UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-K





(Mark
One)





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


For the
fiscal year ended: June 30,
2010





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


For the
transition period from ____________ to _____________





Commission
File No. 000-51908





SUTOR
TECHNOLOGY GROUP LIMITED





(Exact
name of registrant as specified in its charter)





Nevada
                
                87-0578370(State
      or other jurisdiction of incorporation ororganization)
                
                (I.R.S.
      Employer Identification
No.)





No
8, Huaye Road


Dongbang
Industrial Park


Changshu,
215534


People’s
Republic of China





(Address
of principal executive offices)





(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
      registeredCommon
      Stock, par value $0.001 per share
                
                NASDAQ
      Capital Market





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




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




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




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




Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Website, 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 o No o




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




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




Large
      Accelerated Filer  o
                  Accelerated
      Filer oNon-Accelerated
      Filer  o(Do not
      check if a smaller reporting company)
                  Smaller
      reporting company  x




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




As of
December 31, 2009 (the last business day of the registrant’s most recently
completed second fiscal quarter), the aggregate market value of the shares of
the registrant’s common stock held by non-affiliates (based upon the closing
sale price of such shares as reported on the NASDAQ Capital Market) was
approximately $20.2 million. Shares of the registrant’s common stock held
by each executive officer and director and each by each person who owns 10% or
more of the outstanding common stock have been excluded from the calculation in
that 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.




There
were a total of 40,695,602 shares of the registrant’s common stock outstanding
as of September 24, 2010.





DOCUMENTS INCORPORATED BY
REFERENCE





None.












SUTOR
TECHNOLOGY GROUP LIMITED




Annual
Report on FORM 10-K


For the Fiscal
Year Ended June 30, 2010








TABLE
OF CONTENTS





PART IItem 1.
                                                                                              Business.
                                                                                              
                                                                                              2Item 1A.
                                                                                              Risk Factors.
                                                                                              
                                                                                              11Item 1B.
                                                                                              Unresolved Staff Comments.
                                                                                              
                                                                                              21Item 2.
                                                                                              Properties.
                                                                                              
                                                                                              21Item 3.
                                                                                              Legal Proceedings.
                                                                                              
                                                                                              22Item 4.
                                                                                              (Removed and Reserved).
                                                                                              
                                                                                              22PART IIItem 5.
                                                                                              Market for Registrant’s Common Equity, Related
      Stockholder Matters and Issuer Purchases of Equity
      Securities.
                                                                                              
                                                                                              22Item 6.
                                                                                              Selected Financial Data.
                                                                                              
                                                                                              23Item 7.
                                                                                              Management’s Discussion and Analysis of Financial
      Condition and Results of Operations.
                                                                                              
                                                                                              23Item 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.
                                                                                              
                                                                                              33Item 9A.
                                                                                              Controls and Procedures.
                                                                                              
                                                                                              33Item 9B.
                                                                                              Other Information.
                                                                                              
                                                                                              34PART IIIItem 10.
                                                                                              Directors, Executive Officers and Corporate
      Governance.
                                                                                              
                                                                                              34Item 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.
                                                                                              
                                                                                              42Item 14.
                                                                                              Principal Accounting Fees and
      Services.
                                                                                              
                                                                                              44PART IVItem 15.
                                                                                              Exhibits, Financial Statement
      Schedules.
                                                                                              
                                                                                              44







Special
Note Regarding Forward Looking Statements





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





·
                Downturns
      in the steel industry;


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


·
              Our
      heavy reliance on Shanghai
Huaye;


·
              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 anticipated performance are discussed in Item 1A, “Risk
Factors” included herein. All statements other than statements of historical
fact are statements that could be deemed forward-looking statements. We assume
no obligation and do not intend to update these forward-looking statements,
except as required by law.





Use
of Terms





Except as
otherwise indicated by the context, references in this report to:





·
              “Company,”
      “we,” “us” and “our” are to the combined business of Sutor Technology
      Group Limited, a Nevada corporation, and its subsidiaries: Sutor BVI,
      Changshu Huaye, Jiangsu Cold-Rolled and Ningbo
    Zhehua;


·
              “Sutor
      BVI” are to our wholly-owned subsidiary Sutor Steel Technology Co., Ltd.,
      a BVI company;


·
                “Changshu
      Huaye” are to our wholly-owned subsidiary Changshu Huaye Steel Strip Co.,
      Ltd., a PRC company;
 ·
              “Jiangsu
      Cold-Rolled” are to our wholly-owned subsidiary Jiangsu Cold-Rolled
      Technology Co., Ltd., a PRC
company;
 ·
              “Ningbo
      Zhehua” are to our wholly-owned subsidiary Ningbo Zhehua Heavy Steel Pipe
      Manufacturing Co., Ltd., a PRC
company;
 ·
              “Shanghai
      Huaye” are to Shanghai Huaye Iron & Steel Group Co., Ltd., a PRC
      company of which Lifang Chen, our major shareholder and chief executive
      officer, and her husband Feng Gao, are 100% owners, and its
      subsidiaries;
 ·
              “SEC”
      are to the United States Securities and Exchange
    Commission;
 ·
              “Securities
      Act” are to the Securities Act of 1933, as amended, and “Exchange Act” are
      to the Securities Exchange Act of 1934, as
  amended.
 ·
              “China”
      and “PRC” are to People’s Republic of
China;
 ·
              “BVI”
      are to the British Virgin Islands;
 ·
              “RMB”
      are to Renminbi, the legal currency of China;
  and
 ·
              “U.S.
      dollar,” “$” and “US$” are to the legal currency of the United
      States.





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 in other applications. We utilize a variety of
processes and technological methodologies to convert steel manufactured by third
parties into fine 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”). In
addition, we produce acid pickled steel (“AP Steel”), and cold-rolled steel,
which represent the less processed of our finished products.  As a
result of our acquisition of Ningbo Zhehua in November 2009, our product
offerings have expanded to include welded steel pipe products.  A
large portion of our AP Steel and cold-rolled steel is 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. Our
primary export markets are Europe, Middle East, South America 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, or MT, for HDG Steel, 200,000 MT
for PPGI, 500,000 MT for AP Steel and 250,000 MT for cold-rolled steel. Ningbo
Zhehua, our subsidiary located in Ningbo, currently has an annual capacity of
400,000 MT for welded steel pipe products.





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.





In
November 2009, our subsidiary Changshu Huaye acquired 100% equity interest in
Ningbo Zhehua for the total purchase price of RMB 45,172,855.34 (approximately
$6.6 million).




2




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




.





Reportable
Segment Information




Our three
reportable operating segments are categorized according to our three
subsidiaries:





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


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


·
            Ningbo
      Zhehua, which manufactures and sells welded steel pipe
      products.





Changshu
Huaye and Jiangsu Cold-Rolled are located adjacent to each other in Changshu,
China and use largely the same management resources. Ningbo Zhehua is located in
Ningbo, China. 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, cold-rolled steel and welded
steel pipe products. Our HDG Steel and PPGI products are primarily manufactured
by Changshu Huaye and our AP Steel and cold-rolled steel products are primarily
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. Ningbo Zhehua
manufactures our welded steel pipe products.





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 information about our product mix in last two
fiscal years.





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





Fiscal Years Ended June 30,2009
                  
                  
                  2010Product
                  
                  Revenue
                  
                  
                  Percent of Sales
                  
                  
                  Revenue
                  
                  
                  Percent of SalesHDG
      Steel
                  
                  $
                  108.3
                  
                  
                  
                  25.2
                  %
                  
                  $
                  228.69
                  
                  
                  
                  47.8
                  %PPGI
                  
                  
                  144.8
                  
                  
                  
                  33.7
                  %
                  
                  
                  78.6
                  
                  
                  
                  16.4
                  %AP
      Steel
                  
                  
                  49.1
                  
                  
                  
                  11.4
                  %
                  
                  
                  40.3
                  
                  
                  
                  8.4
                  %Cold-Rolled
      Steel
                  
                  
                  30.3
                  
                  
                  
                  7.1
                  %
                  
                  
                  57.8
                  
                  
                  
                  12.1
                  %Welded
      Steel Pipe Products
                  
                  
                  88.3
                  
                  
                  
                  20.5
                  %
                  
                  
                  62.4
                  
                  
                  
                  13.0
                  %Other
                  
                  
                  9.0
                  
                  
                  
                  2.1
                  %
                  
                  
                  10.9
                  
                  
                  
                  2.3
                  %Total
                  
                  $
                  429.8
                  
                  
                  
                  100.0
                  %
                  
                  $
                  478.69
                  
                  
                  
                  100.0
                  %





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)
                          
                          Galvanized Layer Weight (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 58,496 MT in
fiscal year 2010, representing approximately 7.6% of our total revenue. The
remaining HDG Steel products, which represent a majority of our HDG Steel
products, were used for our production of PPGI products. Currently, our HDG
Steel products are manufactured by Changshu Huaye and Jiangsu Cold-Rolled.
Changshu Huaye 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 300,000 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.





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.




4




Sales of
PPGI products amounted to approximately 96,676 MT in fiscal year 2010,
representing approximately 16.4% of our total revenue. Through our vertical
integration strategy, we currently self-supply approximately 66.2% 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 2010, our sales of AP Steel products to third parties
were approximately 16,724 MT, representing approximately 2.2% 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 24,110 MT in fiscal year 2010, representing
approximately 3.1% of our total revenue. In addition, approximately 66.2% of
cold-rolled steel products were used for our own production.





Welded
Steel Pipe Products





Our
subsidiary Ningbo Zhehua has one advanced JCOE production line for
large-diameter, double-side, submerged-arc welded steel pipes, three US Lincoln
production lines for spiral seam, double-side, submerged-arc welded steel pipes
and two REF production lines for roll-bending, double-side, submerged-arc welded
steel pipes.  Ningbo Zhehua is specialized in manufacturing
large-diameter, double-side, submerged-arc welded steel pipes and spiral seam
steel pipes. The finished products are extensively used for oil and gas
transmission, municipal water supply projects, sewage treatment projects, and
piling.  Sales of welded steel pipe products amounted to approximately
117,000 MT in fiscal year 2010, representing approximately 13.1% of our total
sales revenue.





Manufacturing





Our
manufacturing facilities are located in Changshu and Ningbo, China. Our
facilities in Changzhou currently have three HDG Steel production lines, one
PPGI production line, one AP Steel production line and one cold-rolled steel
line. Our facilities in Ningbo have six welded steel pipe production lines. 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, 250,000 MT for cold-rolled
steel and 400,000 MT for welded steel pipe products.




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 68.1% of our raw
materials in fiscal year 2010. We believe that our suppliers are sufficient to
meet our present needs.





Steel
coil accounted for approximately 90% of total production cost in fiscal year
2010. 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 7.8% of our total production costs of HDG Steel in fiscal year
2010. 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.





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.




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.




6




Approximately
51.0% of our revenue was derived from Shanghai Huaye and its affiliates in
fiscal year 2010. 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
2010.





Sales
and Marketing





China is
our most important market. Domestic sales represented approximately 88.8% of our
total revenue in fiscal year 2010. 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, and Hong Kong. Our foreign sales accounted for
approximately 10.6% and 11.2% of our total revenue in fiscal years 2009 and
2010, 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 49.0% of our products through
our own sales and marketing department in fiscal year 2010. Our sales and
marketing department consists of approximately 55 employees as of the date of
this annual report.





Research
and Development




We
believe that the development of new products and production methods is important
to our success. We established our high-performance steel sheet research center
in 2007 which was recognized as the “Jiangsu Province Foreign Invested Research
Center” by the Jiangsu Science and Technology Bureau. As of June 30, 2010, our
research and development personnel consisted of approximately 99
employees.





We
recently set up Sutor Technology Co., Ltd., a wholly-owned subsidiary
incorporated in China, and plan to consolidate all R&D activities into this
subsidiary in the future. We plan to build a facility in the new subsidiary
to be used solely for research and development of new products and technologies.
We expect the new subsidiary will help attract talent and enhance our leading
position in the fine processed steel industry in China. The new subsidiary is
anticipated to enjoy preferential tax treatment when in full
operation.





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. In addition,
through cooperation of our strategic partners, we have also established a
vertically integrated business model that provides processing, distribution and
customized logistic solutions. We believe this business model is difficult to
duplicate and few private companies have this capability.




7




There are
several state-owned steel manufacturers that produce comparable products to our
products. As compared with those competitors, we believe 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 and Hong Kong. Our
export sales accounted for approximately 11.2% of our total sales for fiscal
year 2010.





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. Further, our
subsidiary Ningbo Zhehua is located in Ningbo which is one of the largest and
most important sea port cities in China with easy access to both domestic and
international markets.





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, 2010, we held 23 patents
and had 36 patent applications pending.




Most 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, 2010, we had approximately 657 full-time employees. Approximately 251
are employees of Changshu Huaye, approximately 172 are employees of Jiangsu
Cold-Rolled and approximately 234 are employees of Ningbo Zhehua.


The
following table sets forth the number of our full-time employees by
function.





Function
                    
                    Number of EmployeesManufacturing
                    
                    369General
      and administration
                    
                    134Marketing
      and sales
                    
                    55Research
      and development
                    
                    99




8




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 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.





Regulation





General
Regulation of Business





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





We are
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.





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.





Taxation





On March
16, 2007, the National People’s Congress of China passed the Enterprise Income
Tax Law, or the EIT Law, and on November 28, 2007, the State Council of China
passed its implementing rules, both of which took effect on January 1, 2008. The
EIT Law and its implementing rules impose a unified earned income tax, or EIT,
rate of 25.0% on all domestic-invested enterprises and foreign invested
enterprises, or FIEs, unless they qualify under certain limited
exceptions.  As a result, our PRC operating subsidiaries Changshu
Huaye and Ningbo Zhehua were and are subject to an earned income tax of 25.0% in
2009 and 2010. Our subsidiary Jiangsu Cold-Rolled’s tax holiday will expire at
the end of 2011, therefore, it is and will be subject to an EIT rate of 12.5% in
calendar years 2010 and 2011 and will be subject to an EIT rate of 25% starting
in calendar year 2012.





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% 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 we should be classified as a resident enterprise, then our
organization’s global income will be subject to PRC income tax of
25%.  For detailed discussion of PRC tax issues related to resident
enterprise status, see Item 1A, “Risk Factors – Risks Related to Doing Business
in China – Under the New Enterprise Income Tax Law, we may be classified as a
“resident enterprise” of China. Such classification will likely result in
unfavorable tax consequences to us and our non-PRC stockholders.”





Foreign
Currency Exchange





All of
our sales revenue and expenses are denominated in RMB. Under the PRC foreign
currency exchange regulations applicable to us, RMB is convertible for current
account items, including the distribution of dividends, interest payments, trade
and service-related foreign exchange transactions. Currently, our PRC operating
subsidiaries may purchase foreign currencies for settlement of current account
transactions, including payments of dividends to us, without the approval of the
PRC State Administration of Foreign Exchange, or SAFE, by complying with certain
procedural requirements.  Conversion of RMB for capital account items,
such as direct investment, loan, security investment and repatriation of
investment, however, is still subject to the approval of 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 PRC Ministry of Commerce, or MOFCOM, or their respective local
branches.  These limitations could affect our PRC operating
subsidiaries’ ability to obtain foreign exchange through debt or equity
financing.




9




Dividend
Distributions





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 such fund reaches 50% of its
registered capital.  These reserves are not distributable as cash
dividends. Our PRC subsidiaries have the discretion to allocate a portion of
their after-tax profits to staff welfare and bonus funds, which may not be
distributed to equity owners except in the event of liquidation.





In
addition, under the EIT Law, the Notice of the State Administration
of Taxation on Negotiated Reduction of Dividends and Interest Rates,
which was issued on January 29, 2008, and the Notice of the State Administration
of Taxation Regarding Interpretation and Recognition of Beneficial Owners under
Tax Treaties, which became effective on October 27, 2009, dividends from
our PRC operating subsidiaries paid to us through our subsidiaries may be
subject to a withholding tax at a rate of 10%. Furthermore, the ultimate tax
rate will be determined by treaty between the PRC and the tax residence of the
holder of the PRC subsidiary.  Dividends declared and paid from before
January 1, 2008 on distributable profits are grandfathered under the EIT Law and
are not subject to withholding tax.





The
Company intends on reinvesting profits, if any, and does not intend on making
cash distributions of dividends in the near future.





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 website 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 website: www.sec.gov.




10





ITEM 1A.
            RISK
      FACTORS.





RISKS
RELATED TO OUR BUSINESS





We
maintain a close business relationship with Shanghai Huaye and any disruption of
this relationship or the financial stability of Shanghai Huaye could damage our
business.





Ourcompany
and Shanghai Huaye, which is 100% owned by our major shareholder, Chairperson
and CEO, Lifang Chen and her husband Feng Gao, have a close business
relationship.  Approximately 51.0% of our revenue was derived from
Shanghai Huaye and its affiliates in fiscal year 2010, which distribute our
products. In addition, a large portion of our raw materials were supplied
by Shanghai Huaye in fiscal year 2010.  We believe that the larger
size of Shanghai Huaye gives it greater bargaining power than us and our
arrangement with Shanghai Huaye allows us to leverage its bargaining power and
purchase raw materials at relatively lower purchase prices from suppliers. We do
not have long-term written contracts with Shanghai Huaye.  In the
past, Shanghai Huaye also has provided credit support on our behalf and
guaranties for our benefit in connection with loans to us from third party
lenders.





If our
business relationship with Shanghai Huaye changes negatively or Shanghai Huaye’s
financial condition deteriorates, this would harm our business in many
ways.   We would be forced to rely on other third parties for raw
materials and product distribution if Shanghai Huaye ceases to be a supplier of
our raw materials and/or a distributor of our products at current
levels.  We may not be able to negotiate terms with these third
parties that are as favorable as our arrangements with Shanghai
Huaye.  If this happens, our revenues could decrease, our production
costs could increase and our profit margin could be strained.  In
addition, a material adverse change in the financial condition and
creditworthiness of Shanghai Huaye could impair our existing credit facilities
and ability to obtain loans in the future.





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 90.0% 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.




11




We
may be exposed to potential risks relating to our internal controls over
financial reporting and our ability to have the operating effectiveness of our
internal controls attested to by our independent auditors.





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 and, for
companies that are not small reporting companies, the independent registered
public accounting firm auditing a company’s financial statements to attest to
and report on the operating effectiveness of such company’s internal controls.
Our management had previously identified material weaknesses in our internal
control over financial reporting in fiscal years 2008 and 2009. Although our
management believes that our internal control over financial reporting was
effective as of June 30, 2010, we can provide no assurance that we will comply
with all of the requirements imposed thereby and we will receive a positive
attestation from our independent auditors in the future, when required. In the
event we identify significant deficiencies or material weaknesses in our
internal controls that we cannot remediate in a timely manner or we are unable
to receive a positive attestation from our independent auditors with respect to
our internal controls, investors and others may lose confidence in the
reliability of 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.





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 major
source of liquidity is borrowing through short-term bank and private loans. Our
total debt under existing loans as of June 30, 2010 was approximately $85.6
million, of which approximately $82.1 million are short-term loans to
non-related third party. We expect to renew our short-term loans when they
become due, our inability to renew these loan upon maturity may cause us working
capital constraints. This substantial indebtedness could also 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.




12




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.





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.




13




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
growth strategy includes growing our operations by meeting the anticipated
growth in demand for existing products, introducing new product offerings, and
identifying and acquiring or investing in suitable candidates on acceptable
terms. In 2009, we acquired a 100% ownership interest in Ningbo Zhehua. In
addition, 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. Over time, we may acquire or make
investments in other providers of products that complement our business and
other companies in our industry. 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;


·
            our
      ability to integrate and retain key management, sales, research and
      development, production and other
personnel;


·
            our
      ability to incorporate the acquired products or capabilities into our
      offerings from an engineering, sales and marketing
      perspective;


·
            integration
      and support pre-existing supplier, distribution and customer
      relationships;


·
            adverse
      effects on our reported operating results due to possible write-down of
      goodwill associated with
acquisitions;


·
            potential
      disputes with sellers of acquired businesses, technologies, services,
      products and potential liabilities;


·
            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.





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 Naijiang Zhou, our Vice President of Finance. 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 74.5% 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.




14




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.





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.




15




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.





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





The
majority of our revenues will be settled in RMB and U.S. dollars, and any future
restrictions on currency exchanges may limit our ability to use revenue
generated in RMB to fund any future business activities outside China or to make
dividend or other payments in U.S. dollars. Although the Chinese government
introduced regulations in 1996 to allow greater convertibility of the RMB for
current account transactions, significant restrictions still remain, including
primarily the restriction that foreign-invested enterprises may only buy, sell
or remit foreign currencies after providing valid commercial documents, at those
banks in China authorized to conduct foreign exchange business. In addition,
conversion of RMB for capital account items, including direct investment and
loans, is subject to governmental approval in China, and companies are required
to open and maintain separate foreign exchange accounts for capital account
items. We cannot be certain that the Chinese regulatory authorities will not
impose more stringent restrictions on the convertibility of the
RMB.





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 the U.S. dollar and RMB and between those currencies and other
currencies in which our revenues may be denominated. 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.




16




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.





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 business.





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 its offshore parent company. PRC legal restrictions permit payments
of dividends by our PRC subsidiaries only out of their accumulated after-tax
profits, if any, determined in accordance with PRC accounting standards and
regulations. Our PRC subsidiaries are also required under PRC laws and
regulations to allocate at least 10% of their annual after-tax profits
determined in accordance with PRC generally accepted accounting principles 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
subsidiary 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.





You may have
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




Failure to comply
with PRC regulations relating to the establishment of offshore special purpose
companies by PRC residents may subject our PRC resident stockholders to personal
liability, limit our ability to acquire PRC companies or to inject capital into
PRC subsidiaries, limit our PRC subsidiary's ability to distribute profits to us
or otherwise materially adversely affect us.





In
October 2005, SAFE issued the Notice on Relevant Issues in the Foreign Exchange
Control over Financing and Return Investment Through Special Purpose Companies
by Residents Inside China, generally referred to as Circular 75, which required
PRC residents to register with the competent local SAFE branch before
establishing or acquiring control over an offshore special purpose company, or
SPV, for the purpose of engaging in an equity financing outside of China on the
strength of domestic PRC assets originally held by those residents. Internal
implementing guidelines issued by SAFE, which became public in June 2007 (known
as Notice 106), expanded the reach of Circular 75 by (1) purporting to cover the
establishment or acquisition of control by PRC residents of offshore entities
which merely acquire “control” over domestic companies or assets, even in the
absence of legal ownership; (2) adding requirements relating to the source of
the PRC resident’s funds used to establish or acquire the offshore entity; (3)
covering the use of existing offshore entities for offshore financings; (4)
purporting to cover situations in which an offshore SPV establishes a new
subsidiary in China or acquires an unrelated company or unrelated assets in
China; and (5) making the domestic affiliate of the SPV responsible for the
accuracy of certain documents which must be filed in connection with any such
registration, notably, the business plan which describes the overseas financing
and the use of proceeds. Amendments to registrations made under Circular 75 are
required in connection with any increase or decrease of capital, transfer of
shares, mergers and acquisitions, equity investment or creation of any security
interest in any assets located in China to guarantee offshore obligations, and
Notice 106 makes the offshore SPV jointly responsible for these filings. In the
case of an SPV which was established, and which acquired a related domestic
company or assets, before the implementation date of Circular 75, a retroactive
SAFE registration was required to have been completed before March 31, 2006.
This date was subsequently extended indefinitely by Notice 106, which also
required that the registrant establish that all foreign exchange transactions
undertaken by the SPV and its affiliates were in compliance with applicable laws
and regulations. Failure to comply with the requirements of Circular 75, as
applied by SAFE in accordance with Notice 106, may result in fines and other
penalties under PRC laws for evasion of applicable foreign exchange
restrictions. Any such failure could also result in the SPV’s affiliates being
impeded or prevented from distributing their profits and the proceeds from any
reduction in capital, share transfer or liquidation to the SPV, or from engaging
in other transfers of funds into or out of China.





We have
asked our stockholders, who are PRC residents as defined in Circular 75, to
register with the relevant branch of SAFE as currently required in connection
with their equity interests in us and our acquisitions of equity interests in
our PRC subsidiary. However, we cannot provide any assurances that they can
obtain the above SAFE registrations required by Circular 75 and Notice 106.
Moreover, because of uncertainty over how Circular 75 will be interpreted and
implemented, and how or whether SAFE will apply it to us, we cannot predict how
it will affect our business operations or future strategies. For example, our
present and prospective PRC subsidiaries' ability to conduct foreign exchange
activities, such as the remittance of dividends and foreign currency-denominated
borrowings, may be subject to compliance with Circular 75 and Notice 106 by our
PRC resident beneficial holders.





In
addition, such PRC residents may not always be able to complete the necessary
registration procedures required by Circular 75 and Notice 106. We also have
little control over either our present or prospective direct or indirect
stockholders or the outcome of such registration procedures. A failure by our
PRC resident beneficial holders or future PRC resident stockholders to comply
with Circular 75 and Notice 106, if SAFE requires it, could subject these PRC
resident beneficial holders to fines or legal sanctions, restrict our overseas
or cross-border investment activities, limit our subsidiaries' ability to make
distributions or pay dividends or affect our ownership structure, which could
adversely affect our business and prospects.





Under
the New Enterprise Income Tax Law, we may be classified as a “resident
enterprise” of China. Such classification will likely result in unfavorable tax
consequences to us and our non-PRC stockholders.





On March
16, 2007, the National People’s Congress of China passed the EIT Law and on
November 28, 2007, the State Council of China passed its implementing rules,
both of which took effect on January 1, 2008. Under the 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 enterprise for enterprise income tax purposes. The
implementing rules of the 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 EIT Law and its implementation against non-Chinese enterprise
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 “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) its 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
subject to an enterprise income tax rate of 25% on its worldwide income and its
non-PRC stockholders would be subject to a withholding tax at a rate of 10% when
dividends are paid to such non-PRC stockholders. However, it remains unclear as
to whether the Notice is applicable to an offshore enterprise incorporated by a
Chinese natural person. Nor are detailed measures on enforcement of PRC tax
against non-domestically incorporated resident enterprises are available.
Therefore, it is unclear how tax authorities will determine tax residency based
on the facts of each case.




18




We may be
deemed to be a resident enterprise by Chinese tax authorities. If the PRC tax
authorities determine that we are a “resident enterprise” for PRC enterprise
income tax purposes, a number of unfavorable PRC tax consequences could follow.
First, we may be subject to the enterprise income tax at a rate of 25% on our
worldwide taxable income as well as PRC enterprise income tax reporting
obligations. In our case, this would mean that income such as interest on
financing proceeds and non-China source income would be subject to PRC
enterprise income tax at a rate of 25%. Second, although under the EIT Law and
its implementing rules dividends paid to us from our PRC subsidiary would
qualify as “tax-exempt income,” we cannot guarantee that such dividends will not
be subject to a 10% withholding tax, as the PRC foreign exchange control
authorities, which enforce the withholding tax, have not yet issued guidance
with respect to the processing of outbound remittances to entities that are
treated as resident enterprises for PRC enterprise income tax purposes. Finally,
it is possible that future guidance issued with respect to the new “resident
enterprise” classification could result in a situation in which a 10%
withholding tax is imposed on dividends we pay to our non-PRC stockholders and
with respect to gains derived by our non-PRC stockholders from transferring our
shares. We are actively monitoring the possibility of “resident enterprise”
treatment for the 2010 tax year and are evaluating appropriate organizational
changes to avoid this treatment, to the extent possible.





If we
were treated as a “resident enterprise” by PRC tax authorities, we would be
subject to taxation in both the U.S. and China, and our PRC tax may not be
creditable against our U.S. tax.





We
face uncertainty from China’s Circular on Strengthening the Administration of
Enterprise Income Tax on Non-Resident Enterprises' Share Transfer, or Circular
698, that was released in December 2009 with retroactive effect from January 1,
2008.





The
Chinese State Administration of Taxation released a circular on December 15,
2009 that addresses the transfer of shares by nonresident companies, generally
referred to as Circular 698. Circular 698, which is effective retroactively to
January 1, 2008, may have a significant impact on many companies that use
offshore holding companies to invest in China. Circular 698, which provides
parties with a short period of time to comply with its requirements, indirectly
taxes foreign companies on gains derived from the indirect sale of a Chinese
company. Where a foreign investor indirectly transfers equity interests in a
Chinese resident enterprise by selling the shares in an offshore holding
company, and the latter is located in a country or jurisdiction where the
effective tax burden is less than 12.5% or where the offshore income of his,
her, or its residents is not taxable, the foreign investor is required to
provide the tax authority in charge of that Chinese resident enterprise with the
relevant information within 30 days of the transfers. Moreover, where a foreign
investor indirectly transfers equity interests in a Chinese resident enterprise
through an abuse of form of organization and there are no reasonable commercial
purposes such that the corporate income tax liability is avoided, the PRC tax
authority will have the power to re-assess the nature of the equity transfer in
accordance with PRC’s “substance-over-form” principle and deny the existence of
the offshore holding company that is used for tax planning purposes. There is
uncertainty as to the application of Circular 698. For example, while the term
"indirectly transfer" is not defined, it is understood that the relevant PRC tax
authorities have jurisdiction regarding requests for information over a wide
range of foreign entities having no direct contact with China. It is also
unclear, in the event that an offshore holding company is treated as a
domestically incorporated resident enterprise, whether Circular 698 would still
be applicable to transfer of shares in such offshore holding company. Moreover,
the relevant authority has not yet promulgated any formal provisions or formally
declared or stated how to calculate the effective tax in the country or
jurisdiction and to what extent and the process of the disclosure to the tax
authority in charge of that Chinese resident enterprise. In addition, there are
not any formal declarations with regard to how to decide “abuse of form of
organization” and “reasonable commercial purpose,” which can be utilized by us
to balance if our Company complies with the Circular 698. If Circular 698 is
determined to be applicable to us based on the facts and circumstances around
such share transfers, we may become at risk of being taxed under Circular 698
and we may be required to expend valuable resources to comply with Circular 698
or to establish that we should not be taxed under Circular 698, which could have
a material adverse effect on our financial condition and results of
operations.




19




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 and Chief Executive Officer, is the beneficial owner
of approximately 74.5% 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;


·
            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;




20




·
            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.





Not
Applicable.





ITEM
      2.
            PROPERTIES.





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 located in
Dongbang Town, Changshu, China with approximately $0.36 million 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. We have fully paid the land
use fees. Some of our real property is subject to lien to secure certain bank
loans.





Ningbo
Zhehua leased a factory building located in the Ningbo Camel Machinery &
Electronics Industrial Park, Ningbo, China. The lease has a term of 10 years
which will expire on August 31, 2013.





We have
three principal facilities: Changshu Huaye, Jiangsu Cold-Rolled and Ningbo
Zhehua. Changshu Huaye and Jiangsu Cold-Rolled are located in Dongbang
Industrial park, Changshu, China and Ningbo Zhehua is located in Ningbo, 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 2010. 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 2010, the capacity utilization
rates for the AP Steel production line and cold-rolled steel production line
were approximately 71.0% and 124.0%, 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. As of June 30, 2010, their capacity utilization rate was 39.0%.
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. Ningbo Zhehua was established in 2004. It
has one JCOE production line for large-diameter, double-side, submerged-arc
welded steel pipes, three US Lincoln production lines for spiral seam,
double-side, submerged-arc welded steel pipes and two REF production lines for
roll-bending, double-side, submerged-arc welded steel pipes. In fiscal year
2010, the average utilization rate of our weld steel pipe production lines were
approximately 29.1%.




21




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.
            (REMOVED
      AND RESERVED).




PART
II




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





Market
Information





Our
common stock is quoted on the Nasdaq Capital Market under the symbol
“SUTR.”




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 Bid Prices(1)High
                
                
                LowYear
      Ended June 30, 20101st
      Quarter
                
                $
                4.31
                
                
                $
                2.852nd
      Quarter
                
                
                3.42
                
                
                
                2.353rd
      Quarter
                
                
                4.00
                
                
                
                2.804th
      Quarter
                
                
                3.09
                
                
                
                1.98Year
      Ended June 30, 20091st
      Quarter
                
                $
                7.27
                
                
                $
                2.902nd
      Quarter
                
                
                3.30
                
                
                
                1.313rd
      Quarter
                
                
                2.64
                
                
                
                0.914th
      Quarter
                
                
                4.89
                
                
                
                1.41





(1)The
above table sets forth the range of high and low closing prices per share of our
common stock as reported by www.quotemedia.com
for the periods indicated.





Approximate
Number of Holders of Our Common Stock





As of
September 24, 2010, there were approximately 14 holders 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.




22




Securities
Authorized for Issuance Under Equity Compensation Plans





See Item
12, “Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters — Securities Authorized for Issuance Under Equity
Compensation Plans.”





Recent
Sales of Unregistered Securities





We have
not sold any equity securities during the fiscal year ended June 30, 2010 that
were not previously disclosed in a quarterly report on Form 10-Q or a current
report on Form 8-K that was filed during the 2010 fiscal year.





Purchases
of Equity Securities





No
repurchases of our common stock were made during the fourth quarter of
2010.





ITEM
      6.
            SELECTED
      FINANCIAL DATA.





Not
Applicable.





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





The
following management’s discussion and analysis should be read in conjunction
with our financial statements and the notes thereto and the other financial
information appearing elsewhere in this report. In addition to historical
information, the following discussion contains certain forward-looking
information. See “Special Note Regarding Forward Looking Statements” above for
certain information concerning those forward looking statements. Our financial
statements are prepared in U.S. dollars and in accordance with U.S.
GAAP.





Overview





We are
one of the leading Chinese private manufacturers of fine finished steel products
used by steel fabricators and in other applications. We utilize a variety of
processes and technological methodologies to convert steel manufactured by third
parties into fine finished steel products. Our primary products include HDG
Steel products, PPGI products, AP Steel products, cold-rolled steel, and welded
steel pipe 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.





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
November 2009, we acquired Ningbo Zhehua, which expanded our products offerings
to include welded steel pipe products.





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. As a result of our acquisition of Ningbo Zhehua, we also
generate revenue from sales of steel pipe products, such as longitudinally
welded steel pipes and spiral welded steel pipes. Our revenue has historically
been affected by sales volume, sales price of our products and our product
mix.




23




We have
three reportable business segments: Changshu Huaye, Jiangsu Cold-Rolled and
Ningbo Zhehua, which are our three principal manufacturing
facilities.  Changshu Huaye manufactures HDG Steel and PPGI
products.  In fiscal years 2010 and 2009, Changshu Huaye generated
revenue of $214.6 million and $237.8 million, which represented 44.8% and 55.3%
of our total revenue, respectively.  Jiangsu Cold-Rolled manufactures
AP Steel, cold-rolled steel and HDG Steel. Jiangsu Cold-Rolled generated
revenue of $201.6 million and $103.7 million in fiscal years 2010 and 2009,
which represented 42.1% and 24.1% of our total revenue, respectively. Ningbo
Zhehua manufactures steel pipe products.  In fiscal years 2010 and
2009, Ningbo Zhehua generated revenue of $62.5 million and $88.3 million, which
represented 13.1% and 20.5% of our total revenue, respectively.





A
substantial portion of our products are sold through our affiliate Shanghai
Huaye, which also supplies to us a significant portion of our raw materials.
Approximately 51.0% of our revenue was derived from Shanghai Huaye and its
affiliates in fiscal year 2010, as compared to 44.6% last year. We expanded our
own sales channel this year in effort to gain more market share. At the same
time, we continue to take advantage of Shanghai Huaye’s extensive sales network
and to build brand value.





Cost
of Revenue





Cost of
revenue includes direct costs to manufacture our 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 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.





In fiscal
year 2010, approximately $269.6 million of raw material procurement was
conducted through Shanghai Huaye and its affiliates.  Due to the size
of Shanghai Huaye and the economy of scale, it has stronger bargaining power
than we do and our arrangement with Shanghai Huaye allows us to purchase raw
materials at relatively lower prices than we could obtain from suppliers
ourselves.





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 2010, gross margin for domestic and
international sales were approximately 5.8% and 15.0%, respectively. On a
segment basis, Changshu Huaye, Jiangsu Cold-Rolled and Ningbo Zhehua’s gross
margins were 10.4%, 4.1% and 4.8%, respectively.





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 superior products and services at
competitive 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.





We
implemented a vertical integration strategy where we use our own AP Steel and
cold-rolled steel products as raw materials for HDG Steel and PPGI products. We
believe our vertically integrated operations will allow us to provide customers
with one-stop services, build customer loyalty, and maintain stable operating
margins.





Operating
Expenses





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




24




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 generally affected by the amount of international sales and
our sales to unrelated parties. The transportation costs for our international
sales are generally higher than domestic sales.  In addition, when we
sell products to Shanghai Huaye and its affiliates, Shanghai Huaye generally
arranges and bears the cost of 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





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.





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





Changshu
Huaye, Jiangsu Cold-Rolled and Ningbo Zhehua were and are subject to EIT rates
of 25%, 12.5% and 25% in 2009 and 2010, respectively. See Item 1, “Business –
Regulation – Taxation” for a detailed description of the EIT Law and tax
regulations applicable to our Chinese subsidiaries.





Reportable
Operating Segments





As a
result of the acquisition of Ningbo Zhehua, we now have three reportable
operating segments which are categorized based on manufacturing facilities –
Changshu Huaye, Jiangsu Cold-Rolled and Ningbo Zhehua. Changshu Huaye
manufactures and sells HDG Steel and PPGI products. Jiangsu Cold-Rolled
manufactures and sells AP Steel, Cold-Rolled Steel and HDG Steel. Ningbo Zhehua
manufactures and sells steel pipe products. Changshu Huaye and Jiangsu
Cold-Rolled are adjacent to each other and use largely the same management
resources. Ningbo Zhehua is located in Ningbo, China. See Note 11, “Segment
Information” to the consolidated financial statements included elsewhere in this
report.





Results
of Operations





On
November 10, 2009, Changshu Huaye acquired 100% of the equity interests of
Ningbo Zhehua from Shanghai Huaye for a cash payment of approximately $6.6
million.  We consider Shanghai Huaye to be an affiliate due to the
fact that Ms. Lifang Chen, our major shareholder, chief executive officer and
chairwoman, and her husband Feng Gao own 100% of Shanghai Huaye.  We
treated the acquisition of Ningbo Zhehua as a related party
transaction.  From an accounting perspective, the acquisition was
accounted for as a transfer of equity interests between entities under common
control and was recognized as a recapitalization of Ningbo Zhehua into the
Company in a manner similar to the pooling-of-interests method of accounting,
with the assets and liabilities of Ningbo Zhehua recognized at their historical
carrying amounts.  As a result of the reorganization, the financial
statements for the periods covered by this annual report have been adjusted to
combine the assets, liabilities, stockholders’ equity, and results of operations
and cash flows of Ningbo Zhehua with those of the Company for all periods
presented. The $6.6 million payment to Shanghai Huaye has been recognized as a
dividend distribution to its shareholders in November 2009.




25




Comparison of Fiscal Years
Ended June 20, 2010 and June 30, 2009





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 net
sales.





(All
amounts, other than percentages, in thousands of U.S. dollars)





Fiscal Years Ended June 30,2010
                
                
                2009Amount
                
                
                Percentageof Revenue
                
                
                Amount
                
                
                Percentageof RevenueRevenue:
                
                $
                
                
                
                
                
                
                $Revenue
      from unrelated parties
                
                
                234,634
                
                
                
                49.0
                %
                
                
                238,043
                
                
                
                55.4
                %Revenue
      from related parties
                
                
                244,054
                
                
                
                51.0
                %
                
                
                191,710
                
                
                
                44.6
                %Total
                
                
                478,688
                
                
                
                100.0
                %
                
                
                429,753
                
                
                
                100.0
                %Cost
      of Revenue:Purchases
      from unrelated parties
                
                
                216,663
                
                
                
                45.3
                %
                
                
                185,989
                
                
                
                43.3
                %Purchases
      from related parties
                
                
                229,217
                
                
                
                47.9
                %
                
                
                207,458
                
                
                
                48.3
                %Total
                
                
                445,880
                
                
                
                93.1
                %
                
                
                393,447
                
                
                
                91.6
                %Gross
      Profit
                
                
                32,808
                
                
                
                6.9
                %
                
                
                36,306
                
                
                
                8.4
                %Operating
      ExpensesSelling
      expense
                
                
                8,066
                
                
                
                1.7
                %
                
                
                4,668
                
                
                
                1.1
                %General
      and administrative expense
                
                
                6,358
                
                
                
                1.3
                %
                
                
                5,485
                
                
                
                1.3
                %Total
      Operating Expenses
                
                
                14,425
                
                
                
                3.0
                %
                
                
                10,153
                
                
                
                2.4
                %Income
      from Operations
                
                
                18,383
                
                
                
                3.9
                %
                
                
                26,153
                
                
                
                6.0
                %Other
      Income (Expense)Interest
      income
                
                
                1,106
                
                
                
                0.2
                %
                
                
                1,502
                
                
                
                0.3
                %Other
      income
                
                
                448
                
                
                
                0.1
                %
                
                
                229
                
                
                
                0.1
                %Interest
      expense
                
                
                (5,841
                )
                
                
                (1.2
                )%
                
                
                (6,065
                )
                
                
                (1.4
                )%Other
      expense
                
                
                (367
                )
                
                
                (0.1
                )%
                
                
                (729
                )
                
                
                (0.2
                )%Total
      Other Income (Expense)
                
                
                (4,653
                )
                
                
                (1.0
                )%
                
                
                (5,062
                )
                
                
                (1.2
                )%Income
      Before Taxes
                
                
                13,730
                
                
                
                2.9
                %
                
                
                21,091
                
                
                
                4.9
                %Provision
      for income taxes
                
                
                (2,404
                )
                
                
                (0.5
                )%
                
                
                (2,412
                )
                
                
                (0.6
                )%Net
      Income
                
                $
                11,326
                
                
                
                2.4
                %
                
                $
                18,679
                
                
                
                4.3
                %





Revenue.
Our revenue increased $48.9 million, or 11.4%, to $478.7 million in fiscal year
2010 from $429.8 million in fiscal year 2009. Such increase was mainly due to
higher sales of approximately $99.8 million from the new 400,000 MT HDG steel
production lines operated by Jiangsu Cold-Rolled.





The
following table sets forth revenue by geography and the percentage of our total
revenue and total revenue by business segments for fiscal years 2010 and
2009.





(All
amounts, other than percentages, in thousands of U.S. dollars)





Fiscal Years Ended June 30,2010
                
                
                2009Amount
                
                
                Percentageof Revenue
                
                
                Amount
                
                
                Percentageof RevenueGeographic
      Data:China
                
                $
                425,009
                
                
                
                88.8
                %
                
                $
                384,354
                
                
                
                89.4
                %Other
      Countries
                
                
                53,679
                
                
                
                11.2
                %
                
                
                45,400
                
                
                
                10.6
                %Segment
      Data:Changshu
      Huaye
                
                $
                215,586
                
                
                
                44.9
                %
                
                $
                237,800
                
                
                
                55.3
                %Jiangsu
      Cold-Rolled
                
                
                201,609
                
                
                
                42.0
                %
                
                
                103,685
                
                
                
                24.1
                %Ningbo
      Zhehua
                
                
                62,493
                
                
                
                13.0
                %
                
                
                88,268
                
                
                
                20.5
                %




26





On a
geographic basis, revenue generated from outside of China was $53.7 million, or
11.2% of total revenue for fiscal year 2010, as compared to $45.4 million, or
10.6% of total revenue for fiscal year 2009. As we have increased our marketing
efforts in overseas market, our export sales increased gradually in the last
three fiscal quarters.





On a
segment basis, revenue contributed by Changshu Huaye decreased to $214.6 million
for fiscal year 2010, a decrease of $23.2 million, or 9.8%, from $237.8 million
in fiscal year 2009. Such decrease was mainly due to the decreased sales in
the first fiscal quarter of 2010. In the quarter ended September 30, 2009, due
to global economic crisis, the price of our main raw material steel decreased
approximately 30% which caused the per unit sales price of our products and our
revenue to decrease. The steel market and our sales price gradually
recovered since the first fiscal quarter of 2010.





After
eliminating the inter-company sales, revenues contributed by Jiangsu Cold-Rolled
were $201.6 million for fiscal year 2010, an increase of $97.9 million from
$103.7 million last year. Such increase was mainly due to the increased
output of our 400,000 MT HDG Steel production lines which more than offset the
decrease of revenue contributed by our PPGI products resulting primarily from
the decreased output. In fiscal year 2010, our PPGI production line was mainly
used to manufacture paint-coated sheets, which generally had a higher margin
than common PPGI products. Since manufacturing of paint-coated sheets involves
more complicated process, we produced less PPGI products in fiscal year 2010
than fiscal 2009.





Revenues
contributed by Ningbo Zhehua were $62.5 million for fiscal year 2010, a decrease
of $25.8 million from $88.3 million in fiscal year 2009, primarily
resulting from reduced lower-margin trading volumes. After our acquisition of
Ningbo Zhehua, we made a strategic decision to reduce its lower-margin steel
trading business and increased its efforts on production.





In terms
of sales to related parties as compared with sales to unrelated parties, our
direct sales to unrelated parties in fiscal year 2010 decreased $3.4 million, or
1.4%, to $234.6 million from $238.0 million in fiscal year 2009. By taking
advantage of Shanghai Huaye’s extensive sales and distribution network, we were
able to sell a large portion of Jiangsu Cold-Rolled’s new HDG products through
Shanghai Huaye allowing us to capitalize on increased capacity at a much quicker
pace. At the same time, we also expanded our own sales channel to gain
additional market share.





Cost of
Revenue.  Cost of revenue increased $52.5 million, or 13.3%, to
$445.9 million in fiscal year 2010 from $393.4 million in fiscal year
2009.  As a percentage of revenue, cost of revenue increased to 93.1%
in fiscal year 2010 from 91.6% last year. The amount increase of cost of
revenue was mainly due to the increase of sales. The reason for the reduced
gross margin was due to the fact we received a larger proportion of smaller
orders in fiscal year 2010 as compared to fiscal year 2009, which impaired our
ability to realize economies of scale. Also, the cost of revenue for our new HDG
Steel production lines was relatively higher during the capacity ramping-up
process.





Gross
Profit . Gross profit decreased $3.5 million to $32.8 million in fiscal
year 2010 from $36.3 million in fiscal year 2009.  Gross profit as a
percentage of revenue (gross margin) was 6.9% in fiscal year 2010, as compared
to 8.4% in fiscal year 2009.  On a segment basis, gross margin for
Changshu Huaye decreased to 10.4% in fiscal year 2010 from 12.1% last
year.  Gross margin for Jiangsu Cold-Rolled increased slightly to 4.1%
in fiscal year 2010 from 4.0% last year. Gross margin for Ningbo Zhehua was 4.8%
in fiscal year 2010, as compared to 4.0% in fiscal year 2009. Such decrease in
our gross margin was mainly due to higher production costs attributable to
smaller orders from more customers. During economic recovery, customers tend to
replace large orders with small ones to control risks. Further, lower capacity
utilization ratio of our new HDG production lines also adversely affected the
gross margin.





Total Operating
Expenses. Our total operating expenses increased $4.2 million to $14.4
million in fiscal year 2010 from $10.2 million in fiscal year 2009. As a
percentage of revenue, our total operating expenses increased to 3.0% in fiscal
year 2010 from 2.4% in fiscal year 2009.  Such dollar and percentage
increases were mainly due to increased selling expenses associated with expanded
international sales.


27





General and Administrative
Expenses.  Our general and administrative expenses
increased $0.9 million to $6.4 million in fiscal year 2010 from $5.5
million in fiscal year 2009. As a percentage of revenue, general and
administrative expenses remained the same in 2010 as 1.3% in fiscal year
2009.





Selling Expenses. Our selling
expenses increased $3.4 million to $8.1 million in fiscal year 2010 from $4.7
million in fiscal year 2009. As a percentage of revenue, our selling expenses
increased to 1.7% in fiscal year 2010 from 1.1% in fiscal year 2009. We
increased efforts on marketing and product promotion in the first fiscal quarter
of 2010. In addition, our transportation costs increased in the second half of
fiscal year 2010 due to the increased percentage of international sales and
freight costs.





Interest
Expense. Our
interest expense decreased $0.3 million to $5.8 million in fiscal year 2010,
from $6.1 million in fiscal year 2009. As a percentage of revenue, our interest
expenses decreased to 1.2% in fiscal year 2010, from 1.4% in fiscal year 2009.
Such decrease was mainly due to lower interest rates.  In December
2008, the People’s Bank of China reduced the benchmark interest rate for
one-year loan by 0.27% from 5.58% to 5.31%.





Provision for
Income Taxes. We incurred income tax expense of $2.4 million in both
fiscal years 2010 and 2009.





Net
Income. Net income, without including the foreign currency translation
adjustment, decreased $7.4 million, or 39.6%, to $11.3 million in fiscal year
2010 from $18.7 million in fiscal year 2009, mainly as a result of the decreased
gross margin and sharp increase in selling expenses described
above.





Liquidity
and Capital Resources





Our major
sources of liquidity for the periods covered by this report were borrowings
through short-term bank and private loans.  Our operating activities
used $4.8 million of cash in fiscal year 2010. As of June 30, 2010, our total
indebtedness to non-related parties under existing short-term loans was $82.1
million, our short-term notes payable to related parties was $0.6 million, and
our long-term notes payable to non-related parties was $2.9 million. We had no
long-term notes payable to related parties.





Short-term
bank and private loans are likely to continue to be our key sources of financing
for the foreseeable future, although in the future we may raise additional
capital by issuing shares of our capital stock in an equity financing. We expect
to renew our short term loans when they become due.





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.





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 and (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.


28





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, 2010, we had cash and cash equivalents (excluding restricted cash) of
$13.3 million and restricted cash of $48.3 million.  The following
table provides detailed information about our net cash flow for all financial
statement periods presented in this report.





Cash
Flow


(all
amounts in thousands of U.S. dollars)





(Audited)
                
                Fiscal Years Ended June 30,2010
                
                
                2009Net
      cash (used in) provided by operating activities
                
                $
                (4,833
                )
                
                $
                1,922Net
      cash provided by (used in) investing activities
                
                
                15,537
                
                
                
                (18,891
                )Net
      cash (used in) provided by financing activities
                
                
                (7,906
                )
                
                
                15,086Effect
      of foreign currency translation on cash and cash
    equivalents
                
                
                65
                
                
                
                41Net
      cash flows
                
                
                2,683
                
                
                
                (1,841
                )





Operating
Activities





Net cash
used in operating activities was $4.8 million in fiscal year 2010, a decrease of
$6.7 million from $1.9 million net cash provided by operating activities in
fiscal year 2009.  Such decrease of net cash provided by operating
activities was primarily attributable to decreased net income, increased
advances to suppliers, partially offset by a reduction in account receivables.
During fiscal year 2010, we made more advances to our suppliers for the purchase
of raw materials in anticipation of increased orders in the coming
months.





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
provided by investing activities in fiscal year 2010 was $15.4 million, which is
an increase of $34.3 million from $18.9 million net cash used in investing
activities in fiscal year 2009. We invested approximately $17.4 million in plant
and equipment for constructions of our 400,000 MT HDG Steel production lines in
fiscal year 2009. The remaining variance was primarily due to changes in
restricted cash.





Financing
Activities





Net cash
used in financing activities in fiscal year 2010 totaled $7.9 million as
compared to $15.1 million net cash provided by financing activities in fiscal
year 2009.  Such increase in net cash used in financing activities was
mainly due to the increased outflow for principal payments on notes payable. We
made approximately $6.6 million payment for the acquisition for Ningbo Zhehua in
fiscal year 2010 which offset the approximately $6.8 million net proceeds we
received from the public offering closed in March 2010.


29


We
believe we currently maintain a good business relationship with many banks. As
of June 30, 2010, the amount, maturity date and term of each of our loans were
as follows.





(All
amounts in millions of U.S. dollars)





Lender
                  
                  Amount*
                  
                  
                  Starting Date
                  
                  
                  Maturity Date
                  
                  Guarantor**Changshu
      Rural Commercial Bank
                  
                  
                  1.91
                  
                  
                  
                  2010-3-22
                  
                  
                  
                  2010-7-20
                  
                  NoneChangshu
      Rural Commercial Bank
                  
                  
                  3.23
                  
                  
                  
                  2010-4-9
                  
                  
                  
                  2010-10-8
                  
                  NoneIndustrial
      and Commercial bank of China
                  
                  
                  2.94
                  
                  
                  
                  2010-5-20
                  
                  
                  
                  2011-5-19
                  
                  NoneThe
      Agricultural Bank of China, Changshu Branch
                  
                  
                  7.34
                  
                  
                  
                  2009-5-27
                  
                  
                  
                  2010-5-20
                  
                  Shanghai
      Huaye/ Jiangsu Cold-RolledCommunications
      Bank of China, Changshu Branch
                  
                  
                  2.94
                  
                  
                  
                  2009-6-25
                  
                  
                  
                  2010-12-20
                  
                  Shanghai
      HuayeThe
      Agricultural Bank of China
                  
                  
                  7.34
                  
                  
                  
                  2009-7-10
                  
                  
                  
                  2010-7-9
                  
                  Shanghai
      HuayeThe
      Agricultural Bank of China
                  
                  
                  1.32
                  
                  
                  
                  2009-7-29
                  
                  
                  
                  2010-7-28
                  
                  Shanghai
      HuayeThe
      Agricultural Bank of China
                  
                  
                  5.58
                  
                  
                  
                  2009-9-7
                  
                  
                  
                  2010-8-7
                  
                  Shanghai
      HuayeThe
      Agricultural Bank of China
                  
                  
                  5.87
                  
                  
                  
                  2009-9-15
                  
                  
                  
                  2010-8-15
                  
                  Shanghai
      HuayeThe
      Agricultural Bank of China
                  
                  
                  5.87
                  
                  
                  
                  2009-9-16
                  
                  
                  
                  2010-9-15
                  
                  Shanghai
      HuayeThe
      Agricultural Bank of China
                  
                  
                  5.87
                  
                  
                  
                  2010-9-18
                  
                  
                  
                  2010-7-17
                  
                  Shanghai  HuayeThe
      Agricultural Bank of China
                  
                  
                  9.69
                  
                  
                  
                  2009-10-29
                  
                  
                  
                  2010-10-24
                  
                  NoneThe
      Agricultural Bank of China
                  
                  
                  7.34
                  
                  
                  
                  2009-11-19
                  
                  
                  
                  2010-11-14
                  
                  Shanghai
      HuayeThe
      Agricultural Bank of China
                  
                  
                  2.20
                  
                  
                  
                  2010-2-3
                  
                  
                  
                  2011-1-20
                  
                  Shanghai  HuayeIndustrial
      and Commercial bank of China
                  
                  
                  2.94
                  
                  
                  
                  2010-3-1
                  
                  
                  
                  2011-3-1
                  
                  Changshu
      HuayeIndustrial
      and Commercial bank of China
                  
                  
                  2.94
                  
                  
                  
                  2010-4-30
                  
                  
                  
                  2011-4-29
                  
                  Changshu HuayeChangshu
      Rural Commercial Bank
                  
                  
                  4.99
                  
                  
                  
                  2010-5-26
                  
                  
                  
                  2010-5-24
                  
                  Changshu HuayeBank
      of China, Ning Bo Branch
                  
                  
                  1.79
                  
                  
                  
                  2010-3-10
                  
                  
                  
                  2010-8-10
                  
                  Shanghai
      HuayeChen
      Lifang
                  
                  
                  0.59
                  
                  
                  
                  N/A
                  
                  
                  
                  N/A
                  
                  NoneLin
      Gui Hua
                  
                  
                  2.86
                  
                  
                  
                  2008-11-20
                  
                  
                  
                  2011-11-20
                  
                  NoneTotal
                  
                  
                  85.58


*
            Calculated
      on the basis that $1 = RMB 6.8086




**
              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 generally contain debt covenants that require us to
maintain certain inventory levels. We were in compliance with these debt
covenants as of June 30, 2010.





On March
10, 2010, we completed an offering in which we issued and sold to certain
institutional investors an aggregate of 2,740,000 shares of our common
stockand
warrants to purchase a total of 685,000 shares of our common
stock.  As a result of this offering, we raised approximately $7.40
million in gross proceeds, which left us with approximately $6.8 million in net
proceeds after the deduction of offering expenses in the amount of approximately
$0.6 million.  The offering was effected as a takedown off the
Company’s shelf registration statement on Form S-3 (File No. 333-161026), which
became effective on December 14, 2009 pursuant to a prospectus supplement filed
with the Securities and Exchange Commission on March 5, 2010.





In the
coming 12 months, we have approximately $82.7 million in bank loans that
will mature. We plan to replace these loans with new bank loans in approximately
the same aggregate amounts.





We
believe that our currently available working capital, credit facilities referred
to above and the expected additional credit facility should be adequate to
sustain our operations at the current level for 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.


30





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:





Share Based
Payments– The
Company accounts for share-based compensation to reflect the fair value of
share-based awards measured at the grant date, which is recognized over the
relevant service period, and is adjusted each period for anticipated
forfeitures. The Company estimates 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 Company’s stock compensation
plan.  The plan was approved by the board of directors on April 15,
2009 and approved by the stockholders on June 16, 2009.





Accumulated Other
Comprehensive Income – Accumulated other comprehensive income
presented in the accompanying consolidated financial statements consists of
foreign currency translation adjustments.





Recently Adopted
Accounting Guidance- In February 2010, the Financial Accounting Standards
Board (“FASB”) issued amended guidance on subsequent events. Under this amended
guidance, SEC filers are no longer required to disclose the date through which
subsequent events have been evaluated in originally issued and revised financial
statements. This guidance was effective immediately and the Company adopted
these new requirements in the period ended March 31, 2010.





Business
Combinations


On July
1, 2009, the Company adopted guidance issued by the FASB on business
combinations. The guidance retains the fundamental requirements that the
acquisition method of accounting (previously referred to as the purchase method
of accounting) be used for all business combinations, but requires a number of
changes, including changes in the way assets and liabilities are recognized and
measured as a result of business combinations. It also requires the
capitalization of in-process research and development at fair value and requires
the expensing of acquisition-related costs as incurred. The Company has applied
this guidance to business combinations completed since July 1, 2009. Adoption of
this new guidance did not have an impact on our consolidated financial
statements as the Company did not have any business combination as defined by
this guidance since adoption of the guidance.





Accounting Standards
Codification


In June
2009, the Financial Accounting Standards Board (“FASB”) issued a standard that
established the FASB Accounting Standards Codification (the “ASC”), which
effectively amended the hierarchy of U.S. generally accepted accounting
principles (“GAAP”) and established only two levels of GAAP, authoritative and
non-authoritative. All previously existing accounting standard documents were
superseded, and the ASC became the single source of authoritative,
nongovernmental GAAP, except for rules and interpretive releases of the
Securities and Exchange Commission (the “SEC”), which are sources of
authoritative GAAP for SEC registrants. All other non-grandfathered, non-SEC
accounting literature not included in the ASC became non-authoritative. The ASC
was intended to provide access to the authoritative guidance related to a
particular topic in one place. New guidance issued subsequent to June 30, 2009
will be communicated by the FASB through Accounting Standards Updates. The
ASC was effective for financial statements for interim or annual reporting
periods ending after September 15, 2009. The Company adopted and applied the
provisions of the ASC for its annual reporting ended June 30, 2010, and has
eliminated references to pre-ASC accounting standards throughout the
consolidated financial statements. The adoption of the ASC did not have a
material impact on the Company’s consolidated financial statements.





Fair Value and
Other-Than-Temporary
Impairments


In April
2009, the FASB issued new guidance intended to provide additional application
guidance and enhanced disclosures regarding fair value measurements and
impairments of securities. New guidance related to determining fair value when
the volume and level of activity for the asset or liability have significantly
decreased and identifying transactions that are not orderly provides additional
guidelines for estimating fair value in accordance with pre-existing guidance on
fair value measurements. New guidance on recognition and presentation of
other-than-temporary impairments provides additional guidance related to the
disclosure of impairment losses on securities and the accounting for impairment
losses on debt securities, but does not amend existing guidance related to
other-than-temporary impairments of equity securities. The new guidance was
effective for fiscal years and interim periods ended after June 15, 2009. As
such, the Company adopted this guidance for the year ended June 30, 2010.
Adoption of the new guidance did not have a material impact on the Company’s
consolidated financial statements.


31





Financial
Instruments


In April
2009, the FASB issued an accounting standard that requires disclosures about
fair value of financial instruments not measured on the balance sheet at fair
value in interim financial statements as well as in annual financial statements.
Prior to this accounting standard, fair values for these assets and liabilities
were only disclosed annually. This standard applies to all financial instruments
within its scope and requires all entities to disclose the method(s) and
significant assumptions used to estimate the fair value of financial
instruments. This standard does not require disclosures for earlier periods
presented for comparative purposes at initial adoption, but in periods after the
initial adoption, this standard requires comparative disclosures only for
periods ending after initial adoption. The adoption of this standard did not
have a material impact on the disclosures related to its consolidated
financial statements.





Fair Value
Measurement


In August
2009, the FASB issued an Accounting Standards Update (“ASU”) regarding measuring
liabilities at fair value. This ASU provides additional guidance clarifying the
measurement of liabilities at fair value in circumstances in which a quoted
price in an active market for the identical liability is not available; under
those circumstances, a reporting entity is required to measure fair value using
one or more of valuation techniques, as defined. This ASU is effective for the
first reporting period, including interim periods, beginning after the issuance
of this ASU. The adoption of this ASU did not have a material impact on the
Company’s consolidated financial statements.





Recent
Accounting Pronouncements





Consolidation of Variable
Interest Entities


In June
2009, the FASB issued guidance on the consolidation of variable interest
entities, which is effective for the Company beginning July 1, 2010. The new
guidance requires revised evaluations of whether entities represent variable
interest entities, ongoing assessments of control over such entities, and
additional disclosures for variable interests. The Company believes adoption of
this new guidance will not have a material impact on the financial
statements.





Decreases in Ownership of a
Subsidiary–a Scope
Clarification


In
January 2010, the FASB issued an accounting standard update to address the
accounting and reporting for Decreases in ownership of a subsidiary. This
amendment to Topic 810 clarifies, but does not change, the scope of current US
GAAP. It clarifies the decrease in ownership provisions of Subtopic 810-10 and
removes the potential conflict between guidance in that Subtopic and asset
derecognition and gain or loss recognition guidance that may exist in other US
GAAP. An entity will be required to follow the amended guidance beginning in the
period that it first adopts FAS 160 (now included in Subtopic 810-10). For those
entities that have already adopted FAS 160, the amendments are effective at the
beginning of the first interim or annual reporting period ending on or after
December 15, 2009. The amendments should be applied retrospectively to the first
period that an entity adopted FAS 160. The Company does not expect the
provisions of ASU 2010-02 to have a material effect on the financial position,
results of operations, or cash flows of the Company.





Distributions to
Shareholders with Components of Stock and Cash


In
January 2010, the FASB issued an accounting standard update to address the
accounting for distributions to shareholders with components of stock and cash
(A Consensus of the FASB Emerging Issues Task Force). This amendment to Topic
505 clarifies the stock portion of a distribution to shareholders that allows
them to elect to receive cash or stock with a limit on the amount of cash that
will be distributed is not a stock dividend for purposes of applying Topics 505
and 260 for interim and annual periods ending on or after December 15, 2009, and
should be applied on a retrospective basis. The Company does not expect the
provisions of ASU 2010-01 to have a material effect on the financial position,
results of operations, or cash flows of the Company.


32


Own-Share Lending
Arrangements in Contemplation of Convertible Debt
issuance or Other Financing


In
October 2009, the FASB issued an accounting standard update to address
equity-classified share lending arrangements on an entity’s own shares, when
executed in contemplation of a convertible debt offering or other financing.
This accounting update addresses how to account for the share-lending
arrangement and the effect, if any, that the loaned shares have on
earnings-per-share calculations. The share lending arrangement is required to be
measured at fair value and recognized as an issuance cost associated with the
convertible debt offering or other financing. Earnings-per-share calculations
would not be affected by the loaned shares unless the share borrower defaults on
the arrangement and does not return the shares. If counterparty default is
probable, the share lender is required to recognize an expense equal to the then
fair value of the unreturned shares, net of the fair value of probable
recoveries. This accounting update is effective for share lending agreements
entered into after June 15, 2009 and effective for fiscal years and interim
periods within those years beginning on or after December 15, 2009 for all other
outstanding arrangements, with retrospective application to those arrangements
on the effective date. The Company is currently evaluating the impact of this
statement upon its adoption on the Company’s consolidated financial
statements.





Other
accounting standards that have been issued or proposed by the FASB or other
standards-setting bodies that do not require adoption until a future date are
not expected to have a material impact on our consolidated financial statements
upon adoption.





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, 2010 and
2009 begins on page F-1 of this report.





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





None.





ITEM
      9A.
            CONTROLS
      AND PROCEDURES.





Evaluation
of Disclosure Controls and Procedures





Our
management, with the participation of our chief executive officer and chief
financial officer, Ms. Lifang Chen and Mr. 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 our disclosure controls and procedures were
effective as of June 30, 2010.


33


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.





As of
June 30, 2010, with regard to the scope of our assessment, we excluded Ningbo
Zhehua from our assessment of internal control over financial reporting because
it was acquired in November 2009. Ningbo Zhehua’s revenue was approximately $62
million, representing approximately 13% of our total revenue in fiscal year
2010.





Management
assessed the effectiveness of our internal control over financial reporting as
of June 30, 2010, excluding Ningbo Zhehua. In making this assessment, we used
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, 2010 was effective.





Because
the Company is a smaller reporting company, 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.





Changes
in internal control over financial reporting





Due to
the implementation of remedial measures to address the material weaknesses
identified in our previous filings with the SEC, there were changes in our
internal controls over financial reporting during the fourth
quarter of fiscal 2010 that have materially affected our internal control over
financial reporting. We engaged SEC AuditPrep Limited, an independent financial
service firm, to support us in U.S. GAAP and testing existing Sarbanes-Oxley Act
compliance programs, implemented expanded policies and procedures over financial
reporting, and instituted expanded training of management and staff responsible
for financial transactions and records. As a result of these remedial actions,
management concluded that our internal control over financial reporting,
excluding newly acquired Ningbo Zhehua, was effective as of June 30,
2010.





ITEM
      9B.
            OTHER
      INFORMATION.





We have
no information to disclose that was required to be disclosed in a report on Form
8-K during fourth quarter of fiscal year 2010, but was not
reported.





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
            
            39
            
            Chairman
      of the Board, Chief Executive Officer and PresidentYongfei
      Jiang
            
            33
            
            Director,
      Chief Financial Officer, Treasurer and SecretaryNaijiang
      Zhou
            
            47
            
            Vice
      President of FinanceXun
      Zhang
            
            37
            
            Chief
      Technology OfficerGerard
      Pascale
            
            40
            
            DirectorGuoyou
      Shao
            
            61
            
            DirectorXinchuang
      Li
            
            47
            
            Director




34





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.
Ms. Chen received a M.A. degree in philosophy from Zhenjiang University and a
doctorate degree in Business Management from Century University of America. Ms.
Chen’s management experience, having served as our Chairman since 2007 and our
Chief Executive Officer since 2008, and as Shanghai Huaye’s Vice President since
2001, along with her educational background, led us to the conclusion that she
should serve as a director of our Company, in light of our business and
structure.





Yongfei Jiang.  Mr.
Jiang became a member of our board of directors 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
ten years of experience in corporate accounting and finance. Mr. Jiang graduated
from Zhejiang Finance and Economic College. Mr. Jiang’s management experience,
having served as our Chief Financial Officer since 2005 and as an officer of a
subsidiary of Shanghai Huaye since 2002, along with his finance experience and
educational background, as noted above, led us to the conclusion that he should
serve as a director of our Company, in light of our business and
structure.





Naijiang Zhou. Mr. Zhou became
our Vice President of Finance on February 1, 2010. Mr. Zhou has served as
Executive Vice President and Chief Financial Officer at Rich Fields Investment,
Ltd., a private equity investment firm since 2008.  From April 2007 to
July 2008, Mr. Zhou worked as international research analyst at Roth Capital
Partners, a full service U.S. banking firm.  Before joining Roth
Capital, Mr. Zhou worked for seven years as principal financial planner and
principal financial analyst at American Electric Power, where he was responsible
for strategic planning, financial planning and analysis, and corporate
development. Prior to that, he worked for the Wing Group as financial analyst
and U.S. Global Investors as senior research analyst and co-managed mutual fund
investments. Mr. Zhou received both a Ph.D. and an MBA degree from the
University of Texas at Austin, and a B.S. in Petroleum Engineering from China
Petroleum University. He is a Chartered Financial Analyst (CFA).





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.





Gerard
Pascale.   Mr. Pascale has been a member of our board of
directors since January 15, 2010. Mr. Pascale has extensive experience in
financial accounting, financial analysis and planning, marketing research,
corporate governance and securities. He is a Vice President with Chile Mining
Technologies, Inc. (OTCBB: LVEN), a mineral extraction company based in the
Republic of Chile, whom he advised in preparing for their public transaction and
fund raise. For the past two and a half years he has served as President and CEO
of SC Financial Group, LLC, where he specializes in advising both US and
international clients on valuation, financial modeling and the responsibilities
of publicly traded US companies.  Previously, he was the Director of
Finance at Heritage Management Consultants, Inc. where Mr. Pascale specialized
in providing finance and SEC support throughout the entire process of listing on
a US exchange.  From 2003 to 2005, Mr. Pascale was a Director with the
Corporate Executive Board, a consulting firm delivering data and tools, practice
research and insight to clients. He has also held financial analyst positions
with Intel Corporation and Emerson Electric.  Mr. Pascale has a
Bachelor of Science in Accounting from Virginia Tech and an MBA in finance from
the University of Chicago. Mr. Pascale’s extensive finance, corporate governance
and securities experience, as noted above, along with his educational
background, led us to the conclusion that he should serve as a director of our
Company, in light of our business and structure.


35





Guoyou Shao.  Mr. Shao
has been a member of our board of directors 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. Mr. Shao’s extensive finance and
investor relations experience, as noted above, along with his educational
background, led us to the conclusion that he should serve as a director of our
Company, in light of our business and structure.




Xinchuang Li.  Mr.
Li has been a member of our board of directors since 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. Mr. Li’s extensive industry experience, as noted above, along with
his educational background, led us to the conclusion that he should serve as a
director of our Company, in light of our business and structure.





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.




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, during
the past ten years:





·
            been
      convicted in a criminal proceeding or been subject to a pending criminal
      proceeding (excluding traffic violations and other minor
      offences);




·
            had
      any bankruptcy petition filed by or against the business or property of
      the person, or of any partnership, corporation or business association of
      which he was a general partner or executive officer, either at the time of
      the bankruptcy filing or within two years prior to that
    time;




·
            been
      subject to any order, judgment, or decree, not subsequently reversed,
      suspended or vacated, of any court of competent jurisdiction or federal or
      state authority, permanently or temporarily enjoining, barring, suspending
      or otherwise limiting, his involvement in any type of business,
      securities, futures, commodities, investment, banking, savings and loan,
      or insurance activities, or to be associated with persons engaged in any
      such activity;




·
            been
      found by a court of competent jurisdiction in a civil action or by the
      Securities and Exchange Commission or the Commodity Futures Trading
      Commission to have violated a federal or state securities or commodities
      law, and the judgment has not been reversed, suspended, or
      vacated;




·
            been
      the subject of, or a party to, any federal or state judicial or
      administrative order, judgment, decree, or finding, not subsequently
      reversed, suspended or vacated (not including any settlement of a civil
      proceeding among private litigants), relating to an alleged violation of
      any federal or state securities or commodities law or regulation, any law
      or regulation respecting financial institutions or insurance companies
      including, but not limited to, a temporary or permanent injunction, order
      of disgorgement or restitution, civil money penalty or temporary or
      permanent cease-and-desist order, or removal or prohibition order, or any
      law or regulation prohibiting mail or wire fraud or fraud in connection
      with any business entity; or




·
            been
      the subject of, or a party to, any sanction or order, not subsequently
      reversed, suspended or vacated, of any self-regulatory organization (as
      defined in Section 3(a)(26) of the Exchange Act (15 U.S.C. 78c(a)(26))),
      any registered entity (as defined in Section 1(a)(29) of the Commodity
      Exchange Act (7 U.S.C. 1(a)(29))), or any equivalent exchange,
      association, entity or organization that has disciplinary authority over
      its members or persons associated with a
member.


36





Except as
set forth in our discussion below in Item 13, “Certain Relationships and Related
Transactions, and Director Independence – Transactions with Related Persons,”
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.





Board
Composition and Committees




Our board
of directors is comprised of Lifang Chen, Yongfei Jiang, Gerard Pascale, Guoyou
Shao and Xinchuang Li.





Messrs.
Gerard Pascale, Guoyou Shao, and Xinchuang Li each serves on our board of
directors as an “independent director” as defined by as defined by Rule
5605(a)(2) of the NASDAQ Listing Rules. Our board of directors has determined
that Gerard Pascale possesses the accounting or related financial management
experience that qualifies him as financially sophisticated within the meaning of
Rule 5605(c)(2)(A) of the NASDAQ Listing 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: Gerard Pascale, Guoyou Shao, and Xinchuang
Li. Our audit committee oversees our accounting and financial reporting
processes and the audits of the financial statements of our company. Mr. Pascale
serves as our audit committee chairman.





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;




·
            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;




·
            meeting
      separately and periodically with management and our internal and
      independent auditors;




·
            reporting
      regularly to the full board of directors;
and




·
            such
      other matters that are specifically delegated to our audit committee by
      our board of directors from time to
time.





Compensation
Committee





Our board
of directors established a compensation committee in February 2008. Our
compensation committee consists of three members: Gerard Pascale, Guoyou Shao,
and Xinchuang Li. 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.


37





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




·
            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: Gerard
Pascale, Guoyou Shao, and Xinchuang Li. 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.





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 2010, the Form
3’s for Naijiang Zhou and Gerard Pascale and a Form 4 for Naijiang Zhou were
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.





Summary Compensation Table – Fiscal
Years Ended June 30, 2010 and 2009





The
following table sets forth information concerning all cash and non-cash
compensation awarded to, earned by or paid to the named persons for services
rendered in all capacities during the noted periods. No other executive officer
received total annual salary and bonus compensation in excess of
$100,000.





Name and Principal Position
                        
                        Year
                        
                        
                        Salary
                          ($)
                        
                        
                        Bonus
                          ($)
                        
                        
                        Option
                          Awards (1)
                          ($)
                        
                        
                        All Other
                          Compensation
                          ($)
                        
                        
                        Total
                          ($)Lifang
      Chen, CEO
                        
                        2010
                        
                        
                        
                        100,000
                        
                        
                        
                        -
                        
                        
                        
                        4,534
                        
                        
                        
                        -
                        
                        
                        
                        104,5342009
                        
                        
                        
                        100,000
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        100,000





(1)
Pursuant to the Company’s 2009 Equity Incentive Plan, we granted 40,000 options
to Ms. Chen with an exercise price of $2.71 per share on April 27,
2010. One-third of the option will each vest on the first, second and third
anniversaries of the date of grant. This amount represents the compensation
expense that the Company recognized for financial statement reporting purposes
in fiscal year 2010 for the portion of the fair value of equity awards granted
to Ms. Chen in fiscal year 2010, in accordance with Statement of Financial
Accounting Standards No.123 (Revised 2004), “Share-Based Payment” (“SFAS
123R”).  Such amount thus does not reflect the amount of compensation
actually received by Ms. Chen during the fiscal year 2010.  For a
description of the assumptions used in calculating the fair value of equity
awards under SFAS No.123©, see Note 10 to the consolidated financial statements
included elsewhere in this annual report.





Employment
Agreements





Currently,
we do not have an employment agreement with our CEO, Ms. Lifang
Chen.





On
December 18, 2009, we entered into an employment agreement with Mr. Naijiang
Zhou, our Vice President of Finance, under which Mr. Zhou will receive a monthly
salary of RMB50,000 (approximately $7,353) and 20,000 shares of the Company’s
common stock per year. The employment contract has a one year term, starting
from February 1, 2010, which will be automatically renewed unless terminated or
modified by the parties.





Our
subsidiary, Sutor BVI, has employment agreements with Yongfei Jiang, our Chief
Financial Officer and Xun Zhang, our Chief Technology Officer. Mr. Jiang is an
employee-at-will and is receiving an annual salary at the range of $30,000 to
$60,000 under the agreement. Mr. Zhang is also an employee-at-will and he is
entitled to an annual salary of $30,000 per year under his employment
agreement.





We have
not provided retirement benefits (other than a state pension scheme in which all
of our employees in China participate) or severance or change of control
benefits to our named executive officer.





Outstanding
Equity Awards at Fiscal Year End





The
following table sets forth the equity awards outstanding at June 30, 2010 for
each of our named executive officers.





OPTION AWARDS
                          
                          STOCK AWARDSName
                          
                          Number of
                            Securities
                            Underlying
                            Unexercised
                            Options (#)
                            Exercisable
                          
                          
                          Number of
                            Securities
                            Underlying
                            Unexercised
                            Options (#)
                            Unexercisable
                          
                          
                          Equity
                            Incentive
                            Plan Awards:
                            Number of
                            Securities
                            Underlying
                            Unexercised
                            Unearned
                            Options
                            (#)
                          
                          
                          Option
                            Exercise
                            Price
                            ($)
                          
                          Option
                            Expiration
                            Date
                          
                          Numberof
                            Sharesor
                            Unitsof
                            StockThat
                            Have Not
                            Vested
                            (#)
                          
                          
                          MarketValue
                            ofShares or
                            Units ofStock
                            ThatHave
                            NotVested
                            ($)
                          
                          
                          Equity
                            IncentivePlan
                            Awards:
                            Number of
                            Unearned
                            Shares,Units
                            orOther
                            Rights That
                            Have Not
                            Vested
                            (#)
                          
                          
                          Equity
                            Incentive
                            PlanAwards:
                            Market or
                            PayoutValue
                            ofUnearned
                            Shares, Unitsor
                            OtherRights
                            ThatHave Not
                            Vested
                            (#)Lifang
      Chen
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          40,000
                          (1)
                          
                          
                          2.71
                          
                          4/27/2015
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -




39





(1)
            On
      April 27, 2010, we issued options to our executive officers under the
      Sutor Technology Group Limited 2009 Equity Incentive Plan. One-third of
      the option will each vest on the first, second and third anniversaries of
      the date of grant.





Compensation
of Directors





The table
below sets forth the compensation of our directors for the fiscal year ended
June 30, 2010:





Name
                
                Fees Earned
                  or Paid in Cash
                  ($)
                
                
                Stock
                  Awards
                  ($)
                
                
                Option
                  Awards
                  ($)
                
                
                Non-Equity
                  Incentive Plan
                  Compensation
                  ($)
                
                
                All Other
                  Compensation
                  ($)
                
                
                Total
                  ($)Gerard
      Pascale
                
                
                27,500
                
                
                
                0
                
                
                
                0
                
                
                
                0
                
                
                
                0
                
                
                
                27,500Guoyou
      Shao
                
                
                15,485
                
                
                
                0
                
                
                
                0
                
                
                
                0
                
                
                
                0
                
                
                
                15,485Xinchuang
      Li
                
                
                15,485
                
                
                
                0
                
                
                
                0
                
                
                
                0
                
                
                
                0
                
                
                
                15,485





We have
entered into agreements with each of our independent directors. Under the terms
of the agreements, Mr. Pascale is entitled to $55,000, 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.
Pascale’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. Pascale, 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.





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





Security
Ownership of Certain Beneficial Owners and Management





The
following table sets forth information regarding beneficial ownership of our
common stock as of September 24, 2010 (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.


40





Name & Address of
                                  Beneficial Owner
                                
                                Office, If Any
                                
                                Title of Class
                                
                                Amount &
                                  Nature of
                                  Beneficial
                                  Ownership(1)
                                
                                
                                Percent
                                  of
                                  Class(2)Officers
      and DirectorsLifang Chen
                                
                                Chairman
      and Chief Executive Officer
                                
                                Common
      Stock, $0.001 par value
                                
                                
                                30,338,050
                                (3)
                                
                                
                                74.5
                                %Yongfei
      Jiang
                                
                                Chief
      Financial Officer
                                
                                Common
      Stock, $0.001 par value
                                
                                
                                -
                                
                                
                                
                                *Naijiang
      Zhou
                                
                                VP
      of Finance
                                
                                Common
      Stock, $0.001 par value
                                
                                
                                14,333
                                (4)
                                
                                
                                *Xun
      Zhang
                                
                                Chief
      Technology Officer
                                
                                Common
      Stock, $0.001 par value
                                
                                
                                -
                                
                                
                                
                                *Gerard
      Pascale
                                
                                Director
                                
                                Common
      Stock, $0.001 par value
                                
                                
                                1,625
                                
                                
                                
                                *Guoyou
      Shao
                                
                                Director
                                
                                Common
      Stock, $0.001 par value
                                
                                
                                -
                                
                                
                                
                                *Xinchuang
      Li
                                
                                Director
                                
                                Common
      Stock, $0.001 par value
                                
                                
                                -
                                
                                
                                
                                *All
      Officers and Directors as a group (7 persons named above)
                                
                                
                                
                                
                                
                                
                                30,354,008
                                
                                
                                
                                74.6
                                %5%
      Security HoldersTotal
      Raise Investments Ltd.
                                
                                
                                
                                Common
      Stock, $0.001 par value
                                
                                
                                30,338,050
                                
                                
                                
                                74.5
                                %Lifang
      Chen
                                
                                
                                
                                Common
      Stock, $0.001 par value
                                
                                
                                30,338,050
                                (3)
                                
                                
                                74.5
                                %





·
            Less
      than 1%





(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 40,695,602 shares of our common stock are considered to be
      outstanding pursuant to SEC Rule 13d-3(d)(1) as of September 24, 2010. 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
      BVI company wholly owned by Ms. Chen. Ms. Chen disclaims beneficial
      ownership of such shares except to the extent of her pecuniary interest
      therein.





(4)
            On
      February 1, 2010, Mr. Zhou received 20,000 shares of our common stock in
      accordance with the terms of the employment agreement, to vest in equal
      installments over a twelve month period.  As of September 24,
      2010, 10,000 of these shares have vested and an additional 3,333 shares
      will vest within 60 days.




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.





Securities
Authorized for Issuance Under Equity Compensation Plans





The
following table includes the information as of the end of fiscal year 2010 for
each category of our equity compensation plan:


41





Plan category
                    
                    Number of securities
                      tobe issued upon
                      exerciseof
                      outstanding options,
                      restricted stock,
                      warrants and rights
                      (a)
                    
                    
                    Weighted-average
                      exercise price of
                      outstanding
                      options,restricted
                      stock, warrants
                      andrights
                      (b)
                    
                    
                    Number of securities
                      remainingavailable for
                      future issuanceunder
                      equity compensation
                      plans(excluding securities
                      reflected in column (a))
                      ©Equity
      compensation plans approved by security holders(1)
                    
                    
                    100,000
                    (2)
                    
                    $
                    2.71
                    
                    
                    
                    1,900,000Equity
      compensation plans not approved by security holders
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Total
                    
                    
                    100,000
                    
                    
                    $
                    2.71
                    
                    
                    
                    1,900,000





(1)
            On
      April 15, 2009, our board of directors authorized the establishment of the
      Sutor Technology Group Limited 2009 Equity Incentive Plan, whereby we are
      authorized to issue shares of our Common Stock to certain employees,
      directors and consultants. The maximum aggregate number of shares of our
      common stock that may be issued under the Plan is 2,000,000 shares. The
      Plan was approved by our stockholders on June 16,
  2009.





(2)
            On
      April 27, 2010, we granted options to purchase a total of 100,000 shares
      of our common stock to certain officers, directors and employees with an
      exercise price of $2.71. One third of the option will vest and become
      exercisable on the first, second and third anniversaries of the date of
      grant.  On February 1, 2010, we issued 20,000 shares of our
      common stock to Mr. Naijiang Zhou, to vest in equal installments over a
      twelve month period.





ITEM
      13.
            CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
      INDEPENDENCE.





Transactions
with Related Persons





The
following includes a summary of transactions since the beginning of our 2009
fiscal year, or any currently proposed transaction, in which we were or are to
be a participant and the amount involved exceeded or exceeds the lesser of
$120,000 or one percent of the average of our total assets at year-end for the
last two completed fiscal years, and in which any related person had or will
have a direct or indirect material interest (other than compensation described
under Item 11, “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. See Note 7, “Related Parties” to the consolidated financial
      statements included elsewhere in this report. These transactions related
      to the sale of our products are set forth
below:





Amount of TransactionRelated Party
                        
                        Nature of Transaction
                        
                        Fiscal2010
                        
                        
                        Fiscal 2009Changshu
      Diemate Steel Processing Co. Ltd.
                        
                        Sale
      of products by Company
                        
                        $
                        410,755
                        
                        
                        $
                        70,168Guangzhou
      Huaye Steel Processing Co. Ltd.
                        
                        Sale
      of products by Company
                        
                        
                        
                        
                        
                        
                        264,410Hangzhou
      Nanye Material Co. Ltd.
                        
                        Sale
      of products by Company
                        
                        
                        
                        
                        
                        
                        -Hangzhou
      Xiaoshan Southern Industry Co., Ltd.
                        
                        Sale
      of products by Company
                        
                        
                        207,118
                        
                        
                        
                        397,727Ningbo
      Huaye Steel Processing Co., Ltd.
                        
                        Sale
      of products by Company
                        
                        
                        456,392
                        
                        
                        
                        15,631Shanghai
      Huaye Steel Processing Co., Ltd.
                        
                        Sale
      of products by Company
                        
                        
                        18,010,636
                        
                        
                        
                        6,457,867Shanghai
      Huaye Steel Group Co., Ltd.
                        
                        Sale
      of products by Company
                        
                        
                        192,828,758
                        
                        
                        
                        142,092,727Wuxi
      Haide Steel Processing Co., Ltd.
                        
                        Sale
      of products by Company
                        
                        
                        8,642,826
                        
                        
                        
                        177,459Shanghai
      Pukesheng Steel Trade Co., Ltd
                        
                        Sale
      of products by Company
                        
                        
                        12,244,568
                        
                        
                        
                        1,487,213Zhejiang
      Nanye Metal Cutting & Delivery Co., Ltd.
                        
                        Sale
      of products by Company
                        
                        
                        70,871
                        
                        
                        
                        15,719Guangzhou
      Qiyuan Steel Processing Co., Ltd.
                        
                        Sale
      of products by Company
                        
                        
                        8,667,138Tianjin
      Huaye Steel processing Co., Ltd.
                        
                        Sale
      of products by Company
                        
                        
                        2,514,821




42


·
            On
      November 10, 2009, Changshu Huaye acquired 100% of the equity interests of
      Ningbo Zhehua from Shanghai Huaye for a cash payment of approximately $6.6
      million.  We consider Shanghai Huaye to be an affiliate due to
      the fact that Ms. Lifang Chen, our major shareholder, chief executive
      officer and chairwoman, and her husband Feng Gao own 100% of Shanghai
      Huaye.  We treated the acquisition of Ningbo Zhehua as a related
      party transaction.  From an accounting perspective, the
      acquisition was accounted for as a transfer of equity interests between
      entities under common control and was recognized as a recapitalization of
      Ningbo Zhehua into the Company in a manner similar to the
      pooling-of-interests method of accounting, with the assets and liabilities
      of Ningbo Zhehua recognized at their historical carrying
      amounts.  As a result of the reorganization, the financial
      statements for the periods covered by this annual report have been
      adjusted to combine the assets, liabilities, stockholders’ equity, and
      results of operations and cash flows of Ningbo Zhehua with those of the
      Company for all periods presented. The $6.6 million payment to Shanghai
      Huaye has been recognized as a dividend distribution to its shareholders
      in November 2009.





·
            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%. On July 25, 2009, Ms. Chen loaned our Company $0.2
      million which had a term of one year and carried an annual interest rate
      of 2.0%. The notes to Ms. Chen described above plus the accrued interest
      on the notes was transferred to Shanghai Huaye by Ms. Chen pursuant to an
      agreement between the parties dated December 10, 2009. 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. For details of these loans, see Item 7, “Management’s
      Discussion and Analysis of Financial Condition and Results of Operations –
      Liquidity and Capital
Resources.”





·
            Some
      of our notes payables are guaranteed by Shanghai Huaye and its affiliates,
      as disclosed under Item 7, “Management’s Discussion and Analysis of
      Financial Condition and Results of Operations – Liquidity and Capital
      Resources.” 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, we entered into a lease agreement with Ms. Lifang Chen
      under which we rented 12F, Building B, World Trade Center, NO.45, North
      Haiyu Road, Changshu Cityfrom Ms. Chen as
      our 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).





·
            On
      August 6, 2004, our subsidiary Ningbo Zhehua entered into a lease
      agreement with Ningbo Huaye Steel Processing Co., Ltd., a subsidiary of
      Shanghai Huaye, pursuant to which Ningbo Zhehua leased a factory building
      located at the Ningbo Camel Machinery & Electronics Industrial Park.
      The lease agreement has a term of 10 years which will expire on August 31,
      2013 and the annual rent is RMB 960,000 (approximately $0.14
      million).





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.





Promoters
and Certain Control Persons





We did
not have any promoters at any time during the past five fiscal
years.





Parents
of the Company





Total
Raise Investments Ltd., an entity owned and controlled by Ms. Lifang Chen, our
Chairman and Chief Executive Officer, currently owns 74.5% of our common
stock.


43


Director
Independence





Messrs.
Gerard Pascale, Guoyou Shao, and Xinchuang Li each serves on our board of
directors as an “independent director” as defined by Rule 5605(a)(2) of the
NASDAQ Listing Rules.





ITEM
      14.
            PRINCIPAL
      ACCOUNTING FEES AND SERVICES.





Independent
Registered Public Accounting Firm’s Fees





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, 2010 and 2009:





(in
thousands of U.S. dollars)





Fiscal Years Ended June 30,2010
                
                
                2009Audit
      fees(1)
                
                $
                444.8
                
                
                $
                268.6Audit-related
      fees(2)
                
                
                45.8
                
                
                
                39.6Tax
      fees
                
                
                -
                
                
                
                -All
      other fees
                
                
                -
                
                
                
                -Total
                
                $
                490.6
                
                
                $
                308.2





(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.





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, 2010.





PART
IV




ITEM
      15.
            EXHIBITS,
      FINANCIAL STATEMENT SCHEDULES.





Financial
Statements and Schedules





The
financial statements are set forth under Item 8 of this annual report on Form
10-K. Financial statement schedules have been omitted since they are either not
required, not applicable, or the information is otherwise included.





Exhibit
List





The list
of exhibits in the Exhibit Index to this Report is incorporated herein by
reference.


44


SIGNATURES




In
accordance with section 13 or 15(d) of the Securities Exchange Act of 1934, the
Registrant caused this Report on Form 10-K to be signed on its behalf by the
undersigned, thereto duly authorized individual.




Date:
September 28, 2010


SUTOR
      TECHNOLOGY GROUP LIMITEDBy:
              /s/ Lifang ChenLifang
      ChenChief
      Executive OfficerBy:
              /s/
      Yongfei JiangYongfei
      JiangChief
      Financial Officer




In
accordance with the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the Registrant and in the capacities
and on the dates indicated.





Signature
                      
                      Title
                      
                      Date/s/
      Lifang Chen
                      
                      
                      Chairman
      and Chief Executive Officer
                      
                      September
      28, 2010Lifang
      Chen
                      
                      (Principal
      Executive Officer)/s/
      Yongfei Jiang
                      
                      
                      Director,
      Chief Financial Officer
                      
                      September
      28, 2010Yongfei
      Jiang
                      
                      (Principal
      Financial and Accounting Officer)/s/
      Gerard Pascale
                      
                      
                      Director
                      
                      September
      28, 2010Gerard
      Pascale/s/
      Guoyou Shao
                      
                      
                      Director
                      
                      September
      28, 2010Guoyou
      Shao/s/
      Xinchuang Li
                      
                      
                      Director
                      
                      September
      28, 2010Xinchuang
      Li




45













SUTOR
TECHNOLOGY GROUP LIMITED










PART
I


FINANCIAL
INFORMATION




ITEM
      1.
            FINANCIAL
      STATEMENTS.





SUTOR
TECHNOLOGY GROUP LIMITED AND SUBSIDIARIES


CONSOLIDATED
FINANCIAL STATEMENTS





PageReport
      of Independent Registered Public Accounting Firm
              
              2Consolidated
      Balance Sheets as of June 30, 2010 and 2009
              
              3Consolidated
      Statements of Operations and Comprehensive Income for the Years Ended June
      30, 2010 and 2009
              
              4Consolidated
      Statement of Stockholders’ Equity for the Years Ended June 30, 2009 and
      2010
              
              5Consolidated
      Statements of Cash Flows for the Years Ended June 30, 2010 and
      2009
              
              6Notes
      to Consolidated Financial Statements
              
              7




1




HANSEN,BARNETT& MAXWELL,
      P.C.
              A
      Professional Corporation
              CERTIFIED
      PUBLIC ACCOUNTANTS
              5
      Triad Center, Suite 750
              Salt
      Lake City, UT 84180-1128
              Phone:
      (801) 532-2200
              Fax:
      (801) 532-7944
              www.hbmcpas.com
            Registered
      with the Public Company
              Accounting
      Oversight Board
              
              
              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, 2010 and 2009, and the related
consolidated statements of operations and comprehensive income, stockholders’
equity, and cash flows for the years then ended. 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, 2010 and 2009 and the results of their
operations and their cash flows for the years then ended, in conformity with
accounting principles generally accepted in the United States of
America.




HANSEN,
BARNETT & MAXWELL, P.C.





Salt Lake
City, Utah


September
28, 2010




2




SUTOR
TECHNOLOGY GROUP LIMITED AND SUBSIDIARIES
 CONSOLIDATED
BALANCE SHEETS





June 30,
                            
                            
                            June 30,2010
                            
                            
                            2009ASSETSCurrent
      Assets:Cash
      and cash equivalents
                            
                            $
                            13,336,736
                            
                            
                            $
                            10,653,438Restricted
      cash
                            
                            
                            48,315,962
                            
                            
                            
                            64,811,741Trade
      accounts receivable, net of allowance for doubtful accounts of $498,620
      and $816,268, respectively
                            
                            
                            10,913,736
                            
                            
                            
                            12,107,602Other
      receivables
                            
                            
                            929,507
                            
                            
                            
                            463,916Advances
      to suppliers, related parties
                            
                            
                            96,776,181
                            
                            
                            
                            76,391,552Advances
      to suppliers, net of allowance of $542,490 and $816,268,
      respectively
                            
                            
                            8,304,246
                            
                            
                            
                            25,039,763Inventory,
      net of allowance for impairment of $102,028 and $0,
      respectively
                            
                            
                            40,179,358
                            
                            
                            
                            44,163,502Notes
      receivable
                            
                            
                            73,437
                            
                            
                            
                            178,237Deferred
      income taxes
                            
                            
                            329,414
                            
                            
                            
                            397,998Total
      Current Assets
                            
                            
                            219,158,577
                            
                            
                            
                            234,207,749Property and Eqipment,net of accumulated depreciation of $25,914,352 and $18,799,673,
      respectively
                            
                            
                            70,018,522
                            
                            
                            
                            77,242,707Intangible Assets,net
      of accumulated amortization of $415,178 and $345,130,
      respectively
                            
                            
                            2,995,488
                            
                            
                            
                            3,047,498TOTAL
      ASSETS
                            
                            $
                            292,172,587
                            
                            
                            $
                            314,497,954LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      Liabilities:Accounts
      payable
                            
                            $
                            23,954,009
                            
                            
                            $
                            40,183,304Advances
      from customers
                            
                            
                            6,769,481
                            
                            
                            
                            18,805,901Other
      payables and accrued expenses
                            
                            
                            4,688,324
                            
                            
                            
                            3,810,075Other
      payables - related parties
                            
                            
                            352,495
                            
                            
                            
                            140,252Short-term
      notes payable
                            
                            
                            82,128,484
                            
                            
                            
                            80,232,845Short-term
      notes payable - related parties
                            
                            
                            587,492
                            
                            
                            
                            9,900,727Total
      Current Liabilities
                            
                            
                            118,480,285
                            
                            
                            
                            153,073,104Long-Term
      Notes Payable
                            
                            
                            2,859,995
                            
                            
                            
                            2,859,995Long-Term
      Notes Payable - Related Parties
                            
                            
                            -
                            
                            
                            
                            249,996Total
      Liabilities
                            
                            
                            121,340,280
                            
                            
                            
                            156,183,095Stockholders'
      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, 40,715,602 and
      37,955,602 shares outstanding, respectively
                            
                            
                            40,715
                            
                            
                            
                            37,955Additional
      paid-in capital
                            
                            
                            42,465,581
                            
                            
                            
                            42,233,307Statutory
      reserves
                            
                            
                            12,629,151
                            
                            
                            
                            12,601,921Retained
      earnings
                            
                            
                            96,164,928
                            
                            
                            
                            84,865,780Accumulated
      other comprehensive income
                            
                            
                            19,531,932
                            
                            
                            
                            18,575,896Total
      Stockholders' Equity
                            
                            
                            170,832,307
                            
                            
                            
                            158,314,859TOTAL
      LIABILITIES AND STOCKHOLDERS' EQUITY
                            
                            $
                            292,172,587
                            
                            
                            $
                            314,497,954




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




3




SUTOR
TECHNOLOGY GROUP LIMITED AND SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF OPERATIONS
 AND
COMPREHENSIVE INCOME




For
      The Years Ended June 302010
                                      
                                      
                                      2009Revenue:Revenue
                                      
                                      $
                                      234,633,835
                                      
                                      
                                      $
                                      238,043,282Revenue
      from related parties
                                      
                                      
                                      244,053,884
                                      
                                      
                                      
                                      191,710,186478,687,719
                                      
                                      
                                      
                                      429,753,468Cost
      of RevenueCost
      of revenue
                                      
                                      
                                      216,663,282
                                      
                                      
                                      
                                      185,988,885Cost
      of revenue from related party sales
                                      
                                      
                                      229,216,965
                                      
                                      
                                      
                                      207,458,120445,880,247
                                      
                                      
                                      
                                      393,447,005Gross
      Profit
                                      
                                      
                                      32,807,472
                                      
                                      
                                      
                                      36,306,463Operating
      Expenses:Selling
      expense
                                      
                                      
                                      8,066,336
                                      
                                      
                                      
                                      4,668,095General
      and administrative expense
                                      
                                      
                                      6,358,399
                                      
                                      
                                      
                                      5,484,802Total
      Operating Expenses
                                      
                                      
                                      14,424,735
                                      
                                      
                                      
                                      10,152,897Income
      from Operations
                                      
                                      
                                      18,382,737
                                      
                                      
                                      
                                      26,153,566Other
      Income (Expense):Interest
      income
                                      
                                      
                                      1,106,114
                                      
                                      
                                      
                                      1,502,168Other
      income
                                      
                                      
                                      448,465
                                      
                                      
                                      
                                      229,602Interest
      expense
                                      
                                      
                                      (5,840,518
                                      )
                                      
                                      
                                      (6,064,680
                                      )Other
      expense
                                      
                                      
                                      (366,926
                                      )
                                      
                                      
                                      (729,302
                                      )Total
      Other Income (Expense)
                                      
                                      
                                      (4,652,865
                                      )
                                      
                                      
                                      (5,062,212
                                      )Income
      Before Taxes
                                      
                                      
                                      13,729,872
                                      
                                      
                                      
                                      21,091,354Provision
      for income taxes
                                      
                                      
                                      (2,403,494
                                      )
                                      
                                      
                                      (2,412,243
                                      )Net
      Income
                                      
                                      $
                                      11,326,378
                                      
                                      
                                      $
                                      18,679,111Basic
      and Diluted Earnings per Common Share
                                      
                                      $
                                      0.29
                                      
                                      
                                      $
                                      0.49Basic
      Weighted Shares Outstanding
                                      
                                      
                                      38,804,588
                                      
                                      
                                      
                                      37,955,602Diluted
      Weighted Shares Outstanding
                                      
                                      
                                      38,806,363
                                      
                                      
                                      
                                      37,955,602Net
      Income
                                      
                                      $
                                      11,326,378
                                      
                                      
                                      $
                                      18,679,111Foreign
      currency translation adjustment
                                      
                                      
                                      956,036
                                      
                                      
                                      
                                      587,942Comprehensive
      Income
                                      
                                      $
                                      12,282,414
                                      
                                      
                                      $
                                      19,267,053




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




4




SUTOR
TECHNOLOGY GROUP LIMITED AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


Accumulated Other
                        
                        
                        TotalCommon stock
                        
                        
                        AdditionalPaid-in
                        
                        
                        Statutory
                        
                        
                        Retained
                        
                        
                        Comprehensive
                        
                        
                        Stockholders’Shares
                        
                        
                        Amount
                        
                        
                        Capital
                        
                        
                        Reserves
                        
                        
                        Earnings
                        
                        
                        Income
                        
                        
                        EquityBalance,
      June 30, 2008
                        
                        
                        37,955,602
                        
                        
                        $
                        37,955
                        
                        
                        $
                        42,233,307
                        
                        
                        $
                        12,586,448
                        
                        
                        $
                        66,202,142
                        
                        
                        $
                        17,987,954
                        
                        
                        $
                        139,047,806Provision
      of surplus reserves
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        15,473
                        
                        
                        
                        (15,473
                        )
                        
                        
                        
                        
                        
                        
                        -Net
      income for the year
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        18,679,111
                        
                        
                        
                        
                        
                        
                        
                        18,679,111Foreign
      currency translation difference
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        587,942
                        
                        
                        
                        587,942Balance,
      June 30, 2009
                        
                        
                        37,955,602
                        
                        
                        
                        37,955
                        
                        
                        
                        42,233,307
                        
                        
                        
                        12,601,921
                        
                        
                        
                        84,865,780
                        
                        
                        
                        18,575,896
                        
                        
                        
                        158,314,859Distribution
      to certain stockholders in connection with the reorganization with
      Ningbo
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        (6,615,825
                        )
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        (6,615,825
                        )Issuance
      of common stock and 685,000 warrants, net of issuance cost of
      $583,804
                        
                        
                        2,740,000
                        
                        
                        
                        2,740
                        
                        
                        
                        6,811,456
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        6,814,196Provision
      of surplus reserves
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        27,230
                        
                        
                        
                        (27,230
                        )
                        
                        
                        
                        
                        
                        
                        -Stock
      based compensation
                        
                        
                        20,000
                        
                        
                        
                        20
                        
                        
                        
                        36,643
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        36,663Net
      income for the year
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        11,326,378
                        
                        
                        
                        
                        
                        
                        
                        11,326,378Foreign
      currency translation difference
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        956,036
                        
                        
                        
                        956,036Balance,
      June 30, 2010
                        
                        
                        40,715,602
                        
                        
                        $
                        40,715
                        
                        
                        $
                        42,465,581
                        
                        
                        $
                        12,629,151
                        
                        
                        $
                        96,164,928
                        
                        
                        $
                        19,531,932
                        
                        
                        $
                        170,832,307




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




5




SUTOR
TECHNOLOGY GROUP LIMITED AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


For The Years Ended June 30,2010
                
                
                2009Cash
      Flows from Operating Activities:Net
      income
                
                $
                11,326,378
                
                
                $
                18,679,111Adjustments
      to reconcile net income to net cash provided by operating
      activitiesDepreciation
      and amortization
                
                
                7,117,592
                
                
                
                6,299,498Deferred
      income taxes
                
                
                70,410
                
                
                
                (107,829
                )Stock
      based compensation
                
                
                36,663
                
                
                
                -Loss
      (gain) on sale of assets
                
                
                3,550
                
                
                
                (161,458
                )Changes
      in current assets and liabilities:Trade
      accounts receivable, net
                
                
                1,253,074
                
                
                
                143,247Other
      receivable, net
                
                
                (461,222
                )
                
                
                389,688Advances
      to suppliers
                
                
                16,863,747
                
                
                
                16,158,584Inventories
                
                
                4,201,631
                
                
                
                19,893,366Accounts
      payable
                
                
                (14,370,322
                )
                
                
                (40,565,903
                )Advances
      from customers
                
                
                (12,085,352
                )
                
                
                (1,986,380
                )Other
      payables and accrued expenses
                
                
                716,464
                
                
                
                (283,571
                )Other
      payables - related parties
                
                
                351,048
                
                
                
                -Advances
      to suppliers - related parties
                
                
                (19,856,665
                )
                
                
                (16,535,974
                )Net
      Cash Provided By (Used in) Operating Activities
                
                
                (4,833,004
                )
                
                
                1,922,379Cash
      Flows from Investing Activities:Changes
      in notes receivable
                
                
                105,314
                
                
                
                7,301Purchase
      of property and equipment, net of value added tax refunds
      received
                
                
                (1,519,153
                )
                
                
                (17,433,620
                )Proceeds
      from sale of assets
                
                
                -
                
                
                
                783,033Net
      change in restricted cash
                
                
                16,771,227
                
                
                
                (2,247,589
                )Net
      Cash Provided By (Used in) Investing Activities
                
                
                15,357,388
                
                
                
                (18,890,875
                )Cash
      Flows from Financing Activities:Proceeds
      from issuance of notes payable
                
                
                100,047,386
                
                
                
                116,797,110Payments
      on notes payable
                
                
                (97,999,281
                )
                
                
                (102,544,496
                )Proceeds
      from issuance of notes payable - related parties
                
                
                199,932
                
                
                
                3,354,441Payments
      on notes payable - related parties
                
                
                (10,352,520
                )
                
                
                (2,520,812
                )Distribution
      to certain shareholders in connection with the reorganization of
      Ningbo
                
                
                (6,615,825
                )
                
                
                -Net
      proceeds from issuance of common stock and warrants
                
                
                6,814,196
                
                
                
                -Proceeds
      from issuance of notes payable - principal shareholder
                
                
                -
                
                
                
                -Net
      Cash (Used in) Financing Activities
                
                
                (7,906,112
                )
                
                
                15,086,243Effect
      of Exchange Rate Changes on Cash
                
                
                65,026
                
                
                
                41,352Net
      Change in Cash
                
                
                2,683,298
                
                
                
                (1,840,901
                )Cash
      and Cash Equivalents at Beginning of Year
                
                
                10,653,438
                
                
                
                12,494,339Cash
      and Cash Equivalents at End of Year
                
                $
                13,336,736
                
                
                $
                10,653,438Supplemental
      Non-Cash Financing ActivitiesOffset
      of notes payable to related party against receivable from related parties
      (Note 6)
                
                $
                9,687,935
                
                
                $
                -Supplemental
      Cash Flow InformationCash
      paid during the year for interest
                
                $
                5,305,877
                
                
                $
                4,330,148Cash
      paid during the year for income taxes
                
                $
                1,761,019
                
                
                $
                3,131,154




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


6
 
  SUTOR
TECHNOLOGY GROUP LIMITED AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


NOTE
1 - ORGANIZATION AND NATURE OF OPERATIONS





Sutor
Technology Group Limited and subsidiaries (the “Company”) include its wholly
owned subsidiaries Sutor Steel Technology Co., Ltd. (“Sutor
Steel”),  Changshu Huaye Steel Strip Co., Ltd. (“Changshu
Huaye”),  Jiangsu Cold-Rolled Technology Co., Ltd. (“Jiangsu
Cold-Rolled”), Ningbo Zhehua Heavy Steel Pipe Manufacturing Co., Ltd. (“Ningbo
Zhehua”) and Sutor Technology Co., Ltd (“Sutor Technology”).





Ningbo
Zhehua was organized under the laws of the People’s Republic of China (the
“PRC”) on April 5, 2004. On November 10, 2009, pursuant to an Equity Transfer
Agreement (the “Agreement”), Changshu Huaye acquired 100% of the equity
interests of Ningbo Zhehua from Shanghai Huaye Iron & Steel Co., Ltd., (an
entity under common control with the Company) (“Shanghai Huaye”) for
approximately $6,615,825 in cash. The acquisition was a transfer of equity
interests between entities under common control and was recognized as a
recapitalization of Ningbo Zhehua into the Company in a manner similar to
the pooling-of-interests method of accounting, with the assets and liabilities
of Ningbo Zhehua recognized at their historical carrying amounts.





As a
result of the reorganization, the accompanying financial statements have been
adjusted to combine the assets, liabilities, stockholders’ equity, and results
of operations and cash flows of Ningbo Zhehua with those of the Company for all
periods presented. The $6,615,825 payment to Shanghai Huaye has been recognized
as a dividend distribution to certain of the Company’s shareholders in November
2009. The assets, liabilities and stockholder’s equity of the previously
separate companies at September 30, 2009 and June 30, 2009 were as
follows:





September 
      30,  2009
                  
                  
                  June 
      30,  2009Sutor
                  
                  
                  Ningbo
                  
                  
                  Adjustments
                  
                  
                  Combined
                  
                  
                  Sutor
                  
                  
                  Ningbo
                  
                  
                  Adjustments
                  
                  
                  CombinedCurrent
      assets
                  
                  $
                  227,441,765
                  
                  
                  $
                  27,265,093
                  
                  
                  $
                  (23,613,269
                  )
                  
                  $
                  231,093,589
                  
                  
                  $
                  229,600,069
                  
                  
                  $
                  25,363,397
                  
                  
                  $
                  (20,755,717
                  )
                  
                  $
                  234,207,749Property
      and equipment
                  
                  
                  68,258,117
                  
                  
                  
                  7,315,444
                  
                  
                  
                  
                  
                  
                  
                  75,573,561
                  
                  
                  
                  69,766,127
                  
                  
                  
                  7,476,580
                  
                  
                  
                  
                  
                  
                  
                  77,242,707Total
      assets
                  
                  
                  298,733,608
                  
                  
                  
                  34,580,537
                  
                  
                  
                  (23,613,269
                  )
                  
                  
                  309,700,876
                  
                  
                  
                  302,413,694
                  
                  
                  
                  32,839,977
                  
                  
                  
                  (20,755,717
                  )
                  
                  
                  314,497,954Current
      liabilities
                  
                  $
                  143,328,474
                  
                  
                  $
                  27,883,356
                  
                  
                  $
                  (23,613,269
                  )
                  
                  $
                  147,598,561
                  
                  
                  $
                  147,364,412
                  
                  
                  $
                  26,464,410
                  
                  
                  $
                  (20,755,718
                  )
                  
                  $
                  153,073,104Long-term
      liabilities
                  
                  
                  3,109,991
                  
                  
                  
                  -
                  
                  
                  
                  
                  
                  
                  
                  3,109,991
                  
                  
                  
                  3,109,991
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  3,109,991Common
      stock
                  
                  
                  37,955
                  
                  
                  
                  5,063,143
                  
                  
                  
                  (5,063,143
                  )
                  
                  
                  37,955
                  
                  
                  
                  37,955
                  
                  
                  
                  5,063,143
                  
                  
                  
                  (5,063,143
                  )
                  
                  
                  37,955Additional
      paid-in capital
                  
                  
                  37,170,164
                  
                  
                  
                  -
                  
                  
                  
                  5,063,143
                  
                  
                  
                  42,233,307
                  
                  
                  
                  37,170,164
                  
                  
                  
                  -
                  
                  
                  
                  5,063,143
                  
                  
                  
                  42,233,307Statutory
      reserves
                  
                  
                  12,586,995
                  
                  
                  
                  14,926
                  
                  
                  
                  
                  
                  
                  
                  12,601,921
                  
                  
                  
                  12,586,995
                  
                  
                  
                  14,926
                  
                  
                  
                  -
                  
                  
                  
                  12,601,921Retained
      earnings
                  
                  
                  84,584,674
                  
                  
                  
                  781,782
                  
                  
                  
                  
                  
                  
                  
                  85,366,456
                  
                  
                  
                  84,407,200
                  
                  
                  
                  458,580
                  
                  
                  
                  -
                  
                  
                  
                  84,865,780Accumulated
      other comprehensive income
                  
                  
                  17,915,355
                  
                  
                  
                  837,330
                  
                  
                  
                  
                  
                  
                  
                  18,752,685
                  
                  
                  
                  17,736,977
                  
                  
                  
                  838,919
                  
                  
                  
                  -
                  
                  
                  
                  18,575,896Total
      liabilities and stockholder's equity
                  
                  $
                  298,733,608
                  
                  
                  $
                  34,580,537
                  
                  
                  $
                  (23,613,269
                  )
                  
                  $
                  309,700,876
                  
                  
                  $
                  302,413,694
                  
                  
                  $
                  32,839,978
                  
                  
                  $
                  (20,755,718
                  )
                  
                  $
                  314,497,954





Ningbo
Zhehua reflected receivables from and payables to related parties on a gross
basis while the Company reflects them on a net basis due to the right
of offset.  The related party balances of Ningbo Zhehua have been
reclassified in the above table to the net presentation method used by the
Company.




7
 
  SUTOR
TECHNOLOGY GROUP LIMITED AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


The
results of the operations of the Company for all periods presented and
of Ningbo Zhehua prior to November 10, 2009 were as follows:




For the Year Ended June 30, 2010
                      
                      
                      For the Year Ended June 30, 2009Sutor
                      
                      
                      Ningbo
                      
                      
                      Combined
                      
                      
                      Sutor
                      
                      
                      Ningbo
                      
                      
                      CombinedRevenue
                      
                      $
                      454,078,805
                      
                      
                      $
                      24,608,914
                      
                      
                      $
                      478,687,719
                      
                      
                      $
                      341,485,814
                      
                      
                      $
                      88,267,654
                      
                      
                      $
                      429,753,468Net
      income
                      
                      
                      10,985,222
                      
                      
                      
                      341,156
                      
                      
                      
                      11,326,378
                      
                      
                      
                      18,634,225
                      
                      
                      
                      44,886
                      
                      
                      
                      18,679,111





For the
year ended June 30, 2010, the result of the operations of Ningbo Zhehua
represents the result for the period prior to the acquisition of the equity
interests of Ningbo Zhehua which was between July 1, 2009 and November 9,
2009.





Nature of
Operations - The Company’s operations are located in the PRC. For the
years ended June 30, 2010 and 2009, approximately 88.8% and 89.4%, respectively,
of the Company’s revenue was derived from sales within the PRC of steel
products. A significant portion of the Company’s purchases and revenues consist
of transactions with Shanghai Huaye and its subsidiaries. Changshu Huaye
manufactures hot-dip galvanized steel and pre-painted galvanized steel. Jiangsu
Cold-Rolled operates several production lines that refine products such as
cold-rolled steel, acid pickled steel and hot-dip galvanized steel. Ningbo
Zhehua manufactures heavy steel pipe and purchases and resells cold-rolled
and hot-dip galvanized steel.  Sutor Technology Co., Ltd. has not
started operation as of June 30, 2010.





In
addition, Changshu Huaye owned a 90% interest in Changshu Dongbang Sewage
Treatment Co., Ltd., which was a consolidated subsidiary until it was sold
during the quarter ended September 30, 2008.  The discontinued
operations were not material.





NOTE
2 - SIGNIFICANT ACCOUNTING POLICIES





Principles of
Consolidation – The accompanying consolidated financial
statements includes the accounts and transactions of Sutor Technology Group
Limited and its subsidiaries for all periods presented.  All
significant intercompany accounts and transactions have been eliminated in
consolidation.





Reclassifications
- Certain reclassifications have been made to general and administrative
expense, other expense, accounts payable, and short-term notes payable in the
year ended and at June 30, 2009 to conform to the 2010
presentation.





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 exchange rate on
the dates of significant transactions or 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.





Accounting
Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles 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. There are no estimates that could change materially in the near
term.





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)
collectability 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.





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. The handling fees were $505,830 and $471,927 for the years ended
June 30, 2010 and 2009 respectively and have been classified as selling expenses
in the statement of operations.




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.





Share Based
Payments– The
Company accounts for share-based compensation to reflect the fair value of
share-based awards measured at the grant date, which is recognized over the
relevant service period, and is adjusted each period for anticipated
forfeitures. The Company estimates 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 Company’s stock compensation plan.  The plan
was approved by the board of directors on April 15, 2009 and approved by the
stockholders on June 16, 2009.





Accumulated Other
Comprehensive Income -
Accumulated other comprehensive income presented in the accompanying
consolidated financial statements consists of foreign currency translation
adjustments.





Recently Adopted
Accounting
Guidance- In February 2010, the Financial Accounting Standards Board
(“FASB”) issued amended guidance on subsequent events. Under this amended
guidance, SEC filers are no longer required to disclose the date through which
subsequent events have been evaluated in originally issued and revised financial
statements. This guidance was effective immediately and the Company adopted
these new requirements in the period ended March 31, 2010.





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.





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   $377,437 and $439,212 for the years
ended June 30, 2010 and 2009 respectively





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.




9




SUTOR
TECHNOLOGY GROUP LIMITED AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS




Business
Combinations-On July
1, 2009, the Company adopted guidance issued by the FASB on business
combinations. The guidance retains the fundamental requirements that the
acquisition method of accounting (previously referred to as the purchase method
of accounting) be used for all business combinations, but requires a number of
changes, including changes in the way assets and liabilities are recognized and
measured as a result of business combinations. It also requires the
capitalization of in-process research and development at fair value and requires
the expensing of acquisition-related costs as incurred. The Company have applied
this guidance to business combinations completed since July 1, 2009. Adoption of
this new guidance did not have an impact on our consolidated financial
statements as the Company did not have any business combination as defined by
this guidance since adoption of the guidance.





Accounting
Standards
Codification-In June
2009, the Financial Accounting Standards Board (“FASB”) issued a standard that
established the FASB Accounting Standards Codification (the “ASC”), which
effectively amended the hierarchy of U.S. generally accepted accounting
principles (“GAAP”) and established only two levels of GAAP, authoritative and
non-authoritative. All previously existing accounting standard documents were
superseded, and the ASC became the single source of authoritative,
nongovernmental GAAP, except for rules and interpretive releases of the
Securities and Exchange Commission (the “SEC”), which are sources of
authoritative GAAP for SEC registrants. All other non-grandfathered, non-SEC
accounting literature not included in the ASC became non-authoritative.
The ASC was intended to provide access to the authoritative guidance
related to a particular topic in one place. New guidance issued subsequent to
June 30, 2009 will be communicated by the FASB through Accounting Standards
Updates. The ASC was effective for financial statements for interim or annual
reporting periods ending after September 15, 2009. The Company adopted and
applied the provisions of the ASC for its annual reporting ended June 30, 2010,
and has eliminated references to pre-ASC accounting standards throughout the
consolidated financial statements. The adoption of the ASC did not have a
material impact on the Company’s consolidated financial statements.





Fair Value and
Other-Than-Temporary Impairments
- In April 2009, the FASB issued new guidance intended to provide
additional application guidance and enhanced disclosures regarding fair value
measurements and impairments of securities. New guidance related to determining
fair value when the volume and level of activity for the asset or liability have
significantly decreased and identifying transactions that are not orderly
provides additional guidelines for estimating fair value in accordance with
pre-existing guidance on fair value measurements. New guidance on recognition
and presentation of other-than-temporary impairments provides additional
guidance related to the disclosure of impairment losses on securities and the
accounting for impairment losses on debt securities, but does not amend existing
guidance related to other-than-temporary impairments of equity securities. The
new guidance was effective for fiscal years and interim periods ended after June
15, 2009. As such, the Company adopted this guidance for the year ended June 30,
2010. Adoption of the new guidance did not have a material impact on the
Company’s consolidated financial statements.





Financial
Instruments
- In April 2009, the FASB issued an accounting standard that
requires disclosures about fair value of financial instruments not measured on
the balance sheet at fair value in interim financial statements as well as in
annual financial statements. Prior to this accounting standard, fair values for
these assets and liabilities were only disclosed annually. This standard applies
to all financial instruments within its scope and requires all entities to
disclose the method(s) and significant assumptions used to estimate the fair
value of financial instruments. This standard does not require disclosures for
earlier periods presented for comparative purposes at initial adoption, but in
periods after the initial adoption, this standard requires comparative
disclosures only for periods ending after initial adoption. The adoption of this
standard did not have a material impact on the disclosures related to its
consolidated financial statements.





Fair Value
Measurement- In
August 2009, the FASB issued an Accounting Standards Update (“ASU”) regarding
measuring liabilities at fair value. This ASU provides additional guidance
clarifying the measurement of liabilities at fair value in circumstances in
which a quoted price in an active market for the identical liability is not
available; under those circumstances, a reporting entity is required to measure
fair value using one or more of valuation techniques, as defined. This ASU is
effective for the first reporting period, including interim periods, beginning
after the issuance of this ASU. The adoption of this ASU did not have a material
impact on the Company’s consolidated financial statements.




10




SUTOR
TECHNOLOGY GROUP LIMITED AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS




Recent Accounting
Guidance Not Yet Adopted–





Consolidation of
Variable Interest Entities -In
June 2009, the FASB issued guidance on the consolidation of variable interest
entities, which is effective for the Company beginning July 1, 2010. The new
guidance requires revised evaluations of whether entities represent variable
interest entities, ongoing assessments of control over such entities, and
additional disclosures for variable interests. The Company believes adoption of
this new guidance will not have a material impact on the financial
statements.





Decreases in
Ownership of a Subsidiary–a Scope
Clarification - In
January 2010, the FASB issued an accounting standard update to address the
accounting and reporting for Decreases in ownership of a subsidiary. This
amendment to Topic 810 clarifies, but does not change, the scope of current US
GAAP. It clarifies the decrease in ownership provisions of Subtopic 810-10 and
removes the potential conflict between guidance in that Subtopic and asset
derecognition and gain or loss recognition guidance that may exist in other US
GAAP. An entity will be required to follow the amended guidance beginning in the
period that it first adopts FAS 160 (now included in Subtopic 810-10). For those
entities that have already adopted FAS 160, the amendments are effective at the
beginning of the first interim or annual reporting period ending on or after
December 15, 2009. The amendments should be applied retrospectively to the first
period that an entity adopted FAS 160. The Company adopted this amendment to
topic 810 on January 1, 2010 which had


no
material impact on the consolidated financial statements.





Distributions to
Shareholders with Components of Stock and
Cash - In
January 2010, the FASB issued an accounting standard update to address the
accounting for distributions to shareholders with components of stock and cash
(A Consensus of the FASB Emerging Issues Task Force). This amendment to Topic
505 clarifies the stock portion of a distribution to shareholders that allows
them to elect to receive cash or stock with a limit on the amount of cash that
will be distributed is not a stock dividend for purposes of applying Topics 505
and 260 for interim and annual periods ending on or after December 15, 2009, and
should be applied on a retrospective basis. The Company adopted this amendment
to topic 505 on January 1, 2010 which had no material impact on the consolidated
financial statements.





Own-Share Lending
Arrangements in Contemplation of Convertible Debt issuance or Other
Financing - In
October 2009, the FASB issued an accounting standard update to address
equity-classified share lending arrangements on an entity’s own shares, when
executed in contemplation of a convertible debt offering or other financing.
This accounting update addresses how to account for the share-lending
arrangement and the effect, if any, that the loaned shares have on
earnings-per-share calculations. The share lending arrangement is required to be
measured at fair value and recognized as an issuance cost associated with the
convertible debt offering or other financing. Earnings-per-share calculations
would not be affected by the loaned shares unless the share borrower defaults on
the arrangement and does not return the shares. If counterparty default is
probable, the share lender is required to recognize an expense equal to the then
fair value of the unreturned shares, net of the fair value of probable
recoveries. This accounting update is effective for share lending agreements
entered into after June 15, 2009, and effective for fiscal years and interim
periods within those years beginning on or after December 15, 2009 for all other
outstanding arrangements, with retrospective application to those
arrangements on the effective date. The Company adopted this accounting standard
update on January 1, 2010 which had no material impact on the consolidated
financial statements.





Other
accounting standards that have been issued or proposed by the FASB or other
standards-setting bodies that do not require adoption until a future date are
not expected to have a material impact on our consolidated financial statements
upon adoption.




11




SUTOR
TECHNOLOGY GROUP LIMITED AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS




NOTE
3 – INVENTORY





Inventory
consisted of the following which includes approximately $1.5 million of
inventory that is pledged for deposit on bank acceptance notes:


June
      30,2010
                  
                  
                  2009Raw
      materials
                  
                  $
                  22,285,980
                  
                  
                  $
                  19,928,175Work
      in process
                  
                  
                  265,282
                  
                  
                  
                  8,795Finished
      goods
                  
                  
                  17,730,124
                  
                  
                  
                  24,226,53240,281,386
                  
                  
                  
                  44,163,502Less:
      allowance
                  
                  
                  (102,028
                  )
                  
                  
                  -Total
      Inventory
                  
                  $
                  40,179,358
                  
                  
                  $
                  44,163,502





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. The Company has approximately $16,881,290 of
property and equipment that is used as collateral for loans.


Property
and equipment consisted of the following:





June
      30,2010
                  
                  
                  2009Buildings
      and plant
                  
                  $
                  27,513,920
                  
                  
                  $
                  26,246,637Machinery
                  
                  
                  66,220,306
                  
                  
                  
                  64,664,413Office
      and other equipment
                  
                  
                  994,114
                  
                  
                  
                  1,070,092Vehicles
                  
                  
                  337,454
                  
                  
                  
                  260,490Construction
      in process
                  
                  
                  867,081
                  
                  
                  
                  3,800,748Total
                  
                  
                  95,932,874
                  
                  
                  
                  96,042,380Less:
      accumulated depreciation
                  
                  
                  (25,914,352
                  )
                  
                  
                  (18,799,673
                  )Net
      property, plant and equipment
                  
                  $
                  70,018,522
                  
                  
                  $
                  77,242,707





Depreciation
is computed on a straight-line basis over the estimated useful lives of the
assets, as follows:




LifeBuildings
      and Plant
                                
                                20
      yearsMachinery
                                
                                10
      yearsOffice
      and other equipment
                                
                                10
      yearsVehicles
                                
                                5
      years


Depreciation
expense for the years ended June 30, 2010 and 2009 was $7,049,659 and
$6,231,607, respectively.




12


SUTOR
TECHNOLOGY GROUP LIMITED AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS




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, 2010 and 2009 was $67,933 and $67,891 respectively.
Intangible information by segment is presented below:




As of June 30, 2010
                  
                  Changshu Huaye
                  
                  
                  Jiangsu Cold-Rolled
                  
                  
                  TotalGross
      Carrying Amount
                  
                  $
                  2,170,182
                  
                  
                  $
                  1,240,484
                  
                  
                  $
                  3,410,666Accumulated
      Amortization
                  
                  
                  (284,115
                  )
                  
                  
                  (131,062
                  )
                  
                  
                  (415,177
                  )$
                  1,886,067
                  
                  
                  $
                  1,109,422
                  
                  
                  $
                  2,995,489





As of June 30, 2009
                  
                  Changshu Huaye
                  
                  
                  Jiangsu Cold-Rolled
                  
                  
                  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





The
following schedule sets forth the estimated amortization expense for the periods
presented





ESTIMATED
      AMORTIZATION EXPENSEFor
      the year ending June 30, 2011
                      
                      $
                      67,933For
      the year ending June 30, 2012
                      
                      
                      67,933For
      the year ending June 30, 2013
                      
                      
                      67,933For
      the year ending June 30, 2014
                      
                      
                      67,933For
      the year ending June 30, 2015
                      
                      
                      67,933


13




SUTOR
TECHNOLOGY GROUP LIMITED AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS




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
parties as of the dates presented:





Non-related
party short-term and long term notes were comprised of the
following:




June
      30,Maturity Date
                            
                            2010
                            
                            
                            2009Note
      payable at 4.78% interest, guaranteed by related party
                            
                            various
      dates
                            
                            
                            30,549,599
                            
                            
                            
                            -Note
      payable at 5.31% interest, guaranteed by related party
                            
                            7/9/2010
                            
                            
                            7,343,654
                            
                            
                            
                            -Note
      payable at 4.80% interest, secured by property
                            
                            10/24/2010
                            
                            
                            9,693,623
                            
                            
                            
                            -Note
      payable at 4.05% interest, guaranteed by related party
                            
                            various
      dates
                            
                            
                            1,909,350
                            
                            
                            
                            -Note
      payable at 4.78% interest, guaranteed by related party
                            
                            7/28/2010
                            
                            
                            1,321,858
                            
                            
                            
                            -Note
      payable at 4.78% interest, guaranteed by related party
                            
                            1/20/2011
                            
                            
                            2,203,096
                            
                            
                            
                            -Note
      payable at 5.31% interest, guaranteed by related party
                            
                            3/1/2011
                            
                            
                            2,937,461
                            
                            
                            
                            -Note
      payable at 4.86% interest, guaranteed by related party
                            
                            8/10/2010
                            
                            
                            1,788,914
                            
                            
                            
                            -Note
      payable at 4.05% interest, guaranteed by land use right
                            
                            10/8/2010
                            
                            
                            3,231,208
                            
                            
                            
                            -Note
      payable at 5.31% interest, guaranteed by related party
                            
                            5/19/2011
                            
                            
                            2,937,461
                            
                            
                            
                            -Note
      payable at 4.78% interest, guaranteed by related party
                            
                            5/26/2011
                            
                            
                            7,343,654
                            
                            
                            
                            -Note
      payable at 5.31% interest, guaranteed by related party
                            
                            12/20/2010
                            
                            
                            2,937,461
                            
                            
                            
                            -Note
      payable at 5.31% interest, guaranteed by related party
                            
                            various
      dates
                            
                            
                            2,937,461
                            
                            
                            
                            -Note
      payable at 4.78% interest, guaranteed by related party
                            
                            5/24/2011
                            
                            
                            4,993,684
                            
                            
                            
                            -Note
      payable at 5.31% interest, secured by land use right
                            
                            matured
                            
                            
                            -
                            
                            
                            
                            4,382,889Note
      payable at 5.31% interest, guaranteed by related party
                            
                            matured
                            
                            
                            -
                            
                            
                            
                            2,921,926Note
      payable at 5.31% interest, guaranteed by related party
                            
                            matured
                            
                            
                            -
                            
                            
                            
                            7,304,815Note
      payable at 5.31% interest, guaranteed by related party
                            
                            matured
                            
                            
                            -
                            
                            
                            
                            2,921,926Note
      payable at 5.31% interest, guaranteed by related party
                            
                            matured
                            
                            
                            -
                            
                            
                            
                            2,921,926Note
      payable at 4.86% interest, guaranteed by related party
                            
                            matured
                            
                            
                            -
                            
                            
                            
                            46,312,530Note
      payable at 5.37% interest, guaranteed by related party
                            
                            matured
                            
                            
                            -
                            
                            
                            
                            1,460,963Note
      payable at 5.37% interest, secured by a letter of credit
                            
                            matured
                            
                            
                            -
                            
                            
                            
                            25,973Note
      payable at 4.86% interest, secured by land use right
                            
                            matured
                            
                            
                            -
                            
                            
                            
                            1,899,252Note
      payable at 4.86% interest, secured by property
                            
                            matured
                            
                            
                            -
                            
                            
                            
                            8,327,489Note
      payable at 5.31% interest, guaranteed by related party
                            
                            matured
                            
                            
                            -
                            
                            
                            
                            1,753,156Total
      Short-Term Notes Payable
                            
                            
                            
                            $
                            82,128,484
                            
                            
                            $
                            80,232,845Long-term
      note payable at 6.00% interest, unsecured
                            
                            11/20/2011
                            
                            
                            2,859,995
                            
                            
                            
                            2,859,995Total
      long-term notes payable
                            
                            
                            
                            $
                            2,859,995
                            
                            
                            $
                            2,859,995




14




SUTOR
TECHNOLOGY GROUP LIMITED AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS




Notes due
to related parties were comprised of the following:





Maturity
                            
                            June
      30,Date
                            
                            
                            2010
                            
                            
                            2009Note
      payable to Principal Shareholder, no interest rate,
    unsecured
                            
                            On
      demand
                            
                            $
                            587,492
                            
                            
                            $
                            1,568,636Note
      payable to Principal Shareholder, no interest rate,
    unsecured
                            
                            Note
      6
                            
                            
                            -
                            
                            
                            
                            1,052,099Note
      payable to Principal Shareholder, no interest rate,
    unsecured
                            
                            Note
      6
                            
                            
                            -
                            
                            
                            
                            79,997Note
      payable to Principal Shareholder, no interest rate,
    unsecured
                            
                            Note
      6
                            
                            
                            -
                            
                            
                            
                            99,997Note
      payable to Principal Shareholder, at 2.00%, unsecured
                            
                            Note
      6
                            
                            
                            -
                            
                            
                            
                            -Note
      payable to related party, at 5.00%, unsecured
                            
                            Note
      6
                            
                            
                            -
                            
                            
                            
                            7,099,998Total
      short-term notes payable - related parties
                            
                            
                            
                            $
                            587,492
                            
                            
                            $
                            9,900,727Long-term
      notes payable to related partiesNote
      payable to Principal Shareholder, 3.06%, unsecured
                            
                            Note
      6
                            
                            
                            -
                            
                            
                            
                            99,998Note
      payable to Principal Shareholder, 5.00%, unsecured
                            
                            Note
      6
                            
                            
                            -
                            
                            
                            
                            149,998Total
      long-term notes payable - related parties
                            
                            
                            
                            $
                            -
                            
                            
                            $
                            249,996





The
Company has certain notes payable that 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.





NOTE–7
- RELATED PARTIES





Purchases
from Related Parties


The
Company sells its products to and buys raw materials from various companies
which are owned or controlled by the Principal Shareholders. These other
companies are composed of a number of 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, 2010 and 2009, purchases from these related parties
totaled of $365,354,368 and $207,458,120, respectively.





Due
from Related Parties


The
amounts due to related parties are non-interest bearing and were incurred in the
normal course of business except for certain notes payable. 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, 2010 and 2009, the net amounts due from related parties
were $96,776,181 and $76,391,552, 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 which are related parties, are
relieved once the goods are received.





Unused
Letters of Credit Held by Related Parties


At June
30, 2010, the Company had unused letters of credit totaling $14,687,307 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. At June 30, 2010 and
2009, the Company had banker’s acceptance notes of $16,449,784 and $24,105,891,
respectively which are classified as accounts payable.





Notes
Payable to Principal Shareholder


On
December 20, 2007, Ms. Chen loaned the Company $7,099,998. The loan was for an
initial period of 24 months through December 20, 2009, carried 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 March
11, 2009, Ms. Chen loaned the Company $99,998.  The loan was for a
period of 36 months, carried an interest rate of 3.60% and was 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 was for a
period of 36 months, carried an interest rate of 5.00% and was included in the
accompanying balance sheet at June 30, 2009 under the caption long-term notes
payable – related parties.




15
 
  SUTOR
TECHNOLOGY GROUP LIMITED AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


On July
25, 2009, Ms. Chen loaned the Company $199,930. The loan was for a period of 12
months, and carried an interest rate of 2%.





The notes
to Ms. Chen described above plus the accrued interest on the notes of $905,916
totaling $8,455,840 (along with $1,232,095 of non-interest bearing notes due to
Ms. Chen) was transferred to Shanghai Huaye by Ms. Chen pursuant to an agreement
between the parties dated December 10, 2009.  Since the Company has a
right of offset for amounts due from Shanghai Huaye, the aggregate amount of
these notes and accrued interest of $9,687,935 has been recorded as a reduction
of advances to related parties in the accompanying balance sheet as of June 30,
2010.





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 and as described above Ms. Chen transferred to
Shanghai Huaye $1,232,095 of the notes on December 10, 2009.  The
Company further paid off $1 million as of March 31, 2010. 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 $587,492 and $9,900,727 at June 30, 2010 and 2009,
respectively.





Rental
Agreement with Principal Shareholder


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. The Company has accrued expense for
this lease of $352,495 and $140,252 that is included on the balance sheet
under the caption Other payables – related parties at June 30, 2010 and 2009,
respectively.





On August
6, 2004, the Company entered into a 10 year lease agreement with Ningbo Huaye
Steel Processing, Ltd. to use a factory building in the Ningbo Camel Luo Ji Dian
Industrial Park. Lease payments are made quarterly at a monthly rate of
approximately $11,700.





Rent
expense for the two leases for the years ended June 30, 2010 and 2009 were
$351,048 and $280,366, respectively. Annual future minimum lease payments due
under the operating leases are as follows:





For
      the Year Ending June 30, 20102011
                            
                            $
                            211,4972012
                            
                            
                            140,9982013
                            
                            
                            140,9982014
                            
                            
                            23,5002015
                            
                            
                            -Total
                            
                            $
                            516,993


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 included 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 subsidiary Changshu Huaye, were
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.





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.




16




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 25% for 2009 and beyond. Jiangsu Cold-Rolled is
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. Ningbo Zhehua is subject to an EIT of 25% and has no preferential tax
treatments.  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 year ended June 30, 2010, the PRC tax authorities approved the application
of Jiangsu Cold-Rolled 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 $710,923 for the year
ended June 30, 2010.




Taxes
payable are a component of other payables and accrued expenses in the
accompanying consolidated balance sheets and consisted of:


For The Years EndedJune 30,2010
                      
                      
                      2009Value
      added tax
                      
                      $
                      (584,996
                      )
                      
                      $
                      754,434Income
      tax
                      
                      
                      1,162,792
                      
                      
                      
                      662,093Surtax,
      insurance, other
                      
                      
                      136,401
                      
                      
                      
                      44,639Total
      Taxes
                      
                      $
                      714,196
                      
                      
                      $
                      1,461,166





The
statutory tax rate for 2010 and 2009 is 25%.





Following
is a reconciliation of income taxes at the calculated statutory
rate:





For The Years EndedJune 30,2010
                    
                    
                    2009Income
      tax calculated at statutory rates
                    
                    $
                    3,432,468
                    
                    
                    $
                    5,272,838Tax
      credit
                    
                    
                    (710,923
                    )
                    
                    
                    -Benefit
      of favorable rates
                    
                    
                    (710,983
                    )
                    
                    
                    (573,128
                    )Benefit
      of tax holiday
                    
                    
                    -
                    
                    
                    
                    (2,641,149
                    )Operating
      loss carryforward
                    
                    
                    4,613
                    
                    
                    
                    -Tax
      effect of parent and sewer losses
                    
                    
                    388,320
                    
                    
                    
                    303,859Non-deductible
      expenses
                    
                    
                    -
                    
                    
                    
                    49,823Provision
      for income taxes
                    
                    $
                    2,403,494
                    
                    
                    $
                    2,412,243




17




SUTOR
TECHNOLOGY GROUP LIMITED AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS




Deferred
taxes are comprised of the following:





For
      The Years Ended June 30,2010
                          
                          
                          2009Net
      of operating loss carryforward
                          
                          $
                          1,183,621
                          
                          
                          $
                          1,183,750Allowance
      for doubtful trade receivables
                          
                          
                          124,685
                          
                          
                          
                          182,262Allowance
      for doubtful other receivables
                          
                          
                          79,461
                          
                          
                          
                          25,840Allowance
      for doubtful advances to suppliers
                          
                          
                          99,760
                          
                          
                          
                          189,895Allowance
      for inventory impairment
                          
                          
                          25,507
                          
                          
                          
                          -Less:
      Valuation allowance
                          
                          
                          (1,183,621
                          )
                          
                          
                          (1,183,750
                          )Total
      deferred income tax assets
                          
                          $
                          329,414
                          
                          
                          $
                          397,998


As of
June 30, 2010, the Company has a net operating loss from continuing operations
for United States federal income tax purposes of $3,481,241 which are available
to carry back five years or offset future taxable income, if any, through
2030.





The
provision for income taxes is comprised of the following:


For The Years EndedJune 30,2010
                        
                        
                        2009Current
                        
                        $
                        2,396,834
                        
                        
                        $
                        2,521,200Deferred
                        
                        
                        6,660
                        
                        
                        
                        (108,957
                        )Provision
      for income taxes
                        
                        $
                        2,403,494
                        
                        
                        $
                        2,412,243





If the
Company had not been granted a “tax holiday” during the years ended June 30
2009, the provision for income taxes would have been $5,053,392. Net income
after income tax for the years ended June 30 2009 would have
been $16,037,962. Basic and diluted earnings per common share for the year
ended June 30, 2009 would have been $0.42. There was no tax holiday for the year
ended June 30, 2010.





NOTE
9 – ISSUANCE OF COMMON STOCK AND WARRANTS





On March
10, 2010, the Company issued 2,740,000 shares of common stock and warrants to
purchase up to 685,000 shares of common stock for an aggregate price of
$7,398,000. Issuance costs of $583,804 were netted against the gross
proceeds. The proceeds from the transaction were allocated to the common
stock and warrants based on the relative fair value of the securities which was
$5,838,910 and $975,286, respectively.





The
warrants have a five year term, expiring March 9, 2015, with an exercise price
of $3.76 per share, adjustable for stock dividends, stock splits and upon
occurrence of a fundamental transaction as defined in the warrant agreement. The
fair value of the warrants was $1,368,428, valued using a Black-Scholes
model.  The following assumptions were used to calculate the fair
value of the warrants: dividend yield of 0%, expected volatility of 90%,
risk-free interest rate of 2.39%, expected life of 5 years, and stock price of
$2.99 per share. The Company evaluated the warrants and determined there is no
derivative associated with the warrants.





The
following table summarizes warrant activity for the year ended June 30,
2010:





Warrants
                    
                    
                    Weighted-average
                      exercise
      price
                    
                    
                    Aggregate
                      Intrinsic
      ValueOutstanding
      at June 30, 2009
                    
                    
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -Issued
                    
                    
                    685,000
                    
                    
                    
                    3.76
                    
                    
                    
                    -Outstanding
      at June 30, 2010
                    
                    
                    685,000
                    
                    
                    $
                    3.76
                    
                    
                    $
                    -




18




SUTOR
TECHNOLOGY GROUP LIMITED AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


NOTE
10 – STOCK-BASED COMPENSATION





On
February 1, 2010, the Company granted to an executive 20,000 shares of
restricted common stock with a grant date fair value of $3.04 per share as part
of his remuneration for his service commencing February 1, 2010 for one year
period. The restricted common stock will vest on the first anniversary of the
grant date. Stock-based compensation expense for the year ended June 30,
2010 was $25,328.  The remaining $35,472 stock-based compensation will
be expensed over the remainder of the one year service period.





On April
27, 2010, the Board of Directors approved the grant of stock options to purchase
100,000 shares of the Company’s common stock under the “2009 Equity Incentive
Plan” to certain key employees as reward for past services and to promote future
performance. These options have exercise price of $2.71 per share, expiring on
the fifth anniversary of the grant date, and vest in three equal installments on
each of the first, second and third anniversary of the vesting commencement
date, which is April 27, 2010.





Stock-based
compensation expense for the year ended June 30, 2010 on the stock option was
$11,335.  The remaining $179,617 stock based compensation will be
expensed over the remainder of the three years service period.





The fair
value of the options was $190,952, valued using a Black-Scholes
model.  The following assumptions were used to calculate the fair
value of the options: dividend yield of 0%, expected volatility of 90%,
risk-free interest rate of 2.46%, expected life of 5 years, and stock price of
$2.71 per share.





The
following table summarizes the options for the year ended June 30,
2010:





Weighted-average
                            
                            
                            AggregateOptions
                            
                            
                            exercise price
                            
                            
                            intrinsic valueOutstanding
      at June 30, 2009
                            
                            
                            -
                            
                            
                            $
                            -
                            
                            
                            $
                            -Issued
                            
                            
                            100,000
                            
                            
                            
                            2.71
                            
                            
                            
                            -Exercised
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -Expired
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -Outstanding
      at June 30, 2010
                            
                            
                            100,000
                            
                            
                            $
                            2.71
                            
                            
                            $
                            -


NOTE
11 – EARNINGS PER SHARE





Basic
earnings per share is computed on the basis of the weighted-average number of
shares of common stock outstanding during the period.  Diluted earnings per
share is computed on the basis of the weighted-average number of shares of
common stock plus the effect of dilutive potential common shares
outstanding during the period.  The following table sets forth the
computation of basic and diluted earnings per share:




For
      The Years Ended June 30,2010
                                
                                
                                2009Net
      income attributable to the common stockholders
                                
                                $
                                11,326,378
                                
                                
                                $
                                18,679,111Basic
      weighted-average common shares outstanding
                                
                                
                                38,804,588
                                
                                
                                
                                37,955,602Dilutive
      effect of options, warrants, and contingently issuable
    shares
                                
                                
                                1,775
                                
                                
                                
                                -Diluted
      weighted-average common shares outstanding
                                
                                
                                38,806,363
                                
                                
                                
                                37,955,602Earnings
      per share:Basic
                                
                                $
                                0.29
                                
                                
                                $
                                0.49Diluted
                                
                                $
                                0.29
                                
                                
                                $
                                0.49





Warrants
to purchase 685,000 shares of common stock were outstanding from March 10, 2010
through June 30, 2010, but were excluded from the computation of diluted
earnings per share as their effect would have been anti-dilutive.




19




SUTOR
TECHNOLOGY GROUP LIMITED AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS




NOTE
12 - 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.





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.





NOTE 13
- SEGMENT INFORMATION





The
Company has four reportable segments represented by its four subsidiaries
Changshu Huaye, Jiangsu Cold-Rolled, Ningbo Zhehua and Sutor Technology Co.,
Ltd. as described in Note 1.





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.  Cold-Rolled offers cold-rolled steel
strips and acid pickled steel products.  Ningbo Zhehua trades
steel and manufactures heavy steel pipe products and Sutor Technology Co., Ltd.
has not started operation as of June 30, 2010.





Certain
segment information is presented below:


At June 30, 2010 and for the year thenended
                
                Changshu Huaye
                
                
                Jiangsu Cold-
                  Rolled
                
                
                Ningbo
                
                
                Sutor
                  Technology
                
                
                Inter Segment and
                  Reconciling Items
                
                
                TotalRevenue
                
                $
                217,631,051
                
                
                $
                294,311,655
                
                
                $
                62,492,617
                
                
                $
                -
                
                
                $
                (95,747,605
                )
                
                $
                478,687,719Total
      operating expenses
                
                
                9,425,215
                
                
                
                1,713,686
                
                
                
                2,252,340
                
                
                
                14,148
                
                
                
                1,019,346
                
                
                
                14,424,735Interest
      income
                
                
                850,248
                
                
                
                35,664
                
                
                
                219,848
                
                
                
                354
                
                
                
                -
                
                
                
                1,106,114Interest
      expense
                
                
                1,254,615
                
                
                
                4,009,500
                
                
                
                41,599
                
                
                
                -
                
                
                
                534,804
                
                
                
                5,840,518Depreciation
      and amortization expense
                
                
                2,134,417
                
                
                
                4,190,740
                
                
                
                792,434
                
                
                
                -
                
                
                
                -
                
                
                
                7,117,592Provision
      for income taxes
                
                
                2,099,938
                
                
                
                73,190
                
                
                
                230,367
                
                
                
                -
                
                
                
                -
                
                
                
                2,403,494Net
      income
                
                
                6,240,572
                
                
                
                6,446,360
                
                
                
                136,149
                
                
                
                (18,452
                )
                
                
                (1,478,251
                )
                
                
                11,326,378Capital
      expenditures, net of VAT refunds
                
                
                136,948
                
                
                
                1,125,425
                
                
                
                256,781
                
                
                
                
                
                
                
                
                
                
                
                1,519,153Total
      assets
                
                
                194,515,633
                
                
                
                189,434,179
                
                
                
                29,875,487
                
                
                
                6,498,370
                
                
                
                (128,151,082
                )
                
                
                292,172,587





At June 30, 2009 and for the year thenended
                  
                  Changshu Huaye
                  
                  
                  Jiangsu
                    Cold-Rolled
                  
                  
                  Ningbo
                  
                  
                  Sutor
                    Technology
                  
                  
                  Inter Segment and
                    Reconciling Items
                  
                  
                  TotalRevenue
                  
                  $
                  237,800,296
                  
                  
                  $
                  103,685,518
                  
                  
                  $
                  88,267,654
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  429,753,468Total
      operating expenses
                  
                  
                  5,215,809
                  
                  
                  
                  1,271,239
                  
                  
                  
                  3,064,963
                  
                  
                  
                  -
                  
                  
                  
                  600,886
                  
                  
                  
                  10,152,897Interest
      income
                  
                  
                  1,304,032
                  
                  
                  
                  82,434
                  
                  
                  
                  115,702
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,502,168Interest
      expense
                  
                  
                  1,303,045
                  
                  
                  
                  4,125,061
                  
                  
                  
                  177,953
                  
                  
                  
                  -
                  
                  
                  
                  458,621
                  
                  
                  
                  6,064,680Depreciation
      and amortization expense
                  
                  
                  2,184,553
                  
                  
                  
                  3,561,839
                  
                  
                  
                  553,106
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  6,299,498Provision
      for income taxes
                  
                  
                  1,785,647
                  
                  
                  
                  545,204
                  
                  
                  
                  81,392
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  2,412,243Net
      income (loss)
                  
                  
                  11,829,839
                  
                  
                  
                  7,863,893
                  
                  
                  
                  44,886
                  
                  
                  
                  -
                  
                  
                  
                  (1,059,507
                  )
                  
                  
                  18,679,111Capital
      expenditures, net of VAT refunds
                  
                  
                  1,680,613
                  
                  
                  
                  14,793,382
                  
                  
                  
                  959,625
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  17,433,620Total
      assets
                  
                  
                  232,770,219
                  
                  
                  
                  129,016,250
                  
                  
                  
                  32,839,977
                  
                  
                  
                  -
                  
                  
                  
                  (80,128,492
                  )
                  
                  
                  314,497,954




20




SUTOR
TECHNOLOGY GROUP LIMITED AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS




NOTE
14 - GEOGRAPHIC INFORMATION





The
following schedule summarizes the sources of the Company’s revenue by geographic
regions for the years ended June 30, 2010 and 2009:




Years Ended June 30,Geographic Area
                  
                  2010
                  
                  
                  2009People's
      Republic of China
                  
                  $
                  425,008,643
                  
                  
                  $
                  384,353,522Other
      Countries
                  
                  
                  53,679,076
                  
                  
                  
                  45,399,946Total
                  
                  $
                  478,687,719
                  
                  
                  $
                  429,753,468




21


EXHIBIT
INDEX





Exhibit
      No.
                
                Description1.1
                
                Placement
      Agency Agreement, dated as of March 4, 2010, by and among the registrant
      and Roth Capital Partners, LLC. [Incorporated by reference to Exhibit 1.1
      to the registrant’s current report Form 8-K filed on March 8,
      2010]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 annual report on Form 10K-SB filed on March 30,
      2007]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]4.1
                
                Sutor
      Technology Group Limited 2009 Equity Incentive Plan [Incorporated by
      reference to Exhibit B to the registrant’s proxy statement dated May 13,
      2009 relating to the registrant’s 2009 Annual Meeting of
      Shareholders]10.1
                
                Form
      of Subscription Agreement, dated as of March 4, 2010, by and between the
      registrant and each of the purchasers identified on the signature pages
      thereto. [Incorporated by reference to Exhibit 10.1 to the registrant’s
      current report Form 8-K filed on March 8, 2010]10.2
                
                Equity
      Transfer Agreement, dated November 6, 2009, by and between Shanghai Huaye
      Steel Processing Co., Ltd. and Changshu Huaye Steel Strip Co., Ltd.
      regarding the acquisition of Zhehua Heavy Steel Pipe Manufacturing
      Co., Ltd. [Incorporated by reference to Exhibit 10.1 to the registrant’s
      current report Form 8-K filed on November 10, 2009]10.3
                
                Loan
      agreement, dated July 25, 2009, by and between the registrant and Lifang
      Chen [Incorporated by reference to Exhibit 10.1 to the registrant’s
      quarterly report Form 10-Q filed on November 13, 2009]10.4
                
                Loan
      Agreement, dated April 29, 2009, by and between Sutor Steel Technology
      Co., Ltd. and Lifang Chen. [Incorporated by reference to Exhibit 10.25 to
      the registrant’s annual report Form 10-K filed on September 25,
      2009]10.5
                
                Loan
      Agreement, dated March 11, 2009, by and between Sutor Steel Technology
      Co., Ltd. and Lifang Chen. [Incorporated by reference to Exhibit 10.24 to
      the registrant’s annual report Form 10-K filed on September 25,
      2009]10.6
                
                Loan
      Agreement, dated November 20, 2008, by and between Guihua Ling and Sutor
      Steel Technology Co., Ltd. (English Translation) [Incorporated by
      reference to Exhibit 10.26 to the registrant’s annual report Form 10-K
      filed on September 25, 2009]10.7
                
                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.]10.8
                
                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.]10.9
                
                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.]10.10
                
                Lease
      Agreement, dated November 8, 2008, by and between Lifang Chen and Changshu
      Huaye Steel Strip Co., Ltd. (English Translation) [Incorporated by
      reference to Exhibit 10.33 to the registrant’s annual report Form 10-K
      filed on September 25, 2009]10.11
                
                Employment
      Agreement, dated December 18, 2009, by and between the registrant and
      Naijiang Zhou [Incorporated by reference to Exhibit 10.1 to the
      registrant’s current report Form 8-K filed on January 4,
    2010]10.12
                
                Independent
      Director’s Contract, dated as of January 20, 2010, by and between the
      registrant and Gerard Pascale [Incorporated by reference to Exhibit 10.1
      to the registrant’s current report Form 8-K filed on January 20,
      2010]










Exhibit
      No.
                
                Description10.13
                
                Indemnification
      Agreement, dated as of January 20, 2010, by and between the registrant and
      Gerard Pascale [Incorporated by reference to Exhibit 10.2 to the
      registrant’s current report Form 8-K filed on January 20,
      2010]10.14
                
                Lease
      Agreement, dated August 6, 2004, by and between Ningbo Zhehua and Ningbo
      Huaye Steel Processing Co., Ltd.*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.*23
                
                Consent
      of Hansen, Barnett & Maxwell, P.C.*31.1
                
                Certifications
      of Chief Executive Officer Pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002. *31.2
                
                Certifications
      of Chief Financial Officer Pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002. *32.1
                
                Certification
      of Chief Executive Officer Pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002. *32.2
                
                Certification
      of Chief Financial Officer Pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002.
*




*Filed
herewith.