the acquisition of
      Changshu Huaye Steel Strip Co., Ltd. [Incorporated by reference to
      Exhibit 10.6 to the registrant’s current report on Form 8-K filed on
      February 2, 2007]10.6
              
              Equity
      Transfer Agreement, dated August 18, 2006, by and among Shanghai Huaye
      Iron & Steel Group Co., Ltd., Huaye (Hong Kong) International Group
      Limited and Sutor Steel Technology Co., Ltd. regarding the acquisition of
      Jiangsu Cold-Rolled Technology Co., Ltd. [Incorporated by reference to
      Exhibit 10.5 to the registrant’s current report on Form 8-K filed on
      February 2, 2007]10.7
              
              Procurement
      Cooperation Frame Agreement, dated December 7, 2006, by and between
      Changshu Huaye Steel Strip Co., Ltd. and Shanghai Huaye Iron & Steel
      Group Co., Ltd. [Incorporated by reference to Exhibit 10.7 to the
      registrant’s current report on Form 8-K filed on February 2,
      2007]
  46
 
 10.8
              
              Sales
      Cooperation Frame Agreement, dated December 7, 2006, by and between
      Changshu Huaye Steel Strip Co., Ltd. and Shanghai Huaye Iron & Steel
      Group Co., Ltd. [Incorporated by reference to Exhibit 10.8 to the
      registrant’s current report on Form 8-K filed on February 2,
      2007]10.9
              
              Notification
      Concerning Licensing the Brand Name of “Huaye” to Changshu Huaye Steel
      Strip Co., Ltd., dated August 15, 2005, from Shanghai Huaye Iron &
      Steel Group Co., Ltd. to Changshu Huaye Steel Strip Co., Ltd.
      [Incorporated by reference to Exhibit 10.9 to the registrant’s current
      report on Form 8-K filed on February 2, 2007]10.10
              
              Employment
      Agreement, dated December 26, 2006, by and between Sutor Steel Technology
      Co., Ltd. and Guoxiang Ni. [Incorporated by reference to Exhibit 10.10 to
      the registrant’s current report on Form 8-K filed on February 2,
      2007]10.11
              
              Employment
      Agreement, dated December 26, 2006, by and between Sutor Steel Technology
      Co., Ltd. and Yongfei Jiang. [Incorporated by reference to Exhibit 10.11
      to the registrant’s current report on Form 8-K filed on February 2,
      2007]10.12
              
              Employment
      Agreement, dated December 26, 2006, by and between Sutor Steel Technology
      Co., Ltd. and Liuhua Guo. [Incorporated by reference to Exhibit 10.12 to
      the registrant’s current report on Form 8-K filed on February 2,
      2007]10.13
              
              Consulting
      Agreement, dated November 1, 2006, by and among Heritage Management
      Consultants, Inc., Sutor Steel Technology Co., Ltd. and HFG International,
      Limited. [Incorporated by reference to Exhibit 10.13 to the registrant’s
      current report on Form 8-K filed on February 2, 2007]10.14
              
              Financial
      Advisory Agreement, dated July 3, 2006, by and among HFG International,
      Limited, Changshu Huaye Steel Strip Co., Ltd and Jiangsu Cold-Rolled
      Technology Co., Ltd. [Incorporated by reference to Exhibit 10.14 to the
      registrant’s current report on Form 8-K filed on February 2,
      2007]10.15
              
              Consulting
      Agreement, dated January 8, 2007, by and between the registrant and
      Heritage Management Consultants, Inc. [Incorporated by reference to
      Exhibit 10.1 to the registrant’s current report on Form 8-K filed on
      January 9, 2007]10.16
              
              Consulting
      Agreement, dated January 8, 2007, by and between the registrant and Ye
      Zong. [Incorporated by reference to Exhibit 10.1 to the registrant’s
      current report on Form 8-K filed on January 9, 2007]10.17
              
              Consulting
      Agreement, dated January 8, 2007, by and between the registrant and
      Jingshi Cai. [Incorporated by reference to Exhibit 10.1 to the
      registrant’s current report on Form 8-K filed on January 9,
      2007]10.18
              
              Form
      of Sales Agent Cooperation Agreement. [Incorporated by reference to
      Exhibit 10.18 to the registrant’s Amendment No. 1 to registration
      statement on Form S-1 filed on June 4, 2007]10.19
              
              Employment
      Agreement, dated July 10, 2007, by and between Sutor Steel Technology Co.,
      Ltd. and Liuhua Guo. [Incorporated by reference to Exhibit 10.21 to the
      registrant’s registration statement on Form S-1 filed on July 13,
      2007]10.20
              
              Employment
      Agreement, dated July 10, 2007, by and between Sutor Steel Technology Co.,
      Ltd. and Xun Zhang. [Incorporated by reference to Exhibit 10.22 to the
      registrant’s registration statement on Form S-1 filed on July 13,
      2007]10.21
              
              Loan
      Agreement, dated December 20, 2007, by and between Sutor Steel Technology
      Co., Ltd. and Lifang Chen. [Incorporated by reference to Exhibit 10.23 to
      the registrant’s registration statement on Form S-1, filed January 28,
      2008, in Commission file no. 333-148898.]10.22
              
              Loan
      Agreement, dated May 15, 2008, by and between Lifang Chen and Jiangsu
      Cold-Rolled (English Translation) [Incorporated by reference to Exhibit
      99.1 to the registrant’s periodic report on Form 10-Q for the quarter
      ended September 30, 2008.]
  47





10.23
            
            Loan
      Agreement, dated July 1, 2008, by and between Lifang Chen and Jiangsu
      Cold-Rolled (English Translation) [Incorporated by reference to Exhibit
      99.2 to the registrant’s periodic report on Form 10-Q for the quarter
      ended September 30, 2008.]10.24*
            
            Loan
      Agreement, dated March 11, 2009, by and between Sutor Steel Technology
      Co., Ltd. and Lifang Chen.10.25*
            
            Loan
      Agreement, dated April 29, 2009, by and between Sutor Steel Technology
      Co., Ltd. and Lifang Chen.10.26*
            
            Loan
      Agreement, dated November 20, 2008, by and between Guihua Ling and Sutor
      Steel Technology Co., Ltd. (English Translation)10.27
            
            Sutor
      Technology Group Limited Independent Director’s Contract, dated as of
      February 4, 2008, by and between Sutor Technology Group Limited and A.
      Carl Mudd [Incorporated by reference to Exhibit 10.1 to the registrant
      current report on Form 8-K filed on February 8, 2008]10.28
            
            Sutor
      Technology Group Limited Independent Director’s Contract, dated as of
      February 4, 2008, by and between Sutor Technology Group Limited and Guoyou
      Shao [Incorporated by reference to Exhibit 10.2 to the registrant current
      report on Form 8-K filed on February 8, 2008]10.29
            
            Sutor
      Technology Group Limited Independent Director’s Contract, dated as of
      February 4, 2008, by and between Sutor Technology Group Limited and
      Xinchuang Li [Incorporated by reference to Exhibit 10.3 to the registrant
      current report on Form 8-K filed on February 8, 2008]10.30
            
            Indemnification
      Agreement, dated as of February 4, 2008, by and between Sutor Technology
      Group Limited and A. Carl Mudd [Incorporated by reference to Exhibit 10.4
      to the registrant current report on Form 8-K filed on February 8,
      2008]10.31
            
            Indemnification
      Agreement, dated as of February 4, 2008, by and between Sutor Technology
      Group Limited and Guoyou Shao [Incorporated by reference to Exhibit 10.5
      to the registrant current report on Form 8-K filed on February 8,
      2008]10.32
            
            Indemnification
      Agreement, dated as of February 4, 2008, by and between Sutor Technology
      Group Limited and Xinchuang Li [Incorporated by reference to Exhibit 10.6
      to the registrant current report on Form 8-K filed on February 8,
      2008]10.33*
            
            Lease
      Agreement, dated November 8, 2008, by and between Lifang Chen and Changshu
      Huaye Steel Strip Co., Ltd. (English Translation)14
            
            Amended
      and Restated Business Ethics Policy and Code of Conduct. [Incorporated by
      reference to Exhibit 14 to the registrant’s current report on Form 8-K
      filed on February 2, 2007]21*
            
            List
      of subsidiaries of the registrant.24
            
            Power
      of Attorney (included on the signature page of this annual
      report).31.1*
            
            Certification
      of Principal Executive Officer filed pursuant to Section 302 of the
      Sarbanes-Oxley Act of 200231.2*
            
            Certification
      of Principal Financial Officer filed pursuant to Section 302 of the
      Sarbanes-Oxley Act of 200232.1*
            
            Certification
      of Principal Executive Officer furnished pursuant to 18 U.S.C. Section
      1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      200232.2*
            
            Certifications
      Principal Financial Officer furnished pursuant to 18 U.S.C. Section 1350,
      as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002





* Filed
herewith


48





SUTOR
TECHNOLOGY GROUP LIMITED AND SUBSIDIARIES


INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS





PageReport
      of Independent Registered Public Accounting Firm
                
                F-2Consolidated
      Balance Sheets as of June 30, 2009 and 2008
                
                F-3Consolidated
      Statements of Operations and Comprehensive Income for the Years Ended June
      30, 2009, 2008 and 2007
                
                F-4Consolidated
      Statements of Stockholders’ Equity for the Years Ended June 30, 2007, 2008
      and 2009
                
                F-5Consolidated
      Statements of Cash Flows for the Years Ended June 30, 2009, 2008 and
      2007
                
                F-6Notes
      to Consolidated Financial Statements
                
                F-7


F-1
  HANSEN,BARNETT&
      MAXWELL, P.C.A
      Professional Corporation
                  
                  Registered
      with the Public CompanyCERTIFIED
      PUBLIC ACCOUNTANTS
                  
                  Accounting
      Oversight Board5
      Triad Center, Suite 750Salt
      Lake City, UT 84180-1128Phone:
      (801) 532-2200Fax:
      (801) 532-7944www.hbmcpas.com
                  
                  A
      Member of the Forum of
Firms
 
 REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 To the
Board of Directors and the Stockholders
 Sutor
Technology Group Limited
 
 We have
audited the accompanying consolidated balance sheets of Sutor Technology Group
Limited and subsidiaries as of June 30, 2009 and 2008, and the related
consolidated statements of operations and comprehensive income, stockholders’
equity, and cash flows for each of the three years in the period ended June 30,
2009. These 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 audits 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 audit included consideration of internal
control over financial reporting as a basis of designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
  In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Sutor Technology Group
Limited and subsidiaries as of June 30, 2009 and 2008 and the results of their
operations and their cash flows for each of the three years in the period ended
June 30, 2009, in conformity with accounting principles generally accepted in
the United States of America.
 
 HANSEN,
      BARNETT & MAXWELL,
P.C.
 
 Salt Lake
City, Utah
 September
23, 2009
 
 F-2
 
 SUTOR
TECHNOLOGY GROUP LIMITED AND SUBSIDIARIES
 CONSOLIDATED
BALANCE SHEETS
 
 June
      30,
                                              
                                              
                                              June
      30,2009
                                              
                                              
                                              2008ASSETSCurrent
      Assets:Cash
      and cash equivalents
                                              
                                              $
                                              10,511,028
                                              
                                              
                                              $
                                              11,806,101Restricted
      cash
                                              
                                              
                                              51,809,170
                                              
                                              
                                              
                                              59,489,508Trade
      accounts receivable, net of allowance fordoubtful
      accounts of $389,765 and $70,653, respectively
                                              
                                              
                                              8,355,361
                                              
                                              
                                              
                                              6,268,858Other
      receivables
                                              
                                              
                                              326,848
                                              
                                              
                                              
                                              100,271Advances
      to suppliers, related parties
                                              
                                              
                                              95,810,109
                                              
                                              
                                              
                                              76,118,544Advances
      to suppliers, net of allowanceof
      $817,159 and $1,472,828, respectively
                                              
                                              
                                              23,955,493
                                              
                                              
                                              
                                              28,035,815Inventory
                                              
                                              
                                              38,548,418
                                              
                                              
                                              
                                              51,315,521Notes
      receivable
                                              
                                              
                                              17,532
                                              
                                              
                                              
                                              130,970Deferred
      taxes
                                              
                                              
                                              266,110
                                              
                                              
                                              
                                              288,976Total
      Current Assets
                                              
                                              
                                              229,600,069
                                              
                                              
                                              
                                              233,554,564Property and Equipment,net of accumulated depreciation of$17,484,268
      and $12,019,445, respectively
                                              
                                              
                                              69,766,127
                                              
                                              
                                              
                                              59,736,612Intangible Assets,net
      of accumulated amortization of$345,130
      and $285,888, respectively
                                              
                                              
                                              3,047,498
                                              
                                              
                                              
                                              3,238,931TOTAL
      ASSETS
                                              
                                              $
                                              302,413,694
                                              
                                              
                                              $
                                              296,530,107LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      Liabilities:Accounts
      payable
                                              
                                              $
                                              12,129,003
                                              
                                              
                                              $
                                              6,003,898Advances
      from customers
                                              
                                              
                                              17,845,426
                                              
                                              
                                              
                                              16,871,618Other
      payables and accrued expenses
                                              
                                              
                                              3,176,493
                                              
                                              
                                              
                                              3,265,860Short-term
      notes payable
                                              
                                              
                                              104,312,763
                                              
                                              
                                              
                                              129,192,870Short-term
      notes payable - related parties
                                              
                                              
                                              9,900,727
                                              
                                              
                                              
                                              1,311,510Total
      Current Liabilities
                                              
                                              
                                              147,364,412
                                              
                                              
                                              
                                              156,645,756Long-Term
      Notes Payable
                                              
                                              
                                              2,859,995
                                              
                                              
                                              
                                              -Long-Term
      Notes Payable - Related Parties
                                              
                                              
                                              249,996
                                              
                                              
                                              
                                              7,099,998Total
      Liabilites
                                              
                                              
                                              150,474,403
                                              
                                              
                                              
                                              163,745,754Minority
      Interest in Assets of Subsidiary
                                              
                                              
                                              -
                                              
                                              
                                              
                                              34,697Stockholders'
      EquityUndesignated
      preferred stock - $0.001 par value;1,000,000
      shares authorized; no shares outstanding
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -Common
      stock - $0.001 par value; 500,000,000 shares authorized;37,955,602
      shares outstanding
                                              
                                              
                                              37,955
                                              
                                              
                                              
                                              37,955Additional
      paid-in capital
                                              
                                              
                                              37,170,164
                                              
                                              
                                              
                                              37,170,164Statutory
      reserves
                                              
                                              
                                              12,586,995
                                              
                                              
                                              
                                              12,586,995Retained
      earnings
                                              
                                              
                                              84,407,200
                                              
                                              
                                              
                                              65,772,975Accumulated
      other comprehensive income
                                              
                                              
                                              17,736,977
                                              
                                              
                                              
                                              17,181,567Total
      Stockholders' Equity
                                              
                                              
                                              151,939,291
                                              
                                              
                                              
                                              132,749,656TOTAL
      LIABILITIES AND STOCKHOLDERS' EQUITY
                                              
                                              $
                                              302,413,694
                                              
                                              
                                              $
                                              296,530,107
 
 The
accompanying notes are an integral part of the consolidated financial
statements.
 
 F-3
 
 SUTOR
TECHNOLOGY GROUP LIMITED AND SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF OPERATIONS
 AND
COMPREHENSIVE INCOME
  For
      the Years Ended June 30,2009
                                                  
                                                  
                                                  2008
                                                  
                                                  
                                                  2007Revenue:Revenue
                                                  
                                                  $
                                                  190,506,892
                                                  
                                                  
                                                  $
                                                  237,494,371
                                                  
                                                  
                                                  $
                                                  147,466,726Revenue
      from related parties
                                                  
                                                  
                                                  150,978,922
                                                  
                                                  
                                                  
                                                  180,535,469
                                                  
                                                  
                                                  
                                                  155,972,011341,485,814
                                                  
                                                  
                                                  
                                                  418,029,840
                                                  
                                                  
                                                  
                                                  303,438,737Cost
      of RevenueOther
      cost of revenue
                                                  
                                                  
                                                  142,559,158
                                                  
                                                  
                                                  
                                                  266,149,352
                                                  
                                                  
                                                  
                                                  115,285,842Purchases
      from related parties
                                                  
                                                  
                                                  166,119,456
                                                  
                                                  
                                                  
                                                  106,960,453
                                                  
                                                  
                                                  
                                                  157,615,325308,678,614
                                                  
                                                  
                                                  
                                                  373,109,805
                                                  
                                                  
                                                  
                                                  272,901,167Gross
      Profit
                                                  
                                                  
                                                  32,807,200
                                                  
                                                  
                                                  
                                                  44,920,035
                                                  
                                                  
                                                  
                                                  30,537,570Operating
      Expenses:Selling
      expense
                                                  
                                                  
                                                  3,128,676
                                                  
                                                  
                                                  
                                                  2,237,957
                                                  
                                                  
                                                  
                                                  2,319,728General
      and administrative expense
                                                  
                                                  
                                                  3,959,258
                                                  
                                                  
                                                  
                                                  3,749,453
                                                  
                                                  
                                                  
                                                  4,735,973Total
      Operating Expenses
                                                  
                                                  
                                                  7,087,934
                                                  
                                                  
                                                  
                                                  5,987,410
                                                  
                                                  
                                                  
                                                  7,055,701Income
      from Operations
                                                  
                                                  
                                                  25,719,266
                                                  
                                                  
                                                  
                                                  38,932,625
                                                  
                                                  
                                                  
                                                  23,481,869Other
      Income (Expense):Interest
      income
                                                  
                                                  
                                                  1,386,466
                                                  
                                                  
                                                  
                                                  943,466
                                                  
                                                  
                                                  
                                                  566,469Other
      income
                                                  
                                                  
                                                  149,007
                                                  
                                                  
                                                  
                                                  188,273
                                                  
                                                  
                                                  
                                                  298,488Interest
      expense
                                                  
                                                  
                                                  (5,886,727
                                                  )
                                                  
                                                  
                                                  (6,253,098
                                                  )
                                                  
                                                  
                                                  (2,258,425
                                                  )Other
      expense
                                                  
                                                  
                                                  (402,936
                                                  )
                                                  
                                                  
                                                  (756,943
                                                  )
                                                  
                                                  
                                                  (874,651
                                                  )Total
      Other Income (Expense)
                                                  
                                                  
                                                  (4,754,190
                                                  )
                                                  
                                                  
                                                  (5,878,302
                                                  )
                                                  
                                                  
                                                  (2,268,119
                                                  )Income
      Before Taxes and Minority Interest
                                                  
                                                  
                                                  20,965,076
                                                  
                                                  
                                                  
                                                  33,054,323
                                                  
                                                  
                                                  
                                                  21,213,750Provision
      for income taxes
                                                  
                                                  
                                                  (2,330,851
                                                  )
                                                  
                                                  
                                                  (1,916,468
                                                  )
                                                  
                                                  
                                                  (696,754
                                                  )Minority
      interest in loss of consolidated subsidiary
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  (1,885
                                                  )
                                                  
                                                  
                                                  3,395Net
      Income
                                                  
                                                  $
                                                  18,634,225
                                                  
                                                  
                                                  $
                                                  31,135,970
                                                  
                                                  
                                                  $
                                                  20,520,391Basic
      and Diluted Earnings per Common Share
                                                  
                                                  $
                                                  0.49
                                                  
                                                  
                                                  $
                                                  0.82
                                                  
                                                  
                                                  $
                                                  0.59Net
      Income
                                                  
                                                  $
                                                  18,634,225
                                                  
                                                  
                                                  $
                                                  31,135,970
                                                  
                                                  
                                                  $
                                                  20,520,391Foreign
      currency translation adjustment
                                                  
                                                  
                                                  555,410
                                                  
                                                  
                                                  
                                                  12,261,597
                                                  
                                                  
                                                  
                                                  3,488,320Comprehensive
      Income
                                                  
                                                  $
                                                  19,189,635
                                                  
                                                  
                                                  $
                                                  43,397,567
                                                  
                                                  
                                                  $
                                                  24,008,711
 
 
 
 F-4
 
 SUTOR
TECHNOLOGY GROUP LIMITED AND SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY
 FOR
THE YEARS ENDED JUNE 30, 2007, 2008 AND 2009
 
 AccumulatedSeries
      A Voting Convertible
                                                  
                                                  
                                                  Series
      B Voting Convertible
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  Additional
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  Other
                                                  
                                                  
                                                  TotalPreferred
      Stock
                                                  
                                                  
                                                  Preferred
      Stock
                                                  
                                                  
                                                  Common
      Stock
                                                  
                                                  
                                                  Paid
      in
                                                  
                                                  
                                                  Statutory
                                                  
                                                  
                                                  Retained
                                                  
                                                  
                                                  Comprehensive
                                                  
                                                  
                                                  Stockholders'Shares
                                                  
                                                  
                                                  Amount
                                                  
                                                  
                                                  Shares
                                                  
                                                  
                                                  Amount
                                                  
                                                  
                                                  Shares
                                                  
                                                  
                                                  Amount
                                                  
                                                  
                                                  Capital
                                                  
                                                  
                                                  Reserves
                                                  
                                                  
                                                  Earnings
                                                  
                                                  
                                                  Income
      (Loss)
                                                  
                                                  
                                                  EquityBalance,
      June 30, 2006
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  $
                                                  -
                                                  
                                                  
                                                  
                                                  304,182.73
                                                  
                                                  
                                                  $
                                                  24,586,097
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  $
                                                  -
                                                  
                                                  
                                                  $
                                                  -
                                                  
                                                  
                                                  $
                                                  5,664,889
                                                  
                                                  
                                                  $
                                                  21,038,720
                                                  
                                                  
                                                  $
                                                  1,431,650
                                                  
                                                  
                                                  $
                                                  52,721,356Issuance
      for cash, July
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  18,578.48
                                                  
                                                  
                                                  
                                                  1,500,000
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  1,500,000Issuance
      for cash, November
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  619.29
                                                  
                                                  
                                                  
                                                  21,059,950
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  21,059,950Capital
      distributions
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  (21,036,767
                                                  )
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  (21,036,767
                                                  )Issuance
      for cash, February
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  39,473.56
                                                  
                                                  
                                                  
                                                  10,570,762
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  10,570,762Issuance
      to acquire BronzeMarketing,
      Inc.
                                                  
                                                  
                                                  135,000
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  150,000
                                                  
                                                  
                                                  
                                                  150
                                                  
                                                  
                                                  
                                                  (150
                                                  )
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -Issuance
      for services
                                                  
                                                  
                                                  20,122
                                                  
                                                  
                                                  
                                                  528,077
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  528,077Conversion
      of Series A PreferredStock
      into common stock
                                                  
                                                  
                                                  (155,122
                                                  )
                                                  
                                                  
                                                  (528,077
                                                  )
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  1,520,196
                                                  
                                                  
                                                  
                                                  1,520
                                                  
                                                  
                                                  
                                                  526,557
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -Conversion
      of Series B PreferredStock
      into common stock
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  (362,854.06
                                                  )
                                                  
                                                  
                                                  (36,680,042
                                                  )
                                                  
                                                  
                                                  36,285,406
                                                  
                                                  
                                                  
                                                  36,285
                                                  
                                                  
                                                  
                                                  36,643,757
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -Net
      income for the year
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  2,083,380
                                                  
                                                  
                                                  
                                                  18,437,011
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  20,520,391Foreign
      currency translationadjustment
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  3,488,320
                                                  
                                                  
                                                  
                                                  3,488,320Balance,
      June 30, 2007
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  37,955,602
                                                  
                                                  
                                                  
                                                  37,955
                                                  
                                                  
                                                  
                                                  37,170,164
                                                  
                                                  
                                                  
                                                  7,748,269
                                                  
                                                  
                                                  
                                                  39,475,731
                                                  
                                                  
                                                  
                                                  4,919,970
                                                  
                                                  
                                                  
                                                  89,352,089Net
      income for the year
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  4,838,726
                                                  
                                                  
                                                  
                                                  26,297,244
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  31,135,970Foreign
      currency translationadjustment
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  12,261,597
                                                  
                                                  
                                                  
                                                  12,261,597Balance,
      June 30, 2008
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  37,955,602
                                                  
                                                  
                                                  
                                                  37,955
                                                  
                                                  
                                                  
                                                  37,170,164
                                                  
                                                  
                                                  
                                                  12,586,995
                                                  
                                                  
                                                  
                                                  65,772,975
                                                  
                                                  
                                                  
                                                  17,181,567
                                                  
                                                  
                                                  
                                                  132,749,656Net
      income for the year
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  18,634,225
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  18,634,225Foreign
      currency translationadjustment
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  555,410
                                                  
                                                  
                                                  
                                                  555,410Balance,
      June 30, 2009
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  $
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  $
                                                  -
                                                  
                                                  
                                                  
                                                  37,955,602
                                                  
                                                  
                                                  $
                                                  37,955
                                                  
                                                  
                                                  $
                                                  37,170,164
                                                  
                                                  
                                                  $
                                                  12,586,995
                                                  
                                                  
                                                  $
                                                  84,407,200
                                                  
                                                  
                                                  $
                                                  17,736,977
                                                  
                                                  
                                                  $
                                                  151,939,291
    F-5
  SUTOR
TECHNOLOGY GROUP LIMITED AND SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 
 For
      the Years Ended June 30,2009
                                        
                                        
                                        2008
                                        
                                        
                                        2007Cash
      Flows from Operating Activities:Net
      income
                                        
                                        $
                                        18,634,225
                                        
                                        
                                        $
                                        31,135,970
                                        
                                        
                                        $
                                        20,520,391Adjustments
      to reconcile net income to net cash provided by(used in) operating activitiesDepreciation
      and amortization
                                        
                                        
                                        5,746,392
                                        
                                        
                                        
                                        4,384,418
                                        
                                        
                                        
                                        2,708,805Minority
      interest in loss of consolidated subsidiary
                                        
                                        
                                        -
                                        
                                        
                                        
                                        1,885
                                        
                                        
                                        
                                        (3,395
                                        )Deferred
      income taxes
                                        
                                        
                                        23,994
                                        
                                        
                                        
                                        (272,375
                                        )
                                        
                                        
                                        -Stock
      based compensation
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        528,077Gain
      on sale of assets
                                        
                                        
                                        (161,458
                                        )
                                        
                                        
                                        (2,844
                                        )
                                        
                                        
                                        -Changes
      in current assets and liabilities:Trade
      accounts receivable, net
                                        
                                        
                                        (2,111,269
                                        )
                                        
                                        
                                        9,537,171
                                        
                                        
                                        
                                        (13,596,643
                                        )Other
      receivables, net
                                        
                                        
                                        (226,140
                                        )
                                        
                                        
                                        (48,258
                                        )
                                        
                                        
                                        (41,539
                                        )Advances
      to suppliers
                                        
                                        
                                        4,139,480
                                        
                                        
                                        
                                        7,869,743
                                        
                                        
                                        
                                        (20,747,998
                                        )Inventories
                                        
                                        
                                        12,959,033
                                        
                                        
                                        
                                        (24,623,639
                                        )
                                        
                                        
                                        (9,075,799
                                        )Accounts
      payable
                                        
                                        
                                        6,202,723
                                        
                                        
                                        
                                        1,562,872
                                        
                                        
                                        
                                        395,630Advances
      from customers
                                        
                                        
                                        906,806
                                        
                                        
                                        
                                        7,102,064
                                        
                                        
                                        
                                        490,208Other
      payables and accrued expenses
                                        
                                        
                                        (24,798
                                        )
                                        
                                        
                                        257,455
                                        
                                        
                                        
                                        802,466Advances
      to suppliers - related parties
                                        
                                        
                                        (18,057,041
                                        )
                                        
                                        
                                        (71,873,877
                                        )
                                        
                                        
                                        (10,536,690
                                        )Net
      Cash Provided by (Used in) Operating Activities
                                        
                                        
                                        28,031,947
                                        
                                        
                                        
                                        (34,969,415
                                        )
                                        
                                        
                                        (28,556,487
                                        )Cash
      Flows from Investing Activities:Changes
      in notes receivable
                                        
                                        
                                        99,296
                                        
                                        
                                        
                                        89,430
                                        
                                        
                                        
                                        (126,402
                                        )Purchase
      of property and equipment, net of valueadded tax refunds received
                                        
                                        
                                        (16,473,995
                                        )
                                        
                                        
                                        (10,872,302
                                        )
                                        
                                        
                                        (8,850,305
                                        )Proceeds
      from sale of assets
                                        
                                        
                                        783,033
                                        
                                        
                                        
                                        10,369
                                        
                                        
                                        
                                        -Purchase
      of land use rights
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (198,301
                                        )Net
      change in restricted cash
                                        
                                        
                                        7,911,082
                                        
                                        
                                        
                                        (26,998,292
                                        )
                                        
                                        
                                        5,607,772Net
      Cash Used in Investing Activities
                                        
                                        
                                        (7,680,584
                                        )
                                        
                                        
                                        (37,770,795
                                        )
                                        
                                        
                                        (3,567,236
                                        )Cash
      Flows from Financing Activities:Proceeds
      from issuance of notes payable
                                        
                                        
                                        186,704,193
                                        
                                        
                                        
                                        160,238,315
                                        
                                        
                                        
                                        136,558,731Payments
      on notes payable
                                        
                                        
                                        (209,223,167
                                        )
                                        
                                        
                                        (91,833,084
                                        )
                                        
                                        
                                        (112,004,593
                                        )Proceeds
      from issuance of Series B preferred stock
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        33,130,712Proceeds
      from issuance of notes payable - related parties
                                        
                                        
                                        3,354,441
                                        
                                        
                                        
                                        8,411,508
                                        
                                        
                                        
                                        -Payments
      on notes payable - related parties
                                        
                                        
                                        (2,520,812
                                        )
                                        
                                        
                                        (2,244,164
                                        )
                                        
                                        
                                        -Payments
      on long-term debt
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (2,554,598
                                        )Capital
      distribution to shareholders
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (21,036,767
                                        )Net
      Cash Provided by (Used in) Financing Activities
                                        
                                        
                                        (21,685,345
                                        )
                                        
                                        
                                        74,572,575
                                        
                                        
                                        
                                        34,093,485Effect
      of Exchange Rate Changes on Cash
                                        
                                        
                                        38,909
                                        
                                        
                                        
                                        1,140,794
                                        
                                        
                                        
                                        328,687Net
      Change in Cash
                                        
                                        
                                        (1,295,073
                                        )
                                        
                                        
                                        2,973,159
                                        
                                        
                                        
                                        2,298,449Cash
      and Cash Equivalents at Beginning of Year
                                        
                                        
                                        11,806,101
                                        
                                        
                                        
                                        8,832,942
                                        
                                        
                                        
                                        6,534,493Cash
      and Cash Equivalents at End of Year
                                        
                                        $
                                        10,511,028
                                        
                                        
                                        $
                                        11,806,101
                                        
                                        
                                        $
                                        8,832,942Supplemental
      Cash Flow InformationCash
      paid during the period for interest
                                        
                                        $
                                        4,204,006
                                        
                                        
                                        $
                                        5,952,002
                                        
                                        
                                        $
                                        2,258,425Cash
      paid during the period for taxes
                                        
                                        $
                                        3,061,596
                                        
                                        
                                        $
                                        3,746,316
                                        
                                        
                                        $
                                        2,436,656
    F-6
  SUTOR
TECHNOLOGY GROUP LIMITED AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 NOTE
1 - ORGANIZATION AND OPERATIONS
 
 Organization and
Basis of Presentation - On January 17, 2003, Changshu Huaye Steel Strip
Co., Ltd. (“Changshu Huaye”) was organized under the laws of the People’s
Republic of China (the “PRC”) and on August 28, 2003, Jiangsu Cold-Rolled
Technology Co., Ltd. (“Jiangsu Cold-Rolled”) was organized under the laws of the
PRC. Both were organized by Huaye (H.K.) International Group Company Limited
(“Hong Kong Huaye”) and Shanghai Huaye Iron & Steel Co., Ltd., (“Shanghai
Huaye”). Hong Kong Huaye and Shanghai Huaye are each owned 41% and 59%,
respectively, by two individuals (the “Principal Shareholders”).
 
 On August
15, 2006, the Principal Shareholders formed Sutor Steel Technology Co., Ltd.
(“Sutor Steel”) under the laws of the British Virgin Islands and agreed to
purchase and were issued 50,000 shares of Sutor Steel’s common stock (before the
recapitalization described below) for $50,000. However, by November 13, 2006,
the Principal Shareholders had made capital contributions of cash in the amount
of $21,059,950 instead of the $50,000 previously agreed upon. By November 13,
2006, Sutor Steel had received a business license from the government of the PRC
permitting the acquisition of Changshu Huaye and Jiangsu Cold-Rolled, and on
November 13, 2006, Sutor Steel acquired all of the outstanding ownership
interest in Changshu Huaye and Jiangsu Cold-Rolled from Shanghai Huaye and Hong
Kong Huaye in exchange for cash payments of $21,036,767.
  The
acquisition of Changshu Huaye and Jiangsu Cold-Rolled by Sutor Steel was the
transfer of net assets in exchange for common stock between entities under
common control and the assets and liabilities transferred remained at their
historical carrying amounts at the date of transfer. The reorganization of
Changshu Huaye and Jiangsu Cold-Rolled into Sutor Steel was accounted for as a
recapitalization of Changshu Huaye and Jiangsu Cold-Rolled in a manner similar
to a stock split and the accompanying consolidated financial statements have
been restated to reflect the 50,000 shares of common stock issued to the
Principal Shareholders as outstanding for all periods presented (before the
recapitalization described below). The $21,059,950 received from the Principal
Shareholders and the $21,036,767 cash payments made to Shanghai Huaye and Hong
Kong Huaye were recognized as capital contributions and capital distributions,
respectively, on the date they occurred.
 
 On
November 7, 2006, Bronze Marketing, Inc., a Nevada corporation, (“Bronze”)
entered into an assignment agreement with BTHC III, Inc., an unrelated
third-party, Sutor Steel and Sutor Steel’s shareholders (the Principal
Shareholders), whereby Bronze assumed all rights and obligations of BTHC III,
Inc. pursuant to a Share Exchange Agreement dated September 7, 2006. On February
1, 2007, the Share Exchange Agreement, as amended, (the “Exchange Agreement”)
was consummated and Bronze acquired 100% of the equity interest of Sutor Steel
from the Principal Shareholders in exchange for the issuance of 323,380.50
shares of Series B voting convertible preferred stock (the “Series B Preferred
Stock”) and the Principal Shareholders received a majority of the voting equity
interests of Bronze. The reorganization of Sutor Steel into Bronze under the
Exchange Agreement was accounted for as the recapitalization of Sutor Steel at
historical cost. The accompanying consolidated financial statements have been
restated on a retroactive basis to reflect the 323,380.50 shares of Series B
Preferred Stock issued to the Principal Shareholders as outstanding for all
periods presented.
 
 On
January 31, 2007, a majority of the Bronze shareholders approved an amendment to
the Bronze articles of incorporation to change its name to Sutor Technology
Group Limited and to increase the authorized common stock from 100,000,000
shares to 500,000,000 shares. The amendment to the articles of incorporation
became effective on March 6, 2007.
  F-7
  SUTOR
TECHNOLOGY GROUP LIMITED AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 References
herein to the “Company” or “Sutor Steel” refer both to Sutor Steel Technology
Co., Ltd., a private company, and its subsidiaries for the periods prior to
February 1, 2007, and to Sutor Technology Group Limited (formerly Bronze
Marketing, Inc.), a public company, and its subsidiaries for the periods
following February 1, 2007.  References to “Bronze” refer solely to the
corporate entity for the periods prior to February 1, 2007.
 
 Nature of
Operations - The operations of Changshu Huaye are located in the PRC.
Changshu Huaye manufactures hot-dip galvanized steel (“HDG Steel”) and
pre-painted galvanized steel (“PPGI”). In addition, Changshu Huaye owned a 90%
interest in a consolidated subsidiary, Changshu Dongbang Sewage Treatment Co.,
Ltd. which is also located in the PRC. This subsidiary was sold during 2009. For
the year ended June 30, 2009, approximately 93% of Changshu Huaye revenue is
derived from sales within the PRC of steel products. A significant portion of
the purchases and revenues of Changshu Huaye consist of transactions between
Shanghai Huaye, which is owned by the Principal Stockholders, and its
subsidiaries.
 
 The
operations of Jiangsu Cold-Rolled are also located in the PRC. Jiangsu
Cold-Rolled operates several production lines that refines products such as
cold-rolled steel and acid pickled steel through the use of various
high-technology machines. For the year ended June 30, 2009 all of Jiangsu
Cold-Rolled revenue is derived from sales of steel products within the
PRC.
 
 NOTE
2 - SIGNIFICANT ACCOUNTING POLICIES
 
 Functional
Currency and Translating Financial Statements - The accompanying
consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America. The
functional currency of the Company is the Chinese Yuan Renminbi (“RMB”);
however, the accompanying consolidated financial statements have been expressed
in United States Dollars (“USD”). The accompanying consolidated balance sheets
have been translated into USD at the exchange rates prevailing at each balance
sheet date. The accompanying consolidated statements of operations and cash
flows have been translated using the weighted-average exchange rates prevailing
during the periods of each statement. Transactions in the Company’s equity
securities have been recorded at the exchange rate existing at the time of the
transaction.
 
 Principles of
Consolidation - The operations of Changshu Huaye and Jiangsu Cold-Rolled
have been included in the accompanying consolidated financial statements for all
periods presented. The accounts and transactions of Sutor Steel Technology Co.,
Ltd. have been included from its formation on August 15, 2006. The accounts and
transactions of Sutor Technology Group Limited have been included from February
1, 2007. All significant intercompany accounts and transactions have been
eliminated in consolidation.
 
 Accounting
Estimates - The preparation of financial statements in conformity with
Generally Accepted Accounting Principals in the United States requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and the disclosures of contingent assets and liabilities
at the date of the financial statements, and the reported amounts of revenues
and expenses during the reporting periods. Actual results could differ from
those estimates.
  F-8
  SUTOR
TECHNOLOGY GROUP LIMITED AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 Cash and Cash
Equivalents - Cash and cash equivalents include interest bearing and
non-interest bearing bank deposits, money market accounts, and short-term
certificates of deposit with original maturities of three months or
less.
 
 Restricted Cash
- The Company has entered into agreements to pay suppliers, which require
the Company to maintain cash balances as security for notes payable to the
suppliers. These secured cash balances are presented in the consolidated balance
sheets as restricted cash.
 
 Fair Values of
Financial Instruments  - The carrying amounts
reported in the consolidated balance sheets for trade accounts receivable, other
receivables, advances to suppliers, notes receivable, receivable from related
parties, accounts payable, short-term notes payable, other payables and accrued
expenses, advances from customers, and amounts due to related parties
approximate fair value because of the immediate or short-term maturity of these
financial instruments.
 
 Credit
Risk - The carrying amounts of trade accounts receivable and other
non-trade receivables included in the consolidated balance sheets represent the
Company’s exposure to credit risk in relation to its financial assets. The
Company performs ongoing credit evaluations of each customer’s financial
condition. The Company maintains allowances for doubtful accounts and such
allowances in the aggregate did not exceeded management’s
estimations.
  Trade Accounts,
Other Receivables and Allowance for Doubtful Accounts - Trade accounts
receivables and other receivables are carried at original invoiced amounts less
an allowance for doubtful accounts. Other receivables consist of amounts
advanced to suppliers, but subsequently not used, resulting in a
receivable.
 
 Inventory
- Inventory is valued at the lower of cost or market, with cost computed on a
first-in-first-out basis.
 
 Valuation of
Long-lived Assets - The carrying values of the Company's long-lived
assets are reviewed for impairment whenever events or changes in circumstances
indicate that they may not be recoverable. When such an event occurs, the
Company projects the undiscounted cash flows to be generated from the use of the
asset and its eventual disposition over the remaining life of the asset. If
projections were to indicate that the carrying value of the long-lived asset
will not be recovered, the carrying value is reduced by the estimated excess of
the carrying value over the projected discounted cash flows.
 
 Property and
Equipment - Property and equipment are stated at cost less accumulated
depreciation. Depreciation is provided on a straight line basis over the
estimated useful lives of the assets. Maintenance and repairs are charged to
expense as incurred and major improvements are capitalized. Gains or losses on
sales, trade-ins, or retirements are recognized in income. Interest is
capitalized on significant construction projects.
 
 Intangible
Assets - Acquisition costs of land use rights are capitalized and
amortized using the straight-line method over their estimated useful
lives.
 
 Advances to
Suppliers and from Customers - The Company, as is common practice in the
PRC, will often make advance payments to its suppliers for materials, or receive
advance payments from its customers. The Company had net advances to suppliers
of $23,955,493 and $28,035,815 at June 30, 2009 and 2008, respectively. The
Company also had advances from its customers in the amount of $17,845,426 and
$16,871,618 at June 30, 2009 and 2008, respectively.
  F-9
  SUTOR
TECHNOLOGY GROUP LIMITED AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 Revenue
Recognition - The Company recognizes revenues from the sale of products
when they are realized and earned. The Company considers revenue realized or
realizable and earned when (1) it has persuasive evidence of an arrangement, (2)
delivery has occurred, (3) the sales price is fixed or determinable, and (4)
collectibility is reasonably assured. Revenues are not recognized until products
have been shipped to the client, risk of loss has transferred to the client and
client acceptance has been obtained, client acceptance provisions have lapsed,
or the Company has objective evidence that the criteria specified in client
acceptance provisions have been satisfied.
 
 As
discussed in Note 7, the Company sells product to affiliates, who in turn sell
the product to various other third party customers. The price, terms and
conditions on the sales to affiliates are the same as those to third parties.
Revenue is considered realized or realizable and earned when the affiliates ship
the product to third party customers. A fee of 0.5% of the sale is paid to the
affiliate for handling the product. These handling fees have been classified as
selling expenses in the statement of operations.
 
 Cost of
Revenue - Cost of products sold includes wages, materials, handling
charges, and other expenses associated with the manufacture and delivery of
product.
  Shipping and
Handling Costs  - Shipping and
handling costs are billed to customers and are recorded as revenue and the
associated costs are included in cost of revenues.
 
 Retirement
Benefit Plans  - Full time employees
of subsidiaries of the Company participate in a government mandated
multi-employer defined contribution plan pursuant to which certain pension
benefits, medical care, employee housing fund, and other welfare benefits are
provided to employees. Chinese labor regulations require that the subsidiaries
of the company make contributions to the government for these benefits based on
a certain percentages of employees’ salaries. The Company has no legal
obligation for the benefits beyond the contributions made. The total amounts for
such employee benefits, which were expensed as incurred, were $327,362, $492,804
and $315,821 for the years ended June 30, 2009, 2008 and 2007,
respectively.
 
 Share Based
Payments –The Company accounts for share-based compensation expense in
accordance with Statement of Financial Accounting Standards
(SFAS) No. 123(R), “Share-Based Payment” (SFAS 123R). Under SFAS 123R,
share-based compensation expense reflects the fair value of share-based awards
measured at the grant date, is recognized over the relevant service period, and
is adjusted each period for anticipated forfeitures. We estimate the fair value
of each share-based award on the date of grant using the Black-Scholes option
valuation model. The Black-Scholes option valuation model incorporates
assumptions as to stock price volatility, the expected life of options, a
risk-free interest rate and dividend yield.  A total of 2,000,000
shares of common stock were authorized for issuance under the
plan.  The plan was approved by the board of directors on April 15,
2009 and approved by the stockholders on June 16, 2009.
 
 Basic and Diluted
Earnings per Common Share  - The computation of
basic earnings per common share is based on income divided by the
weighted-average number of common shares outstanding after giving effect of
using the if-converted method for qualified participating securities during each
period presented where the qualified participating securities are dilutive.
Diluted earnings per common share are calculated by dividing income assuming
dilution by the weighted-average number of common shares and potential dilutive
shares of common stock issuable upon conversion of non-participating shares. The
Company does not have any non-participating potentially dilutive securities. The
calculations of basic and diluted income per share were as
follows:
  F-10
  SUTOR
TECHNOLOGY GROUP LIMITED AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 For the Years Ended June 30,2009
                                                
                                                
                                                2008
                                                
                                                
                                                2007Net
      income
                                                
                                                $
                                                18,634,225
                                                
                                                
                                                $
                                                31,135,970
                                                
                                                
                                                $
                                                20,520,391Weighted-average
      common shares outstanding
                                                
                                                
                                                37,955,602
                                                
                                                
                                                
                                                37,955,602
                                                
                                                
                                                
                                                4,181,750Effect
      of participating convertible Series B Preferred Stock
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                30,418,273Weighted-Average
      Basic and Dilutive Common Shares Outstanding
                                                
                                                
                                                37,955,602
                                                
                                                
                                                
                                                37,955,602
                                                
                                                
                                                
                                                34,600,023Basic
      and Diluted Earnings per Common Share
                                                
                                                $
                                                0.49
                                                
                                                
                                                $
                                                0.82
                                                
                                                
                                                $
                                                0.59
 
 Accumulated Other
Comprehensive Income - Accumulated other comprehensive income presented
in the accompanying consolidated financial statements consists of foreign
currency translation adjustments.
 
 Recently Enacted
Accounting Standards - In September 2006, the Financial Accounting
Standards Board (FASB) issued SFAS No. 157, Fair Value Measurements,
which defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles and expands disclosures about fair
value measurements. SFAS No. 157 was effective for fiscal years beginning
after November 15, 2007, and interim periods within those fiscal years. In
February 2008, the FASB issued FASB Staff Position (FSP FIN) No. 157-2 which
extended the effective date for certain nonfinancial assets and nonfinancial
liabilities to fiscal years beginning after November 15, 2008.  The
adoption of the portions of SFAS No. 157 that were not postponed by (FSP FIN)
No. 157-2 did not have an effect on our consolidated financial statements. The
Company does not expect the adoption of the postponed portions of SFAS
No. 157 to have a material impact on our consolidated financial
statements.
 
 In
December 2007, the FASB issued SFAS No. 141(R), Business Combinations, and
SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements. SFAS No. 141(R) requires an
acquirer to measure the identifiable assets acquired, the liabilities assumed
and any non-controlling interest in the acquiree at their fair values on the
acquisition date, with goodwill being the excess value over the net identifiable
assets acquired. SFAS No. 160 clarifies that a non-controlling interest in
a subsidiary should be reported as equity in the consolidated financial
statements, consolidated net income shall be adjusted to include the net income
attributed to the non-controlling interest and consolidated comprehensive income
shall be adjusted to include the comprehensive income attributed to the
non-controlling interest. The calculation of earnings per share will continue to
be based on income amounts attributable to the parent. SFAS
No. 141(R) and SFAS No. 160 are effective for financial
statements issued for fiscal years beginning after December 15, 2008. Early
adoption is prohibited. SFAS No. 141(R) and SFAS No. 160 are not expected to
have a material impact on our results of operations or financial
position.
 
 In
December 2007, the FASB ratified Emerging Issues Task Force (EITF)
Issue No. 07-1, Accounting for Collaborative
Arrangements(EITF 07-1). EITF 07-1 defines collaborative
arrangements and establishes reporting requirements for transactions between
participants in a collaborative arrangement and between participants in the
arrangement and third parties. EITF 07-1 also establishes the appropriate income
statement presentation and classification for joint operating activities and
payments between participants, as well as the sufficiency of the disclosures
related to these arrangements. EITF 07-1 is effective for fiscal years
beginning after December 15, 2008. The Company does not expect the adoption
of EITF 07-1 to have a material impact on our consolidated financial
statements.
  F-11
  SUTOR
TECHNOLOGY GROUP LIMITED AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 In April
2008, the FASB issued FSP FAS 142-3, Determination of the Useful Life of
Intangible Assets(FSB FAS 142-3). FSP FAS 142-3 amends the
factors that should be considered in developing renewal or extension assumptions
used to determine the useful life of a recognized intangible asset under SFAS
No. 142, Goodwill and Other
Intangible Assets. The intent of this FSP is to improve the consistency
between the useful life of a recognized intangible asset under FAS 142 and the
period of expected cash flows used to measure the fair value of the asset under
SFAS No. 141(R) and other generally accepted accounting principles. FSP FAS
142-3 is effective for fiscal years, and interim periods within those fiscal
years, beginning after December 15, 2008. The Company does not expect the
adoption of FSP FAS 142-3 to have a material impact on our consolidated
financial statements.
 
 In May
2008, the FASB issued SFAS 162, The Hierarchy of Generally Accepted
Accounting Principles.  SFAS No. 162 identifies the sources of
accounting principles and provides entities with a framework for selecting the
principles used in preparation of financial statements that are presented in
conformity with GAAP.  The current GAAP hierarchy has been criticized
because it is directed to the auditor rather than the entity, it is complex, and
it ranks FASB Statements of Financial Accounting Concepts, which are subject to
the same level of due process as FASB Statements of Financial Accounting
Standards, below industry practices that are widely recognized as generally
accepted but that are not subject to due process.  The Board believes
the GAAP hierarchy should be directed to entities because it is the entity (not
its auditors) that is responsible for selecting accounting principles for
financial statements that are presented in conformity with GAAP.  The
adoption of FASB 162 is not expected to have a material impact on the Company’s
financial statements.
 
 In
September 2008, the FASB issued FSP FAS 133-1 and FIN 45-4, Disclosures about Credit Derivatives
and Certain Guarantees: An Amendment of FASB Statement No. 133 and FASB
Interpretation No. 45; and Clarification of the Effective Date of FASB Statement
No. 161 (FSP FAS 133-1 and FIN 45-4). FSP FAS 133-1 and FIN 45-4 amends
and enhances disclosure requirements for sellers of credit derivatives and
financial guarantees. It also clarifies that the disclosure requirements of SFAS
No. 161 are effective for quarterly periods beginning after November 15, 2008,
and fiscal years that include those periods. FSP FAS 133-1 and FIN 45-4 is
effective for fiscal years ending after November 15, 2008. The adoption of FSP
FAS 133-1 and FIN 45-4 has not had a material impact on the Company’s financial
statements.
 
 In
December 2008, the FASB issued FASB Staff Position FAS 140-4 and FIN 46(R)-8,
Disclosures by Public Entities
(Enterprises) about Transfers of Financial Assets and Interests in Variable
Interest Entities ("FSP FAS 140-4 and FIN 46(R)-8"). FSP FAS 140-4 and
FIN 46(R)-8 amends SFAS 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities and FIN
46(R), FASB Interpretation No.
46 (R), Consolidation of Variable Interest Entities, an interpretation of
Accounting Research Bulletin No. 51, to require public entities to
provide additional disclosures about transfers of financial assets and their
involvement with variable interest entities. FSP FAS 140-4 and FIN 46(R)-8 is
effective for fiscal years ending after December 15, 2008. The adoption of FSP
FAS 140-4 and FIN 46(R)-8 has not had a material impact on the Company’s
financial statements.
  F-12
  SUTOR
TECHNOLOGY GROUP LIMITED AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 In April
2009, the FASB issued FSP FAS 107-1 and APB 28-1 Interim Disclosures about Fair Value
of Financial Instruments. FSP FAS 107-1 and APB 28-1 relate to fair value
disclosures for any financial instruments that are not currently reflected on
the balance sheet of companies at fair value. Prior to issuing this FSP, fair
values for these assets and liabilities were only disclosed once a year. The FSP
now requires these disclosures on a quarterly basis, providing qualitative and
quantitative information about fair value estimates for all those financial
instruments not measured on the balance sheet at fair value.  FSP FAS
107-1 and APB 28-1 is effective for interim reporting periods ending after June
15, 2009, with early adoption permitted for periods ending after March 15,
2009.  The adoption of FSP FAS 107-1 and APB 28-1 is not expected to
have a material impact on the Company’s financial statements.
 
 In May
2009, the FASB issued Statement of Financial Accounting Standards No. 165,
“Subsequent Events”
(SFAS 165). Under SFAS 165, requires companies to evaluate events and
transactions that occur after the balance sheet date but before the date the
financial statements are issued, or available to be issued in the case of
non-public entities. SFAS 165 requires entities to recognize in the
financial statements the effect of all events or transactions that provide
additional evidence of conditions that existed at the balance sheet date,
including the estimates inherent in the financial preparation process. Entities
shall not recognize the impact of events or transactions that provide evidence
about conditions that did not exist at the balance sheet date but arose after
that date. SFAS 165, also requires entities to disclose the date through
which subsequent events have been evaluated. SFAS 165 is effective for
interim and annual reporting periods ending after June 15, 2009. The
Company adopted the provisions of SFAS 165 for the year ended June 30,
2009, as required, the adoption did not have a material impact on the Company’s
financial statements.  The Company evaluated events subsequent to the
balance sheet date through September 23, 2009.
 
 On
January 1, 2009 the Company adopted EITF Issue No. 08-5, Issuer’s Accounting for Liabilities
Measured at Fair Value With a Third-Party Credit Enhancement (EITF 08-5).
EITF 08-5 provides guidance for measuring liabilities issued with an attached
third-party credit enhancement (such as a guarantee). It clarifies that the
issuer of a liability with a third-party credit enhancement (such as a
guarantee) should not include the effect of the credit enhancement in the fair
value measurement of the liability. There was no effect on the Company’s
consolidated financial statements upon adoption of EITF 08-5.
 
 In June
2009, the FASB issued SFAS No. 168, The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting
Principles or SFAS No. 168. SFAS No. 168 will become the single
source of authoritative nongovernmental U.S. GAAP, superseding existing FASB,
American Institute of Certified Public Accountants (AICPA), Emerging Issues Task
Force (EITF), and related accounting literature. SFAS No. 168 reorganizes the
thousands of GAAP pronouncements into roughly 90 accounting topics and displays
them using a consistent structure. Also included is relevant SEC guidance
organized using the same topical structure in separate sections. SFAS No. 168
will be effective for financial statements issued for reporting periods ending
after September 15, 2009. This will have an impact on the Company’s financial
disclosures since all future references to authoritative accounting literature
will be references in accordance with SFAS No. 168.
 
 NOTE
3 – INVENTORY
 
 Inventory
consisted of the following:
 
 June 30,2009
                    
                    
                    2008Raw
      materials
                    
                    $
                    18,266,080
                    
                    
                    $
                    32,840,857Finished
      goods
                    
                    
                    20,282,338
                    
                    
                    
                    18,474,664Total
      Inventory
                    
                    $
                    38,548,418
                    
                    
                    $
                    51,315,521
  F-13
  SUTOR
TECHNOLOGY GROUP LIMITED AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 NOTE
4 - PROPERTY AND EQUIPMENT
 
 Property
and equipment includes value-added tax paid. Foreign invested enterprises and
foreign enterprises doing business in the PRC are generally able to receive a
refund of the value-added tax paid on property and equipment purchased and
manufactured within the PRC. The Company recognizes refunds of value-added tax
as a reduction of property and equipment when the refunds are collected. The
refunds are a long-term asset as it can take up to three years to collect them
from the PRC government. Investment tax credits are realized upon collection
from the government. For further discussion regarding the investment tax credit,
see Note 8.
 
 Property
and equipment consisted of the following:
 
 June 30,2009
                          
                          
                          2008Buildings
      and plant
                          
                          $
                          26,121,807
                          
                          
                          $
                          17,525,800Machinery
                          
                          
                          57,126,473
                          
                          
                          
                          40,119,643Office
      and other equipment
                          
                          
                          878,692
                          
                          
                          
                          789,968Vehicles
                          
                          
                          217,961
                          
                          
                          
                          217,883Construction
      in process
                          
                          
                          2,905,462
                          
                          
                          
                          13,102,763Total
                          
                          
                          87,250,395
                          
                          
                          
                          71,756,057Less
      accumulated depreciation
                          
                          
                          (17,484,268
                          )
                          
                          
                          (12,019,445
                          )Net
      property, plant and equipment
                          
                          $
                          69,766,127
                          
                          
                          $
                          59,736,612
 
 Depreciation
is computed on a straight-line basis over the estimated useful lives of the
assets, as follows:
 
 LifeBuildings
      and plant
                          20
      yearsMachine
                          10
      yearsOffice
      and other equipment
                          5
      yearsVehicles
                          5
      years
 
 Depreciation
expense for the years ended June 30, 2009, 2008 and 2007 was $5,677,843,
$4,311,708 and $2,653,422, respectively.
 
 NOTE
5 - INTANGIBLE ASSETS
 
 The
Company’s intangible assets consist of several land use rights, which are
amortized over the 50-year life of those rights. Amortization expense for the
years ended June 30, 2009, 2008, and 2007 was $68,549, $72,710 and $55,383,
respectively. Intangible information by segment is presented below:
 
 Steel
      Coating
                        
                        
                        Cold
      RolledAs of June 30, 2009
                        
                        and Plating
                        
                        
                        Steel Production
                        
                        
                        TotalGross
      Carrying Amount
                        
                        $
                        2,158,704
                        
                        
                        $
                        1,233,924
                        
                        
                        $
                        3,392,628Accumulated
      Amortization
                        
                        
                        (239,439
                        )
                        
                        
                        (105,691
                        )
                        
                        
                        (345,130
                        )$
                        1,919,265
                        
                        
                        $
                        1,128,233
                        
                        
                        $
                        3,047,498
 
 Steel
      Coating
                      
                      
                      Cold
      RolledAs of June 30, 2008
                      
                      and Plating
                      
                      
                      Steel Production
                      
                      
                      TotalGross
      Carrying Amount
                      
                      $
                      2,150,222
                      
                      
                      $
                      1,374,597
                      
                      
                      $
                      3,524,819Accumulated
      Amortization
                      
                      
                      (195,493
                      )
                      
                      
                      (90,395
                      )
                      
                      
                      (285,888
                      )$
                      1,954,729
                      
                      
                      $
                      1,284,202
                      
                      
                      $
                      3,238,931
  F-14
 
 SUTOR
TECHNOLOGY GROUP LIMITED AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
    Estimated Amortization
    ExpenseFor
      the year ending June 30, 2010
                              
                              $
                              67,819For
      the year ending June 30, 2011
                              
                              
                              67,819For
      the year ending June 30, 2012
                              
                              
                              67,819For
      the year ending June 30, 2013
                              
                              
                              67,819For
      the year ending June 30, 2014
                              
                              
                              67,819
 
 NOTE
6 - NOTES PAYABLE
 
 The
Company’s notes payable consist of short and long-term debt.  All non
related party short-term notes payable were due to banks. The following
schedules sets forth the Company’s notes payable and notes payable – related
party as of the dates presented:
 
 Non related party short-term notes were
comprised of the following:
 
 Maturity
                  
                  June
      30,
                  
                  
                  June
      30,Date
                  
                  2009
                  
                  
                  2008Short-term
      notes payable, no interest rate, secured by cash deposits,guaranteed
      by related parties
                  various
      dates
                  
                  $
                  24,105,891
                  
                  
                  $
                  65,455,921Note
      payable at 4.86% interest, secured by land use right
                  8/4/2009
                  
                  
                  1,899,252
                  
                  
                  
                  -Note
      payable at 4.86% interest, secured by property
                  8/6/2009
                  
                  
                  8,327,489
                  
                  
                  
                  -Note
      payable at 5.31% interest, guaranteed by related party
                  8/13/2009
                  
                  
                  1,753,156
                  
                  
                  
                  -Note
      payable at 5.37% interest, guaranteed by related party
                  12/28/2009
                  
                  
                  1,460,963
                  
                  
                  
                  -Note
      payable at 5.31% interest, guaranteed by related party
                  2/26/2010
                  
                  
                  2,921,926
                  
                  
                  
                  -Note
      payable at 5.31% interest, secured by land use right
                  4/13/2010
                  
                  
                  4,382,889
                  
                  
                  
                  -Note
      payable at 6.03% interest, guaranteed by related party
                  4/29/2010
                  
                  
                  2,921,926
                  
                  
                  
                  -Note
      payable at 6.03% interest, guaranteed by related party
                  5/27/2010
                  
                  
                  7,304,815
                  
                  
                  
                  -Note
      payable at 5.31% interest, guaranteed by related party
                  6/25/2010
                  
                  
                  2,921,926
                  
                  
                  
                  -Note
      payable at 4.86% interest, guaranteed by related party
                  various
      dates
                  
                  
                  46,312,530
                  
                  
                  
                  -Note
      payable at 6.84% interest
                  matured
                  
                  
                  -
                  
                  
                  
                  2,910,446Note
      payable at 7.52% interest
                  matured
                  
                  
                  -
                  
                  
                  
                  2,910,446Note
      payable at 6.57% interest
                  matured
                  
                  
                  -
                  
                  
                  
                  1,746,267Note
      payable at 6.57% interest
                  matured
                  
                  
                  -
                  
                  
                  
                  3,347,012Note
      payable at 6.57% interest
                  matured
                  
                  
                  -
                  
                  
                  
                  11,787,305Note
      payable at 8.22% interest
                  matured
                  
                  
                  -
                  
                  
                  
                  4,509,381Note
      payable at 6.90% interest
                  matured
                  
                  
                  -
                  
                  
                  
                  1,746,267Note
      payable at 6.57% interest
                  matured
                  
                  
                  -
                  
                  
                  
                  2,910,446Note
      payable at 6.57% interest
                  matured
                  
                  
                  -
                  
                  
                  
                  1,891,790Note
      payable at 6.57% interest
                  matured
                  
                  
                  -
                  
                  
                  
                  18,917,896Note
      payable at 6.90% interest
                  matured
                  
                  
                  -
                  
                  
                  
                  11,059,693Total
      Short-Term Notes Payable
                  
                  
                  $
                  104,312,763
                  
                  
                  $
                  129,192,870
 
 F-15
 
 SUTOR
TECHNOLOGY GROUP LIMITED AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 Notes due
to related parties were comprised of the following:
 
 Short-term
      note payable to related partyNote
      payable to Principal Shareholder, no interest rate,
    unsecured
                      On
      demand
                      
                      $
                      1,568,636
                      
                      
                      $
                      1,311,510Note
      payable to Principal Shareholder, no interest rate,
    unsecured
                      On
      demand
                      
                      
                      1,052,099
                      
                      
                      
                      -Note
      payable to Principal Shareholder, no interest rate,
    unsecured
                      On
      demand
                      
                      
                      79,997
                      
                      
                      
                      -Note
      payable to Principal Shareholder, no interest rate,
    unsecured
                      On
      demand
                      
                      
                      99,997
                      
                      
                      
                      -Note
      payable to related party, at 5.00%, unsecured
                      12/20/2009
                      
                      
                      7,099,998
                      
                      
                      
                      -Total
      short-term notes payable - related parties
                      
                      
                      $
                      9,900,727
                      
                      
                      $
                      1,311,510Long-term
      note payable to related party at 5.00% interest, unsecured
                      12/20/2009
                      
                      $
                      -
                      
                      
                      $
                      7,099,998Note
      payable to Principal Shareholder,  3.6% interest,
      unsecured
                      3/11/2012
                      
                      
                      99,998
                      
                      
                      $
                      -Note
      payable to Principal Shareholder,  5.0% interest,
      unsecured
                      4/29/2012
                      
                      
                      149,998
                      
                      
                      $
                      -Total
      long-term notes payable - related parties
                      
                      
                      $
                      249,996
                      
                      
                      $
                      7,099,998Long-term
      note payable at 6.00% interest, unsecured
                      11/20/2011
                      
                      
                      2,859,995
                      
                      
                      
                      -Total
      long-term notes payable
                      
                      
                      $
                      2,859,995
                      
                      
                      $
                      -
 
 The
Company has certain notes payable that indicate that they have a zero interest
rate.  The Company intends to repay these notes as they
mature.  Interest-free loans are common in China; therefore, the
Company does not impute interest on these loans.
 
 The
Company’s debt agreements contain debt covenants which require the Company to
maintain certain inventory levels. The Company was in compliance with these debt
covenants at June 30, 2009.
 
 NOTE
7 - RELATED PARTIES
 
 The
Company sells it products to and buys raw materials from various companies which
are owned or controlled by the Principal Shareholders. These other companies are
composed of 20 sister companies with which the Company conducts significant
transactions. Revenues related to these transactions are shown separately in the
accompanying consolidated statements of operations. For the years ended June 30,
2009, 2008, and 2007, costs of revenue include purchases from these related
parties of $166,119,456, $106,960,453 and $157,615,325,
respectively.
 
 The
amounts due to related parties are non-interest bearing and were incurred in the
normal course of business. Receivables from, advances to suppliers, sales to,
payables from advanced sales deposits, and payables from purchases from related
parties have been netted due to the right of offset. At June 30, 2009 and 2008,
the net amounts due from related parties were $95,810,109 and $76,118,544,
respectively. The amounts charged for products to the Company by the related
parties are under the same pricing, terms and conditions as those charged to
third parties, and are due upon receipt. It is not uncommon for the Company with
its related parties to accommodate an extension of 90 to 180 days. Amounts
receivable from related parties are also due upon delivery. Advances to
suppliers to related parties are relieved once the goods are
received.
 
 At June
30, 2009, the Company had unused letters of credit totaling $54,347,826 in the
form of banker’s acceptance notes that are held by related parties in connection
with purchases from related parties. The banker’s acceptance notes carry a 0%
interest rate, can be presented to the respective banks in 90 to 180 days from
the dates they were written, are secured by cash on deposit with the respective
banks and are guaranteed by related parties.
  F-16
  SUTOR
TECHNOLOGY GROUP LIMITED AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 On
December 20, 2007, Ms. Chen loaned the Company $7.1 million. The loan is for a
period of 24 months, carries an interest rate of 5% and is included in the
accompanying balance sheet at June 30, 2009 under the caption short term notes
payable – related parties.
 
 On
various dates from February 25, 2007 to June 30, 2009, Ms. Chen loaned the
Company a total of $5.3 million.  The Company during that same period
paid Ms. Chen $2.5 million.  The notes are due on demand and bear no
interest and are included in the accompanying balance sheet under the caption
short-term notes payable – related parties in the net amount of $2.8 million and
$1.3 million at June 30, 2009 and 2008, respectively.
 
 On
November 8, 2008, the Company entered into an agreement with the Principal
Shareholder for the lease of 1,200 square meters of property in the Dongbang
Industrial Park, in Changhsu, China.  The terms of the agreement state
that the Company will lease the property for three years, and pay the Principal
Shareholder approximately $17,500 per month.
 
 On March
11, 2009, Ms. Chen loaned the Company $99,998.  The loan is for a
period of 36 months, carries an interest rate of 3.60% and is included in the
accompanying balance sheet at June 30, 2009 under the caption long-term notes
payable – related parties.
 
 On April
29, 2009, Ms. Chen loaned the Company $149,998.  The loan is for a
period of 36 months, carries an interest rate of 5.00% and is included in the
accompanying balance sheet at June 30, 2009 under the caption long-term notes
payable – related parties.
 
 Some of
the Company’s notes payables are guaranteed by related parties as described in
Note 6.
 
 NOTE
8 - INCOME TAXES
 
 Before
the implementation of the new Enterprise Income Tax Law (“EIT Law”) as discussed
below, Foreign Invested Entities (“FIE”) established in the PRC were generally
subject to an enterprise income tax (“EIT”) rate of 33.0%, which includes a
30.0% state income tax and a 3.0% local income tax. FIEs established in Coastal
Open Economic Zones, Special Economic Zones or Economic and Technical
Development Zones, such as the Company’s PRC subsidiaries Changshu Huaye and
Jiangsu Cold-Rolled, are subject to an EIT rate of 24.0% of the assessable
profits. As approved by the local tax authority in the PRC, Changshu Huaye was
entitled to a two-year exemption from EIT followed by 50% tax exemption for the
next three calendar years, commencing from the first cumulative profit-making
year in the calendar of 2004. Accordingly, Changshu Huaye was exempt from EIT
for the calendar year of 2004 and 2005 and was and would be subject to a tax
rate of 12% for the calendar years 2006, 2007 and 2008. The Company’s other
subsidiary, Jiangsu Cold-Rolled had the same two-year full tax exemption for the
calendar years 2006 and 2007, followed by 50% tax exemption for the next three
years.
 
 In
addition, Changshu Huaye, being a FIE, was entitled to a special tax concession
that allows an amount up to 40% of the qualifying domestic capital expenditures
(as defined and approved under the relevant PRC income tax rule) to be used as
an offset against the excess of the current year’s EIT over the prior year’s
EIT.
  F-17
 
 SUTOR
TECHNOLOGY GROUP LIMITED AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 On March
16, 2007, the National People’s Congress of China passed the new EIT Law, and on
December 6, 2007, the State Council of China passed the Implementing Rules for
the EIT Law (“Implementing Rules”) which took effect on January 1, 2008. The EIT
Law and Implementing Rules impose a unified EIT of 25.0% on all
domestic-invested enterprises and FIEs, unless they qualify under certain
limited exceptions. Therefore, nearly all FIEs are subject to the new tax rate
alongside other domestic businesses rather than benefiting from the old FIE tax
laws, and its associated preferential tax treatments, beginning January 1,
2008.
 
 The EIT
Law gives existing FIEs a five-year grandfather period during which they can
continue to enjoy their existing preferential tax treatments. Changshu Huaye is
subject to an EIT rate of 12.5% for the calendar year of 2008 and will be
subject to EIT rate of 25% for 2009 and beyond. Jiangsu Cold-Rolled is exempt
from EIT for the calendar year 2008 and will be subject to EIT of 12.5% for the
calendar years 2009, 2010 and 2011. Jiangsu Cold-Rolled will be subject to an
EIT of 25% for the calendar year 2012 and beyond. The discontinuation of any
such special or preferential tax treatment or other incentives would have an
adverse affect on the Company’s business, fiscal condition and current
operations in China.
 
 During
the years ended June 30, 2008 and 2007, the PRC tax authorities approved the
application of Changshu Huaye for a tax credit on certain domestic purchases of
machinery in the PRC.  The credit is based upon 40% of certain
eligible assets for specific industries in the PRC, and is payable at the
government’s discretion.  The credit is recorded when the refund for
the tax credit is collected. As a result of being granted the credit, the
Company recorded a reduction in its income tax provision in the amount of
$1,385,711 and $1,889,992 for the years ended June 30, 2008 and
2007.
 
 Taxes
payable are a component of other payables and accrued expenses in the
accompanying consolidated balance sheets and consisted of:
 
 June 30,2009
                        
                        
                        2008Value
      added tax
                        
                        $
                        813,789
                        
                        
                        $
                        339,849Income
      tax
                        
                        
                        337,646
                        
                        
                        
                        1,035,182Surtax,
      insurance, other
                        
                        
                        23,675
                        
                        
                        
                        115,046Total
      Taxes
                        
                        $
                        1,175,110
                        
                        
                        $
                        1,490,077
 
 The
statutory tax rate for 2009 is 25%. Due to the change in tax rate during fiscal
2008, the statutory tax rate for June 30, 2008 is a blended rate of
approximately 30%, which was calculated as 33% during the six months ended
December 31, 2007 and 25% during the six months ended June 30, 2008. For the
year ended June 30, 2007 the statutory rate was 33%.
  F-18
  SUTOR
TECHNOLOGY GROUP LIMITED AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 Following
is a reconciliation of income taxes at the calculated statutory
rates:
 
 For the Years Ended June 30,2009
                        
                        
                        2008
                        
                        
                        2007Income
      tax calculated at statutory rates
                        
                        $
                        5,241,269
                        
                        
                        $
                        10,003,860
                        
                        
                        $
                        7,000,538Investment
      tax credit
                        
                        
                        -
                        
                        
                        
                        (1,385,711
                        )
                        
                        
                        (1,889,992
                        )Benefit
      of favorable rates
                        
                        
                        (573,128
                        )
                        
                        
                        (1,640,703
                        )
                        
                        
                        (1,886,627
                        )Benefit
      of tax holiday
                        
                        
                        (2,641,149
                        )
                        
                        
                        (5,008,137
                        )
                        
                        
                        (2,615,685
                        )Tax
      effect of change in tax rates
                        
                        
                        -
                        
                        
                        
                        165,585
                        
                        
                        
                        -Tax
      effect of parent and sewer losses
                        
                        
                        303,859
                        
                        
                        
                        (218,426
                        )
                        
                        
                        88,520Provision
      for income taxes
                        
                        $
                        2,330,851
                        
                        
                        $
                        1,916,468
                        
                        
                        $
                        696,754
 
 Deferred
taxes are comprised of the following:
 
 June
      30,2009
                      
                      
                      2008Allowance
      for doubtful trade receivables
                      
                      $
                      75,637
                      
                      
                      $
                      16,105Allowance
      for doubtful other receivables
                      
                      
                      20,979
                      
                      
                      
                      -Allowance
      for doubtful advances to suppliers
                      
                      
                      169,494
                      
                      
                      
                      272,871Total
      deferred income tax assets
                      
                      $
                      266,110
                      
                      
                      $
                      288,976
 
 The
provision for income taxes is comprised of the following:
 For
      the Years Ended June 30,2009
                        
                        
                        2008
                        
                        
                        2007Current
                        
                        $
                        2,307,985
                        
                        
                        $
                        2,205,444
                        
                        
                        $
                        696,754Deferred
                        
                        
                        22,866
                        
                        
                        
                        (288,976
                        )
                        
                        
                        -Provision
      for income taxes
                        
                        $
                        2,330,851
                        
                        
                        $
                        1,916,468
                        
                        
                        $
                        696,754
 
 If the
Company had not been granted a “tax holiday” during the years ended June 30,
2009, 2008, and 2007, the provision for income taxes would have been $4,972,000,
$6,924,605, and $3,312,439, respectively. Net income after income tax for the
years ended June 30, 2009, 2008, and 2007 would have been $15,993,076,
$26,127,833, and $17,904,706, respectively. Basic and diluted earnings per
common share for the years ended June 30, 2009, 2008, and 2007 diluted earnings
per common share would have been $0.42, $0.69, and $0.52,
respectively.
  NOTE
9 - COMMITMENTS AND CONTINGENCIES
 
 Economic
environment - Since most of the Company’s operations are conducted in the
PRC, the Company is subject to special considerations and significant risks.
These risks include, among others, the political, economic and legal
environments and foreign currency exchange rates. The Company’s results from
operations may, among other things, be adversely affected by changes in the
political and social conditions in the PRC, and by changes in governmental
policies with respect to: laws and regulations, anti-inflationary measures,
currency conversions and remittances abroad, and rates and methods of
taxation.
  F-19
  SUTOR
TECHNOLOGY GROUP LIMITED AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 Foreign currency
remittance - The Company’s revenue is either earned in the PRC or
remitted to banks within the PRC and is denominated in the PRC’s currency of
RMB. The transfer of currencies outside of the PRC must be converted into other
currencies. Both the conversion of RMB into foreign currencies and the
remittance of those currencies outside the PRC require approval of the PRC
government.
 
 Commitment under
Make Good Agreement - On February 1, 2007, the Company issued 39,473.56
shares of Series B Preferred Stock in a private placement offering for
$10,570,762 of cash, net of $720,000 of commissions and other costs of $709,238.
In connection with the private placement offering, a Principal Shareholder
delivered 39,473.68 shares of Series B voting convertible preferred stock into
an escrow pursuant to the terms of a Make Good Agreement. Upon conversion, as
described below, the Series B Preferred Stock held in the escrow was exchanged
for 3,947,368 shares of common stock. Under the terms of the Make Good
Agreement, the escrow agent would have released a portion of the escrowed shares
to the investors under the private placement offering if the Company’s net
income was not at least $18,900,000 and $23,500,000 for the years ending June
30, 2007 and 2008, respectively. The Company achieved the net income
requirements above for the year ended June 30, 2008 and 2007. On December 7,
2007, the escrow agent returned 1,973,684 shares to the Principal Shareholder
and on October 23, 2008 the escrow agent returned the remaining 1,973,684 shares
to the Principal Shareholder and no contingent obligation remains under the Make
Good Agreement.
 
 NOTE 10 - STOCKHOLDERS’
EQUITY
 
 Preferred
Stock - On February 3, 2006, the articles of incorporation were amended
to authorize 1,000,000 shares of preferred stock with a par value of $0.001 per
share. The Company may issue the preferred stock in one or more series with such
rights, preferences and designations as determined by its Board of Directors. On
November 3, 2006, and amended on January 24, and January 25, 2007, the Board of
Directors designated 185,000 shares of Series A voting convertible preferred
stock and 500,000 shares of Series B preferred stock. All shares of Series A
preferred stock and Series B preferred stock have been converted into common
shares. Since the Series A and Series B shares have been converted, there are
1,000,000 shares of preferred stock that remain undesignated.
 
 Series A Voting
Convertible Preferred Stock - The shares of Series A Preferred Stock
ranked equal to all outstanding shares of common stock with respect to rights on
liquidation, dissolution and winding up and are treated as though the shares of
Series A Preferred Stock had been converted into common stock. Shares of Series
A Preferred Stock were not entitled to any preferential dividends but were
treated as though the shares of Series A Preferred Stock had been converted into
common stock and shared equally in any dividend granted to shareholders of
common stock, unless the holders of Series A Preferred Stock waived such rights
in writing. The holders of Series A Preferred Stock were entitled to 9.8 votes
per share and voted together with the common shareholders as one class on all
matters submitted to a vote of common stockholders of the Company. The Series A
Preferred Stock was convertible into common stock on the basis of one share of
Series A Preferred Stock for 9.8 shares of common stock.
 
 On
January 8, 2007, the Company entered into a consulting agreement through Bronze
with three parties for the purpose of obtaining assistance in completing the
obligations assumed in the Exchange Agreement described in Note 1, and in
consideration for those services, the Company issued 20,122 shares of Series A
Preferred Stock to the three parties, which shares were valued at $528,077, or
$26.24 per share, based on the equivalent value the Company received in net
proceeds on February 1, 2007 as described below. The related consulting expense
was recognized upon issuance and was charged to general and administrative
expense.
  F-20
  SUTOR
TECHNOLOGY GROUP LIMITED AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 As
further described in Note 1, Sutor Steel consummated a share exchange agreement
with Bronze Marketing, Inc. on February 1, 2007. As of February 1, 2007, Bronze
had no assets, liabilities or operations. Bronze had 155,122 shares of Series A
Preferred Stock outstanding (including the 20,122 shares described in the
preceding paragraph) and 150,000 shares of common stock outstanding, and was a
shell corporation. The reverse acquisition of Bronze was recognized by Sutor
Steel as the constructive issuance of 135,000 shares of Series A Preferred Stock
and 150,000 shares of common stock that remained outstanding for no
consideration. Since there were no proceeds received from the constructive
issuance of the Series A Preferred Stock, no value was assigned to the
beneficial conversion option received by the Series A Preferred Stock
stockholders.
 
 On March
9, 2007, the 155,122 shares of Series A Preferred Stock outstanding were
converted into 1,520,196 shares of common stock on the basis of 9.8 shares of
common stock for one share of Series A Preferred Stock.
 
 Series B Voting
Convertible Preferred Stock - Shares of Series B Preferred Stock were
entitled to vote on an as-converted basis along with the common stock on all
matters presented to a vote of the security holders. Shares of Series B
Preferred Stock had anti-dilution protection in the event of any restructuring
of the Company. Upon liquidation of the net assets of the Company, each share of
Series B Preferred Stock was entitled to receive an amount equal to the stated
value per share of the Series B Preferred Stock, subject to any adjustments in
the stated value, outstanding prior to any distribution or payment to holders of
any junior securities. With respect to rights on liquidation, dissolution and
winding up, the shares of Series B Preferred Stock ranked equal to all
outstanding shares of common stock. Holders of Series B Preferred Stock were not
entitled to any preferential dividends but the shares were treated as though
they had been converted into common stock and shared equally in any dividend
granted to shareholders of common stock. Each share of Series B Preferred Stock
was convertible into 100 shares of common stock.
 
 On
February 1, 2007, the Company issued 39,473.56 shares of Series B Preferred
Stock in a private placement offering for $10,570,762 of cash, net of $720,000
of commissions and other costs of $709,238.
 
 On March
9, 2007, the 362,854.06 shares of Series B Preferred Stock outstanding were
converted into 36,285,406 shares of common stock on the basis of 100 shares of
common stock for one share of Series B Preferred Stock.
 
 Statutory
Reserves - According to the articles of association of Changshu Huaye and
Jiangsu Cold-Rolled, the Company is required to transfer a certain portion of
its net profits, as determined under PRC accounting regulations, from net income
to both the surplus reserve fund and the public welfare fund.
 
 2009 Equity
Incentive Plan - During 2009 the Company created the 2009 Equity
Incentive Plan and reserved 2,000,000 shares of the Company’s common stock to be
included as part of the plan.  There were no issuances under the plan
during fiscal 2009.
  F-21
  SUTOR
TECHNOLOGY GROUP LIMITED AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 NOTE
11 - SEGMENT INFORMATION
 
 The
Company has two reportable segments represented by its two subsidiaries Changshu
Huaye and Jiangsu Cold-Rolled, as described in Note 1. Changshu Dongbang Sewage
Treatment Co., Ltd. has been included with Changshu Huaye as its operations are
insignificant and do not meet any of the quantitative thresholds for discrete
presentation.
 
 Factors
Management Used to Identify the Enterprise’s Reportable Segments - The
Company’s reportable segments are business units that offer different products
and are managed separately and require reporting to the various regulatory
jurisdictions. Changshu Huaye mainly produces HDG products and PPGI products,
while Cold-Rolled offers cold-rolled steel strips and acid pickled steel
products.
 
 Certain
segment information is presented below:
 
 At June 30, 2009 and for the year then ended
                  
                  ChangshuHuaye
                  
                  
                  Jiangsu Cold-
                    Rolled
                  
                  
                  Inter-Segment and
                    Reconciling Items
                  
                  
                  TotalRevenue
                  
                  $
                  237,800,296
                  
                  
                  $
                  103,685,518
                  
                  
                  $
                  -
                  
                  
                  $
                  341,485,814Total
      operating expenses
                  
                  
                  5,215,809
                  
                  
                  
                  1,271,239
                  
                  
                  
                  600,886
                  
                  
                  
                  7,087,934Interest
      income
                  
                  
                  1,304,032
                  
                  
                  
                  82,434
                  
                  
                  
                  -
                  
                  
                  
                  1,386,466Interest
      expense
                  
                  
                  1,303,045
                  
                  
                  
                  4,125,061
                  
                  
                  
                  458,621
                  
                  
                  
                  5,886,727Depreciation
      and amortization expense
                  
                  
                  2,184,553
                  
                  
                  
                  3,561,839
                  
                  
                  
                  -
                  
                  
                  
                  5,746,392Provision
      for income taxes
                  
                  
                  1,785,647
                  
                  
                  
                  545,204
                  
                  
                  
                  -
                  
                  
                  
                  2,330,851Net
      income
                  
                  
                  11,829,839
                  
                  
                  
                  7,863,893
                  
                  
                  
                  (1,059,507
                  )
                  
                  
                  18,634,225Capital
      expenditures, net of VAT refunds
                  
                  
                  1,680,613
                  
                  
                  
                  14,793,382
                  
                  
                  
                  -
                  
                  
                  
                  16,473,995Total
      assets
                  
                  
                  232,770,219
                  
                  
                  
                  129,016,250
                  
                  
                  
                  (59,372,775
                  )
                  
                  
                  302,413,694
 
 At June 30, 2008 and for the year then ended
                  
                  ChangshuHuaye
                  
                  
                  Jiangsu Cold-
                    Rolled
                  
                  
                  Inter-Segment and
                    Reconciling Items
                  
                  
                  TotalRevenue
                  
                  $
                  260,528,089
                  
                  
                  $
                  157,501,751
                  
                  
                  $
                  -
                  
                  
                  $
                  418,029,840Total
      operating expenses
                  
                  
                  4,635,428
                  
                  
                  
                  665,992
                  
                  
                  
                  685,990
                  
                  
                  
                  5,987,410Interest
      income
                  
                  
                  832,179
                  
                  
                  
                  111,287
                  
                  
                  
                  -
                  
                  
                  
                  943,466Interest
      expense
                  
                  
                  1,944,739
                  
                  
                  
                  4,120,647
                  
                  
                  
                  187,712
                  
                  
                  
                  6,253,098Depreciation
      and amortization expense
                  
                  
                  2,024,644
                  
                  
                  
                  2,359,774
                  
                  
                  
                  -
                  
                  
                  
                  4,384,418Provision
      for income taxes
                  
                  
                  1,916,468
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,916,468Net
      income
                  
                  
                  26,169,281
                  
                  
                  
                  5,840,391
                  
                  
                  
                  (873,702
                  )
                  
                  
                  31,135,970Capital
      expenditures, net of VAT refunds
                  
                  
                  455,198
                  
                  
                  
                  10,417,104
                  
                  
                  
                  -
                  
                  
                  
                  10,872,302Total
      assets
                  
                  
                  196,192,239
                  
                  
                  
                  101,176,306
                  
                  
                  
                  (838,438
                  )
                  
                  
                  296,530,107
 
 At June 30, 2007 and for the year then ended
                  
                  ChangshuHuaye
                  
                  
                  Jiangsu Cold-Rolled
                  
                  
                  Inter-Segment and
                    Reconciling Items
                  
                  
                  TotalRevenue
                  
                  $
                  257,707,856
                  
                  
                  $
                  45,730,881
                  
                  
                  $
                  -
                  
                  
                  $
                  303,438,737Total
      operating expenses
                  
                  
                  4,424,360
                  
                  
                  
                  1,293,103
                  
                  
                  
                  1,338,238
                  
                  
                  
                  7,055,701Interest
      income
                  
                  
                  544,467
                  
                  
                  
                  5,104
                  
                  
                  
                  16,898
                  
                  
                  
                  566,469Interest
      expense
                  
                  
                  2,093,320
                  
                  
                  
                  165,105
                  
                  
                  
                  -
                  
                  
                  
                  2,258,425Depreciation
      and amortization expense
                  
                  
                  1,793,356
                  
                  
                  
                  915,449
                  
                  
                  
                  -
                  
                  
                  
                  2,708,805Provision
      for income taxes
                  
                  
                  696,754
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  696,754Net
      income
                  
                  
                  21,286,961
                  
                  
                  
                  834,850
                  
                  
                  
                  (1,601,420
                  )
                  
                  
                  20,520,391Capital
      expenditures, net of VAT refunds
                  
                  
                  (498,378
                  )
                  
                  
                  9,348,683
                  
                  
                  
                  -
                  
                  
                  
                  8,850,305Total
      assets
                  
                  
                  99,195,391
                  
                  
                  
                  59,362,560
                  
                  
                  
                  (853,634
                  )
                  
                  
                  157,704,317
  F-22
  SUTOR
TECHNOLOGY GROUP LIMITED AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 NOTE
12 - GEOGRAPHIC INFORMATION
 
 The
following schedule summarizes the sources of the Company’s revenue by geographic
regions for the years ended June 30, 2009, 2008, and 2007:
 
 Years
      Ended June 30,Geographic
      Area
                        
                        2009
                        
                        
                        2008
                        
                        
                        2007People's
      Republic of China
                        
                        $
                        318,000,791
                        
                        
                        $
                        401,872,120
                        
                        
                        $
                        272,460,649Hong
      Kong
                        
                        
                        2,135,061
                        
                        
                        
                        470,456
                        
                        
                        
                        24,968,006Other
      Countries
                        
                        
                        21,349,962
                        
                        
                        
                        15,687,264
                        
                        
                        
                        6,010,082Total
                        
                        $
                        341,485,814
                        
                        
                        $
                        418,029,840
                        
                        
                        $
                        303,438,737
  NOTE
13 - QUARTERLY FINANCIAL DATA (UNAUDITED)
 
 The
following tables are a summary of unaudited quarterly financial information for
the years ended June 30, 2009, 2008 and 2007.
 
 Three Months EndedSeptember 30,
                    
                    
                    December 31,
                    
                    
                    March 31,
                    
                    
                    June 30,2008
                    
                    
                    2008
                    
                    
                    2009
                    
                    
                    2009Revenues
                    
                    $
                    101,777,689
                    
                    
                    $
                    70,836,277
                    
                    
                    $
                    76,456,937
                    
                    
                    $
                    92,414,911Income
      from Operations
                    
                    
                    12,312,783
                    
                    
                    
                    6,155,081
                    
                    
                    
                    4,643,152
                    
                    
                    
                    2,608,250Net
      Income
                    
                    
                    10,121,197
                    
                    
                    
                    4,426,239
                    
                    
                    
                    3,064,698
                    
                    
                    
                    1,022,091Basic
      and Diluted Earnings Per Common Share
                    
                    
                    0.27
                    
                    
                    
                    0.11
                    
                    
                    
                    0.08
                    
                    
                    
                    0.03
 
 Three Months EndedSeptember 30,
                    
                    
                    December 31,
                    
                    
                    March 31,
                    
                    
                    June 30,2007
                    
                    
                    2007
                    
                    
                    2008
                    
                    
                    2008Revenues
                    
                    $
                    99,490,092
                    
                    
                    $
                    114,892,021
                    
                    
                    $
                    98,101,235
                    
                    
                    $
                    105,546,492Income
      from Operations
                    
                    
                    8,320,903
                    
                    
                    
                    8,658,641
                    
                    
                    
                    10,179,585
                    
                    
                    
                    11,773,496Net
      Income
                    
                    
                    6,619,990
                    
                    
                    
                    6,687,792
                    
                    
                    
                    7,792,258
                    
                    
                    
                    10,035,930Basic
      and Diluted Earnings Per Common Share
                    
                    
                    0.17
                    
                    
                    
                    0.18
                    
                    
                    
                    0.21
                    
                    
                    
                    0.26
 
 
 Three Months EndedSeptember 30,
                    
                    
                    December 31,
                    
                    
                    March 31,
                    
                    
                    June 30,2006
                    
                    
                    2006
                    
                    
                    2007
                    
                    
                    2007Revenues
                    
                    $
                    61,397,183
                    
                    
                    $
                    78,610,889
                    
                    
                    $
                    71,283,941
                    
                    
                    $
                    92,146,724Income
      from Operations
                    
                    
                    3,437,274
                    
                    
                    
                    5,134,447
                    
                    
                    
                    4,978,618
                    
                    
                    
                    9,931,530Net
      Income
                    
                    
                    3,032,156
                    
                    
                    
                    4,464,447
                    
                    
                    
                    3,885,959
                    
                    
                    
                    9,137,829Basic
      and Diluted Earnings Per Common Share
                    
                    
                    0.09
                    
                    
                    
                    0.14
                    
                    
                    
                    0.11
                    
                    
                    
                    0.25
 
 NOTE
14 - PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION
 
 Basis
of presentation
 For the
purpose of presenting parent company only condensed financial information, the
basis used in this presentation assumes the reorganization and the change of the
reporting entity had taken place for all periods presented. The investment in
the unconsolidated subsidiaries, which occurred on February 1, 2007, is recorded
under the equity method of accounting as prescribed in APB opinion No. 18, The Equity Method of Accounting for
Investments in Common Stock . Under PRC laws and regulations, there are
restrictions on the Company’s ability to transfer substantially all of its
assets out of the PRC, regardless of the form of such transfer (dividends,
loans, advances) (See Note 9).
  F-23
  SUTOR
TECHNOLOGY GROUP LIMITED AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 SUTOR
TECHNOLOGY GROUP LIMITED
 CONDENSED
BALANCE SHEETS
 
 June
      30,2009
                                        
                                        
                                        2008ASSETSCurrent
      Assets:Cash
      and cash equivalents
                                        
                                        $
                                        42,657
                                        
                                        
                                        $
                                        63,666Total
      Current Assets
                                        
                                        
                                        42,657
                                        
                                        
                                        
                                        63,666Investment
      in unconsolidated subsidiaries
                                        
                                        
                                        163,985,051
                                        
                                        
                                        
                                        139,973,700TOTAL
      ASSETS
                                        
                                        $
                                        164,027,708
                                        
                                        
                                        $
                                        140,037,366LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      Liabilities:Accrued
      liabilities
                                        
                                        $
                                        646,335
                                        
                                        
                                        $
                                        187,712Notes
      Payable - related parties
                                        
                                        
                                        8,332,091
                                        
                                        
                                        
                                        -Total
      Current Liabilities
                                        
                                        
                                        8,978,426
                                        
                                        
                                        
                                        187,712Long-Term
      LiabilitiesNotes
      Payable
                                        
                                        
                                        2,859,995
                                        
                                        
                                        
                                        -Notes
      Payable - Related Parties
                                        
                                        
                                        249,996
                                        
                                        
                                        
                                        7,099,998Total
      Long-Term Liabilities
                                        
                                        
                                        3,109,991
                                        
                                        
                                        
                                        7,099,998Stockholders'
      EquityUndesignated
      preferred stock - $0.001 par value;1,000,000
      shares authorized; no shares outstanding
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -Common
      stock - $0.001 par value; 500,000,000 shares authorized; 37,955,602 shares
      outstanding
                                        
                                        
                                        37,955
                                        
                                        
                                        
                                        37,955Additional
      paid-in capital
                                        
                                        
                                        37,170,164
                                        
                                        
                                        
                                        37,170,164Statutory
      reserves
                                        
                                        
                                        12,586,995
                                        
                                        
                                        
                                        12,586,995Retained
      earnings
                                        
                                        
                                        84,407,200
                                        
                                        
                                        
                                        65,772,975Accumulated
      other comprehensive income
                                        
                                        
                                        17,736,977
                                        
                                        
                                        
                                        17,181,567Total
      Stockholders' Equity
                                        
                                        
                                        151,939,291
                                        
                                        
                                        
                                        132,749,656TOTAL
      LIABILITES AND STOCKHOLDERS' EQUITY
                                        
                                        $
                                        164,027,708
                                        
                                        
                                        $
                                        140,037,366
  F-24
 
 SUTOR
TECHNOLOGY GROUP LIMITED AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 SUTOR
TECHNOLOGY GROUP LIMITED
 CONDENSED
STATEMENTS OF OPERATIONS
 
 For
      the Years Ended June 30,2009
                    
                    
                    2008
                    
                    
                    2007General
      and Administrative expenses
                    
                    $
                    (600,886
                    )
                    
                    $
                    (685,990
                    )
                    
                    $
                    (1,321,340
                    )Interest
      expense
                    
                    
                    (458,621
                    )
                    
                    
                    (187,712
                    )
                    
                    
                    -Equity
      in earnings of unconsolidated subsidiaries
                    
                    
                    19,693,732
                    
                    
                    
                    32,009,672
                    
                    
                    
                    21,841,731Net
      Income
                    
                    $
                    18,634,225
                    
                    
                    $
                    31,135,970
                    
                    
                    $
                    20,520,391
 
 SUTOR
TECHNOLOGY GROUP LIMITED
 CONDENSED
STATEMENTS OF CASH FLOWS
 
 For
      the Years Ended June 30,2009
                      
                      
                      2008
                      
                      
                      2007Cash
      Flows from Operating Activities:Net
      income
                      
                      $
                      18,634,225
                      
                      
                      $
                      31,135,970
                      
                      
                      $
                      20,520,391Stock
      based compensation
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      528,077Adjustments
      to reconcile net income to net cash  used in operating
      activitites:Undistributed
      equity in earnings of unconsolidated subsidiaries
                      
                      
                      (19,693,732
                      )
                      
                      
                      (32,009,672
                      )
                      
                      
                      (21,841,731
                      )Changes
      in current assets and liabilities:Other
      payables and accrued expenses
                      
                      
                      458,623
                      
                      
                      
                      187,712
                      
                      
                      
                      -Net
      Cash Used in Operating Activities
                      
                      
                      (600,884
                      )
                      
                      
                      (685,990
                      )
                      
                      
                      (793,263
                      )Cash
      Flows from Investing ActivitiesInvestment
      in subsidiaries
                      
                      
                      (2,860,104
                      )
                      
                      
                      (6,377,953
                      )
                      
                      
                      (9,953,064
                      )Net
      Cash Used in Investing Activities
                      
                      
                      (2,860,104
                      )
                      
                      
                      (6,377,953
                      )
                      
                      
                      (9,953,064
                      )Cash
      Flows from Financing Activities:Proceeds
      from issuance of related party notes payable
                      
                      
                      3,439,979
                      
                      
                      
                      7,099,998
                      
                      
                      
                      179,993Proceeds
      from issuance of Series B preferred stock
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      10,570,762Cash
      contributed by shareholders
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      21,059,950Cash
      distributed to shareholders
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (21,036,767
                      )Net
      Cash Provided by Financing Activities:
                      
                      
                      3,439,979
                      
                      
                      
                      7,099,998
                      
                      
                      
                      10,773,938Net
      increase in cash and cash equivalents
                      
                      
                      (21,009
                      )
                      
                      
                      36,055
                      
                      
                      
                      27,611Cash
      at beginning of period
                      
                      
                      63,666
                      
                      
                      
                      27,611
                      
                      
                      
                      -Cash
      and Cash Equivalents at End of Period
                      
                      $
                      42,657
                      
                      
                      $
                      63,666
                      
                      
                      $
                      27,611
  F-25