General Steel 10Q 2009 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended June 30, 2009

Commission File Number 001-33717

General Steel Holdings, Inc.

(Exact name of registrant as specified in its charter)

Nevada

(State or other Jurisdiction of

Incorporation or Organization)

412079252

(I.R.S. Employer Identification No.)

Room 2315, Kun Tai International Mansion Building,

Yi No 12, Chao Yang Men Wai Ave.

Chao Yang District, Beijing, China 100020

(Address of Principal Executive Office, Including Zip Code)

+86(10)58797346

(Registrant's Telephone Number, Including Area Code)

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

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

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

Large accelerated filer ¨

Accelerated filer x

Non-accelerated filer ¨

Smaller reporting company ¨

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

As of August 7th, 2009, 44,755,397 shares of common stock, par value $0.001 per share, were issued and outstanding.

Table of Contents

		Page
Part I: FINANCIAL INFORMATION:

Item 1.	Financial Statements.	3

	Consolidated Balance Sheets as of June 30, 2009 (Unaudited) and December 31, 2008	3

	Consolidated Statements of Income and Other Comprehensive Income for the Three and six Months Ended June 30, 2009 and 2008 (Unaudited)	4

	Consolidated Statements of Changes In Equity (Unaudited)	5

	Consolidated Statements of Cash Flows for the Three and Six Months Ended June 30, 2009 and 2008 (Unaudited)	6

	Notes to Consolidated Financial Statements (Unaudited)	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.	42

Item 3.	Quantitative and Qualitative Disclosures About Market Risks.	70

Item 4.	Controls and Procedures	70

Part II. OTHER INFORMATION

Item 1.	Legal Proceedings.	72

Item 1A.	Risk Factors	72

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	82

Item 3.	Defaults on Senior Securities	82

Item 4.	Submission of Matters to a Vote of Security Holders	82

Item 5.	Other Information	82

Item 6.	Exhibits	82

Signatures		83

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

(Moore Stephens Wurth Frazer and Torbet, LLP provides)

GENERAL STEEL HOLDINGS INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

AS OF JUNE 30, 2009 AND DECEMBER 31, 2008

	June 30			December 31,
	2009			2008
	Unaudited
ASSETS

CURRENT ASSETS:
Cash	$	63,930,960		$	14,895,442
Restricted cash		200,216,250			130,700,335
Notes receivable		33,243,064			38,207,312
Accounts receivable, net of allowance for doubtful accounts of $601,754
and $401,109 as of June 30, 2009 and December 31, 2008, respectively		16,037,008			8,329,040
Other receivables, net of allowance for doubtful accounts of $563,963
and $563,616 as of June 30, 2009 and December 31, 2008, respectively		5,551,193			5,099,469
Other receivables - related parties		15,467,140			523,024
Dividend receivable		4,950,550			630,481
Inventories		143,713,281			59,548,915
Advances on inventory purchases		35,823,700			47,153,869
Advances on inventory purchases - related parties		15,699,234			2,374,637
Prepaid expenses - current		356,728			494,370
Deferred tax assets		5,312,504			7,487,380
Total current assets		540,301,612			315,444,274

PLANT AND EQUIPMENT, net		538,475,953			491,705,028

OTHER ASSETS:
Advances on equipment purchases		5,889,360			8,965,382
Investment in unconsolidated subsidiaries		18,909,182			13,959,432
Prepaid expenses - non current		1,099,045			1,195,073
Prepaid expenses related party - non current		184,590			211,248
Long term other receivables		3,651,182			4,872,584
Intangible assets, net of accumulated amortization		24,216,780			24,555,655
Note issuance cost		1,449,664			4,217,974
Plant and equipment to be disposed		1,244,461			586,508
Total other assets		56,644,264			58,563,856

Total assets	$	1,135,421,829		$	865,713,158

LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:
Short term notes payable	$	274,013,600		$	206,040,150
Accounts payable		208,631,197			149,239,317
Accounts payable - related parties		30,583,551			15,326,524
Short term loans - bank		97,196,890			67,840,256
Short term loans - others		101,360,240			87,833,706
Short term loans - related parties		7,339,650			7,349,670
Other payables		19,715,682			3,182,661
Other payables - related parties		16,419,308			677,013
Accrued liabilities		10,854,900			7,779,488
Customer deposits		157,061,121			141,101,584
Customer deposits - related parties		3,946,437			7,216,319
Deposits due to sales representatives		40,056,218			8,149,279
Taxes payable		1,149,824			13,916,636
Distribution payable to former shareholders		19,193,149			18,765,209
Total current liabilities		987,521,767			734,417,812

CONVERTIBLE NOTES PAYABLE, net of debt discount of $8,500,381 and
$26,094,942 as of June 30, 2009 and December 31, 2008, respectively		3,049,619			7,155,058

DERIVATIVE LIABILITIES		11,053,276			9,903,010

COMMITMENT AND CONTINGENCIES

Total liabilities		1,001,624,662			751,475,880

EQUITY:
Preferred stock, $0.001 par value, 50,000,000 shares authorized, 3,092,899 shares
issued and outstanding		3,093			3,093
Common Stock, $0.001 par value, 200,000,000 shares authorized, 43,301,428 and
36,128,833 shares issued and outstanding as of June 30, 2009 and December 31, 2008, respectively		43,301			36,129
Paid-in-capital		69,812,604			37,128,641
Retained earnings (deficits)		(14,622,511	)		10,091,829
Statutory reserves		5,162,401			4,902,641
Contribution receivable		-			(959,700	)
Accumulated other comprehensive income		8,393,270			8,407,359
Total equity		68,792,158			59,609,992

NONCONTROLLING INTERESTS		65,005,009			54,627,286

Total equity		133,797,167			114,237,278

Total liabilities and equity	$	1,135,421,829		$	865,713,158

The accompanying notes are an integral part of these statements.

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME

(UNAUDITED)

	Three months ended June 30,						Six months ended June 30,
	2009			2008			2009			2008
REVENUES	$	324,460,829		$	277,514,917		$	586,875,245		$	456,007,084

REVENUES - RELATED PARTIES		84,486,318			109,514,019			144,865,798			222,587,851

TOTAL REVENUES		408,947,147			387,028,936			731,741,043			678,594,935

COST OF SALES		301,849,136			259,734,698			553,851,240			426,449,361

COST OF SALES - RELATED PARTIES		84,599,318			104,425,433			142,468,991			216,294,654

TOTAL COST OF SALES		386,448,454			364,160,131			696,320,231			642,744,015

GROSS PROFIT		22,498,693			22,868,805			35,420,812			35,850,920

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES		9,564,057			9,503,221			18,732,318			16,036,042

INCOME FROM OPERATIONS		12,934,636			13,365,584			16,688,494			19,814,878

OTHER EXPENSE, NET
Interest income		763,764			877,099			1,642,397			1,457,417
Finance/interest expense		(4,854,138	)		(6,289,868	)		(7,792,916	)		(12,276,375	)
Convertible note make whole interest		(6,454,683	)		-			(6,454,683	)		-
Change in fair value of derivative liabilities		(26,726,167	)		(27,786,632	)		(22,611,599	)		(25,115,869	)
Gain from debt extinguishment		-			-			2,930,200			-
Government grant		-			-			3,519,890			-
Income from equity investments		2,752,664			-			2,698,032			-
Other non-operating income, net		142,348			649,871			652,564			1,019,142
Total other expense, net		(34,376,212	)		(32,549,530	)		(25,416,115	)		(34,915,685	)

LOSS BEFORE PROVISION FOR INCOME TAXES
AND NONCONTROLLING INTEREST		(21,441,576	)		(19,183,946	)		(8,727,621	)		(15,100,807	)

PROVISION FOR INCOME TAXES
Current		3,229,810			1,292,890			3,394,031			1,959,246
Deferred		(1,221,850	)		(206,100	)		-			(422,633	)
Total provision for income taxes		2,007,960			1,086,790			3,394,031			1,536,613

NET LOSS BEFORE NONCONTROLLING INTEREST		(23,449,536	)		(20,270,736	)		(12,121,652	)		(16,637,420	)

Less: Net income attributable to noncontrolling interest		8,339,676			4,000,490			12,332,928			5,445,346

NET LOSS ATTRIBUTABLE TO CONTROLLING INTEREST		(31,789,212	)		(24,271,226	)		(24,454,580	)		(22,082,766	)

OTHER COMPREHENSIVE INCOME (LOSS) :
Foreign currency translation adjustments		162,842			4,841,277			(14,089	)		6,457,227
Comprehensive (loss) income attributable to noncontrolling interest		(1,031,639	)		1,498,426			(1,106,385	)		4,205,415

COMPREHENSIVE LOSS	$	(32,658,009	)	$	(17,931,523	)	$	(25,575,054	)	$	(11,420,124	)

WEIGHTED AVERAGE NUMBER OF SHARES
Basic		39,533,099			34,928,576			37,918,177			34,883,740
Diluted		39,533,099			34,928,576			37,918,177			34,883,740

LOSS PER SHARE
Basic	$	(0.804	)	$	(0.69	)	$	(0.645	)	$	(0.63	)
Diluted	$	(0.804	)	$	(0.69	)	$	(0.645	)	$	(0.63	)

The accompanying notes are an integral part of these statements.

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

																			Accumulated
	Preferred stock				Common stock						Retained earnings								other
									Paid-in		Statutory					Contribution			comprehensive			Noncontrolling
	Shares		Par value		Shares		Par value		capital		reserves		Unrestricted			receivable			income			interest			Totals

BALANCE, January 1, 2008		3,092,899	$	3,093		34,634,765	$	34,635	$	23,429,153	$	3,632,325	$	22,686,590		$	(959,700	)	$	3,285,278		$	43,322,066		$	95,433,440

Net loss														(22,082,766	)								5,445,346			(16,637,420	)
Acquired noncontrolling interest																							15,767,571			15,767,571
Adjustment to statutory reserve												648,363		(648,363	)											-
Common stock issued for compensation, $7.16						76,600		77		548,379																548,456
Common stock issued for compensation, $10.43						150,000		150		1,564,350																1,564,500
Common stock issued for compensation, $6.66						87,400		87		581,997																582,084
Common stock transferred by CEO for compensation, $6.91										69,100																69,100
Foreign currency translation adjustments																				6,457,227			4,205,415			10,662,642

BALANCE,June 30, 2008, unaudited		3,092,899	$	3,093		34,948,765	$	34,949	$	26,192,979	$	4,280,688	$	(44,539	)	$	(959,700	)	$	9,742,505		$	68,740,398		$	107,990,373

Net income														10,758,321									(13,987,183	)		(3,228,862	)
Acquired noncontrolling interest																							127,915			127,915
Adjustment to statutory reserve												621,953		(621,953	)											-
Common stock issued for compensation, $10.29						90,254		90		928,582																928,672
Common stock issued for consulting fee, $3.6						100,000		100		359,900																360,000
Common stock issued for public relations, $3.6						25,000		25		89,975																90,000
Common stock issued for compensation, $3.5						87,550		88		306,337																306,425
Common stock transferred by CEO for compensation, $6.91										138,200																138,200
Common stock issued at $5/share						140,000		140		699,860																700,000
Notes converted to common stock						541,299		541		6,102,691																6,103,232
Make whole shares issued on notes conversion						195,965		196		2,310,117																2,310,313
Foreign currency translation adjustments																				(1,335,146	)		(253,844	)		(1,588,990	)

BALANCE, December 31, 2008		3,092,899	$	3,093		36,128,833	$	36,129	$	37,128,641	$	4,902,641	$	10,091,829		$	(959,700	)	$	8,407,359		$	54,627,286		$	114,237,278

Net Loss														(24,454,580	)								12,332,928			(12,121,652	)
Disposal of subsidiaries																							(292,820	)		(292,820	)
Distribution of dividend to noncontrolling shareholders																							(556,000	)		(556,000	)
Adjustment to statutory reserve												259,760		(259,760	)											-
Common stock issued for compensation, $1.85						109,250		109		202,003																202,112
Common stock issued for compensation, $2.77						106,750		107		295,591																295,698
Common stock issued for interest payment, $3.66						152,240		152		557,709																557,861
Common stock issued for repayment of debt, $6.00						300,000		300		1,799,700																1,800,000
Notes converted to common stock						5,104,596		5,105		24,125,324																24,130,429
Make whole shares issued on notes conversion						1,399,759		1,399		5,565,436																5,566,835
Common stock transferred by CEO for compensation, $6.91										138,200																138,200
Reduction of Registered Capital																	959,700									959,700
Foreign currency translation adjustments																				(14,089	)		(1,106,385	)		(1,120,474	)

BALANCE, June 30, 2009, unaudited		3,092,899	$	3,093		43,301,428	$	43,301	$	69,812,604	$	5,162,401	$	(14,622,511	)	$	-		$	8,393,270		$	65,005,009		$	133,797,167

The accompanying notes are an integral part of these statements.

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30

(UNAUDITED)

	2009			2008
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income attributable to controlling interest	$	(24,454,580	)	$	(22,082,766	)
Net income attributable to noncontrolling interest		12,332,928			5,445,346
Consolidated net income		(12,121,652	)		(16,637,420	)
Adjustments to reconcile net income to cash
provided by (used in) operating activities:
Depreciation		13,073,512			8,868,941
Amortization		404,564			444,670
Debt waiver		(2,930,200	)		-
(Gain) Loss on disposal of equipment		(3,431,337	)		-
Stock issued for services and compensation		636,010			1,199,640
Income from investment		(2,698,500	)		-
Amortization of deferred note issuance cost		43,282			20,429
Amortization of discount on convertible notes		-			1,626,184
Change in fair value of derivative instrument		22,611,599			25,115,869
Convertible note make whole interest		6,454,683			-
Deferred tax assets		2,165,702			(422,633	)
Changes in operating assets and liabilities
Accounts receivable		(7,924,301	)		(13,657,403	)
Accounts receivable - related parties		-			(21,068,625	)
Notes receivable		4,914,506			(13,961,703	)
Notes receivable - restricted		-			-
Other receivables		(618,596	)		(1,219,841	)
Other receivables - related parties		(14,992,788	)		1,471,397
Loan receivable		-			1,276,560
Inventories		(84,204,445	)		(44,931,442	)
Advances on inventory purchases		11,271,266			33,110,981
Advances on inventory purchases - related parties		(13,021,451	)		(8,517,117	)
Prepaid expense - current		126,940			(245,115	)
Prepaid expense - non current		91,871			11,443
Prepaid expense - non current - related parties		38,207			(82,388	)
Accounts payable		59,067,210			1,188,213
Accounts payable - related parties		15,283,470			1,440,412
Other payables		16,545,247			(2,250,089	)
Other payable - related parties		15,748,520			(1,208,217	)
Dividend payable		440,230			(391,165	)
Accrued liabilities		2,198,275			2,598,366
Customer deposits		16,159,621			90,831,063
Customer deposits - related parties		(3,574,353	)		(3,998,027	)
Taxes payable		(12,768,702	)		(4,147,173	)
Net cash provided by operating activities		28,988,390			36,465,810

CASH FLOWS FROM INVESTING ACTIVITIES:
Acquired long term investment		(6,592,500	)		-
Cash acquired from subsidiary		-			1,256,385
Deposits due to sales representatives		31,933,299			(1,053,871	)
Proceeds from short term investment		-			2,340,360
Long term other receivables		1,215,339			-
Advance on equipment purchases		3,065,263			674,550
Cash proceeds from sale of equipment		4,413,964			-
Equipment purchases		(60,289,090	)		(93,010,998	)
Intangible assets purchases		(99,020	)		(186,623	)
Payment to original shareholders		-			(7,092,000	)
Net cash used in investing activities		(26,352,745	)		(97,072,197	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Restricted cash		(69,727,403	)		(55,759,041	)
Notes receivable - restricted		-			12,947,333
Borrowings on short term loans - bank		72,815,976			27,141,084
Payments on short term loans - bank		(43,352,782	)		(41,610,454	)
Borrowings on short term loans - related parties		-			7,106,184
Payments on short term loans - related parties		2,931,400			-
Borrowings on short term loan - others		79,354,464			42,641,359
Payments on short term loans - others		(63,899,468	)		(33,772,944	)
Borrowings on short term notes payable		371,613,578			109,642,320
Payments on short term notes payable		(303,326,615	)		(26,325,504	)
Net cash provided by financing activities		46,409,150			42,010,337

EFFECTS OF EXCHANGE RATE CHANGE IN CASH		(9,277	)		1,792,862

INCREASE (DECREASE) IN CASH		49,035,518			(16,803,188	)

CASH, beginning of period		14,895,442			43,713,346

CASH, end of period	$	63,930,960		$	26,910,158

The accompanying notes are an integral part of these statements.

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2009

Unaudited

Note 1 – Background

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

Daqiuzhuang Metal was established on August 18, 2000 in Jinghai county, Tianjin city, Hebei province, the People’s Republic of China (PRC). The Company is a Chinese registered limited liability which engages in the manufacturing of hot rolled carbon and silicon steel sheets. Daqiuzhuang Metal changed its legal name to General Steel (China) Co., Ltd. on May 14, 2009.

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

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

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

On January 14, 2008, the Company, through Longmen Joint Venture, completed its acquisition of a controlling interest in Hancheng Tongxing Metallurgy Co., Ltd. (“Tongxing”). The joint venture contributed its land use right of 217,487 square meters (approximately 53 acres) with appraised value of approximately $4.1 million (RMB 30 million). Pursuant to the agreement, the land will be converted into shares valued at approximately $3.1 million (RMB 23 million), providing the Joint Venture stake of 22.76% ownership in Tongxing and making it Tongxing’s largest and controlling shareholder. The parties agreed to make the effective date of the transaction January 1, 2008. The acquisition is accounted for as acquisition under common control. See more detail in Note 17 – Business combinations.

On June 25, 2008, the Company and Tianjin Qiu Steel Investment (“Qiu Steel Investment”) entered into an equity purchase agreement (the “Purchase Agreement”) with Maoming Hengda Steel Group Limited (the “Maoming”), in which the Company contributed $7.1 million (RMB 50 million) through its subsidiary, Qiu Steel, to Maoming original shareholders in exchange for 99% of the equity of Maoming. The acquisition was completed and became effective June 30, 2008. See Note 17 – Business combinations. Maoming is a steel products processor located in Maoming city, Guangdong province, in China’s southern coastal region. Production capacity at the facility is 1.8 million tons annually, with the majority of production focused on high-speed wire, an industrial steel product used in construction.

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2009

Unaudited

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

Note 2 – Summary of significant accounting policies

Basis of presentation

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

		Percentage
Subsidiary		Of Ownership
General Steel Investment Co., Ltd.	British Virgin Islands		100.0	%
General Steel (China) Co., Ltd.	P.R.C.		100.0	%
Baotou Steel – General Steel Special Steel Pipe Joint Venture Co., Ltd.	P.R.C.		80.0	%
Yangpu Shengtong Investment Co., Ltd.	P.R.C.		99.1	%
Qiu Steel Investment Co., Ltd.	P.R.C.		98.7	%
Shaanxi Longmen Iron and Steel Co. Ltd.	P.R.C.		60.0	%
Maoming Hengda Steel Group Co., Ltd.	P.R.C.		99.0	%

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

Use of estimates

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

Management has included all adjustments, consisting only of normal recurring adjustments, considered necessary to give a fair presentation of operating results for the periods presented. Interim results are not necessarily indicative of results for a full year. The information included in this Form 10-Q should be read in conjunction with information included in the 2008 annual report filed on Form 10-K.

Concentration of risks

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

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2009

Unaudited

Cash includes cash on hand and demand deposits in accounts maintained with state owned banks within the People’s Republic of China, Hong Kong and the United States. Total cash (including restricted cash balances) in these banks on June 30, 2009 and December 31, 2008 amounted to $264,147,210 and $145,595,777, respectively, none of which are covered by insurance. The Company has not experienced any losses in such accounts and believes it is not exposed to any risks on its cash in bank accounts.

The Company had five major customers, which represented approximately 13%, and 33.7% of the Company’s total sales for the three months ended June 30, 2009 and 2008, respectively, and approximately 21%, and 42.1% of the Company’s total sales for the six months ended June 30, 2009 and 2008, respectively. Five customers accounted for 0% and 58.7% of total accounts receivable as of June 30, 2009 and 2008, respectively.

The purchase of raw materials from five major suppliers represent approximately 32% and 29% of Company’s total purchase for the three months ended June 30, 2009 and 2008, respectively, and 41% and 44% of the Company’s total purchase for the six months ended June 30, 2009 and 2008. Five vendors accounted for 20.5% and 1.4% of total accounts payable as of June 30, 2009 and 2008, respectively.

Revenue recognition

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

Foreign currency translation and other comprehensive income

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

Translation adjustments resulting included in accumulated other comprehensive income amounted to $8,393,270 and $8,407,359 as of June 30, 2009, and December 31, 2008, respectively. The balance sheet amounts, with the exception of equity at June 30, 2009 and December 31, 2008 were translated at 6.83 RMB and 6.82 RMB to $1.00, respectively. The equity accounts were stated at their historical rate. The average translation rates applied to income statement accounts for the six months ended June 30, 2009 and 2008 were 6.82 RMB, 7.16 RMB, respectively. Cash flows are also translated at average translation rates for the period, therefore, amounts reported on the statement of cash flows will not necessarily agree with changes in the corresponding balances on the balance sheet.

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2009

Unaudited

Financial instruments

SFAS 107, “Disclosures about Fair Value of Financial Instruments” defines financial instruments and requires disclosure of the fair value of financial instruments held by the Company. The Company considers the carrying amount of cash, accounts receivable, other receivables, accounts payable and accrued liabilities, to approximate their fair values because of the short period of time between the origination of such instruments and their expected realization. For short term loans and notes payable, the Company concluded the carrying values are a reasonable estimate of fair value because of the short period of time between the origination and repayment and their stated interest rate approximates current rates available.

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

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

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

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

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

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

The Company’s investment in unconsolidated subsidiaries amounted to $18,909,182 as of June 30, 2009. Since there is no quoted or observable market price for the fair value of similar long term investment, the Company then used the level 3 inputs for its valuation methodology. The determination of the fair value was based on the capital investment that the Company contributed and income from investment. The carrying value of the long term investments approximated the fair value as of June 30, 2009.

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2009

Unaudited

In 2007, the conversion option on the $40 million Notes, as well as the 1,154,958 warrants issued in conjunction with the Notes are carried at fair value. The fair value was determined using the Cox Rubenstein Binomial Model, defined in SFAS 157 as level 2 inputs, and recorded the change in earnings. As a result, the derivative liability is carried on the balance sheet at its fair value.

As of June 30, 2009, the outstanding principal amounted to $11,550,000, and the carrying value of the convertible note amounted to $3,049,619. The Company used Level 3 inputs for its valuation methodology for the convertible note, and their fair values are determined using cash flows discounted at relevant market interest rates in effect at the period close since there is no observable market price. The embedded warrants and conversion feature are valued by using level 2 inputs to the Binomial Model and determined that the fair value amounted to approximately $11.05 million due to the increase in the Company’s common stock price.

	Carrying Value as of June 30, 2009		Fair Value Measurements at June 30, 2009 Using Fair Value Hierarchy
			Level 1	Level 2		Level 3
Long term investments	$	18,909,182				$	18,909,182
Derivative liabilities	$	11,053,276		$	11,053,276
Convertible notes payable	$	3,049,619				$	2,831,993

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

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2009

Unaudited

Level 3 Valuation Reconciliation:

	Derivative Liabilities
Balance, December 31, 2008	$	9,903,010
Current period gain (loss)		1,150,266
Transferred out of Level 3 Valuation		-11,053,276
Balance, June 30, 2009	$	-

	Convertible Notes
Balance, December 31, 2008	$	7,155,058
Current period effective interest charges on notes		1,847,709
Current period cash payments made for principal		-557,861
Current period note converted carrying value		-5,395,287
Balance, June 30, 2009	$	3,049,619

	Long term Investment
Balance, December 31, 2008	$	13,959,432
Current period investment		6,592,500
Distribution of previous year dividend		-1,662,147
Current period investment gain (loss)		-1,570
Foreign currency exchange gain (loss)		20,967
Balance, June 30, 2009	$	18,909,182

Cash and cash equivalents

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

Restricted cash

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

Receivables and allowance for doubtful accounts

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

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2009

Unaudited

Notes receivable

Notes receivable represent trade accounts receivable due from various customers where the customers’ banks have guaranteed the payment of the receivables. The notes are non-interest bearing and normally paid within three to six months. The Company has the ability to submit request for payment to the customer’s bank earlier than the scheduled payment date, but will incur an interest charge and a processing fee. The Company had $33,243,064 and $38,207,312 of notes receivable outstanding as of June 30, 2009 and December 31, 2008, respectively.

Inventories

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

Shipping and handling

Shipping and handling for raw materials purchased are included in cost of goods sold. Shipping and handling cost incurred to ship finished products to customers are included in selling expenses. Shipping and handling expenses for finished goods for the three months ended June 30, 2009 and 2008 amounted to $1,043,743 and $919,220 respectively. Shipping and handling for the six months ended June 30, 2009 and 2008 amounted to $1,606,041 and $1,622,292, respectively.

Intangible assets

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

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

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

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

Intangible assets of the Company are reviewed at least annually, more often when circumstances require to determine whether their carrying value has become impaired. The Company considers assets to be impaired if the carrying value exceeds the future projected cash flows from related operations. The Company also re-evaluates the periods of amortization to determine whether subsequent events and circumstances warrant revised estimates of useful lives. As of June 30, 2009, the Company expects these assets to be fully recoverable.

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2009

Unaudited

Plant and equipment, net

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

The estimated useful lives are as follows:

Property and plant		10-40 Years
Machinery & Equipment		10-30 Years
Office equipment and furniture		5 Years
Motor vehicles		5 Years

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

Long lived assets, including plant, equipment and intangible assets are reviewed annually, more often if necessary, to determine whether their carrying value has become impaired. The Company considers assets to be impaired if the carrying value exceeds the future projected cash flows from related operations. The Company also re-evaluates the periods of depreciation and amortization to determine whether subsequent events and circumstances warrant revised estimates of useful lives. As of June 30, 2009, the Company expects these assets to be fully recoverable.

Investments in unconsolidated subsidiaries

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

The Company’s subsidiary, Hancheng Tongxing Metallurgy Co., Ltd. and EPID invested in several companies from 2004 to 2009.

Unconsolidated subsidiary	Year acquired	Amount invested		% owned
Shaanxi Daxigou Mining Co., Ltd	2004		732,500		11
Shaanxi Xinglong Thermoelectric Co., Ltd	2004-2007		6,837,008		37.6
Shaanxi Longgang Group Xian steel Co., Ltd	2005		60,448		10
Shaanxi Longgang Group Co., Ltd	2003-2004		3,472,050		3.8
Huashan Metallurgical Equipment Co. Ltd.	2003		87,807		25
Hejin Liyuan Washing Coal Co., Ltd.	2006		135,268		38
Shanxi Longmen Coal Chemical Industry Co., Ltd	2009		6,592,500		15
Xian Delong Powder Engineering Materials Co., Ltd.	2006		991,601		27
Total		$	18,909,182

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2009

Unaudited

Total investment in unconsolidated subsidiaries amounted to $18,909,182 and $13,959,432 as of June 30, 2009 and December 31, 2008, respectively.

Short-term notes payable

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

Earnings per share

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

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

Income taxes

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

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

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2009

Unaudited

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

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

Share-based compensation

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

Non controlling interests

Effective January 1, 2009, the Company adopted SFAS 160, “Noncontrolling Interests in Consolidated Financial Statements - an amendment of Accounting Research Bulletin No. 51” Certain provisions of this statement are required to be adopted retrospectively for all periods presented. Such provisions include a requirement that the carrying value of noncontrolling interests (previously referred to as minority interests) be removed from the mezzanine section of the balance sheet and reclassified as equity.

Further, as a result of adoption on SFAS 160, net income attributable to noncontrolling interests is now excluded from the determination of consolidated net income. In addition, foreign currency translation adjustment is allocated between controlling and noncontrolling interests.

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2009

Unaudited

Recently issued accounting pronouncements

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

In April 2009, the FASB issued FSP FAS 157-4, “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” (FSP FAS 157-4). FSP FAS 157-4 amends SFAS 157 and provides additional guidance for estimating fair value in accordance with SFAS 157 when the volume and level of activity for the asset or liability have significantly decreased and also includes guidance on identifying circumstances that indicate a transaction is not orderly for fair value measurements. This FSP shall be applied prospectively with retrospective application not permitted. This FSP shall be effective for interim and annual periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. An entity early adopting this FSP must also early adopt FSP FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments” (FSP FAS 115-2 and FAS 124-2). Additionally, if an entity elects to early adopt either FSP FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments” (FSP FAS 107-1 and APB 28-1) or FSP FAS 115-2 and FAS 124-2, it must also elect to early adopt this FSP. The adoption of FAS 157-4 does not have a significant impact on the determination or reporting of our financial results.

In April 2009, the FASB issued FSP FAS 115-2 and FAS 124-2. This FSP amends SFAS 115, “Accounting for Certain Investments in Debt and Equity Securities,” SFAS 124, “Accounting for Certain Investments Held by Not-for-Profit Organizations,” and EITF Issue No. 99-20, “Recognition of Interest Income and Impairment on Purchased Beneficial Interests and Beneficial Interests That Continue to Be Held by a Transferor in Securitized Financial Assets,” to make the other-than-temporary impairments guidance more operational and to improve the presentation of other-than-temporary impairments in the financial statements. This FSP will replace the existing requirement that the entity’s management assert it has both the intent and ability to hold an impaired debt security until recovery with a requirement that management assert it does not have the intent to sell the security, and it is more likely than not it will not have to sell the security before recovery of its cost basis. This FSP provides increased disclosure about the credit and noncredit components of impaired debt securities that are not expected to be sold and also requires increased and more frequent disclosures regarding expected cash flows, credit losses, and an aging of securities with unrealized losses. Although this FSP does not result in a change in the carrying amount of debt securities, it does require that the portion of an other-than-temporary impairment not related to a credit loss for a held-to-maturity security be recognized in a new category of other comprehensive income and be amortized over the remaining life of the debt security as an increase in the carrying value of the security. This FSP shall be effective for interim and annual periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. An entity may early adopt this FSP only if it also elects to early adopt FSP FAS 157-4. Also, if an entity elects to early adopt either FSP FAS 157-4 or FSP FAS 107-1 and APB 28-1, the entity also is required to early adopt this FSP. The adoption of FAS 115-2 and FAS 124-2 do not have a significant impact on the determination or reporting of our financial results.

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2009

Unaudited

In April 2009, the FASB issued FSP FAS 107-1 and APB 28-1. This FSP amends SFAS No. 107, “Disclosures about Fair Value of Financial Instruments,” to require 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 FSP, fair values for these assets and liabilities were only disclosed annually. This FSP applies to all financial instruments within the scope of SFAS 107 and requires all entities to disclose the method(s) and significant assumptions used to estimate the fair value of financial instruments. This FSP shall be effective for interim periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. An entity may early adopt this FSP only if it also elects to early adopt FSP FAS 157-4 and FSP FAS 115-2 and FAS 124-2. This FSP does not require disclosures for earlier periods presented for comparative purposes at initial adoption. In periods after initial adoption, this FSP requires comparative disclosures only for periods ending after initial adoption. The adoption of FAS 107-1 and APB 28-1 do not have a significant impact on the determination or reporting of our financial results.

In May 2009, the FASB issued Statement of Financial Accounting Standards No. 165,Subsequent Events (“FAS 165”) [ASC 855-10-05], which provides guidance to establish general standards of accounting for and disclosures of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. FAS 165 also requires entities to disclose the date through which subsequent events were evaluated as well as the rationale for why that date was selected. FAS 165 is effective for interim and annual periods ending after June 15, 2009, and accordingly, we adopted this Standard during the second quarter of 2009. FAS 165 requires that public entities evaluate subsequent events through the date that the financial statements are issued.

In June 2009, the FASB issued Statement No. 166, Accounting for Transfers of Financial Assets – an amendment of FASB No. 140 (“FAS 140”), Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities (“FAS 166”). FAS 166 amends the criteria for a transfer of a financial asset to be accounted for as a sale, redefines a participating interest for transfers of portions of financial assets, eliminates the qualifying special-purpose entity concept and provides for new disclosures. FAS 166 is effective for the Company beginning in 2010. Should the Company’s accounts receivable securitization programs not qualify for sale treatment under the revised rules, future securitization transactions entered into on or after January 1, 2010 would be classified as debt and the related cash flows would be reflected as a financing activity. We do not believe that it will have a significant impact on the determination or reporting of our financial results.

In June 2009, the FASB issued Statement No. 167, Amendments to FASB Interpretation No. 46(R) (“FAS 167”). FAS 167 amends the consolidation guidance for variable interest entities (“VIE”) by requiring an on-going qualitative assessment of which entity has the power to direct matters that most significantly impact the activities of a VIE and has the obligation to absorb losses or benefits that could be potentially significant to the VIE. FAS 167 is effective for the Company beginning in 2010. We do not believe that it will have a significant impact on the determination or reporting of our financial results.

Note 3 – Accounts receivable and allowance for doubtful accounts

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

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2009

Unaudited

	June 30, 2009		December 31, 2008
	Unaudited
Accounts receivable	$	16,638,762	$	8,730,149
Less: allowance for doubtful accounts		601,754		401,109
Net accounts receivable	$	16,037,008	$	8,329,040

Movement of allowance for doubtful accounts is as follows:

	June 30, 2009			December 31, 2008
	Unaudited
Beginning balance	$	401,109		$	148,224
Charge to expense		201,287			124,727
Addition from acquisition		-			238,259
Less Written-off		-			(119,022	)
Exchange rate effect		(642	)		8,921
Ending balance	$	601,754		$	401,109

Note 4 – Inventory

Inventory consists of the following:

	June 30, 2009		December 31, 2008
	Unaudited
Supplies	$	1,872,255	$	1,884,387
Raw materials		72,434,365		41,083,743
Work in process		-		333,611
Finished goods		69,406,661		16,247,174
Totals	$	143,713,281	$	59,548,915

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

The Company values its inventory at the lower of cost or market, determined on a weighted average method, or net realizable value. As of December 31, 2008, management determined the carrying amount of inventory exceeded net realizable value, $2,243,232 had been written down and the amounts were included in cost of goods sold. As of June 30, 2009, management determined the net realizable value of inventory was over the carrying amount, therefore $0 had been written down.

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2009

Unaudited

Note 5 – Advances on inventory purchases

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

This amount is refundable and bears no interest. The Company has legally binding contracts with its vendors, which required the deposit to be returned to the Company when the contract ends. The inventory is normally delivered within one month after the monies have been advanced. The total outstanding amount, including advances to related parties, was $51,522,934 and $49,528,506 as of June 30, 2009 and December 31, 2008, respectively.

Note 6 – Plant and equipment, net

Plant and equipment consist of the following:

	June 30, 2009			December 31, 2008
	Unaudited
Buildings and improvements	$	119,162,032		$	118,143,847
Machinery		365,197,169			226,594,341
Transportation equipment		8,579,858			7,299,240
Other equipment		2,769,607			2,755,129
Construction in process		113,666,583			199,818,052
Totals		609,375,249			554,610,609
Less accumulated depreciation		(70,899,296	)		(62,905,581	)
Totals	$	538,475,953		$	491,705,028

Longmen Joint Venture constructed two blast furnaces and a sintering system. All costs related to construction have been capitalized as construction in progress and amounted to $180,471,238 as of December 31, 2008. The two blast furnaces amounting $147,704,581 had been transferred to fixed assets in April 2009, the sintering system is still under construction as of June 30, 2009.

Depreciation, including amounts in cost of sales, for the three months ended June 30, 2009 and 2008 amounted to $7,048,755 and $4,369,068, respectively, and for the six months ended June 30, 2009 and 2008, amount to $13,073,512 and $8,868,941, respectively.

The rebar production line from our Maoming subsidiary was sold and transferred to our Longmen Joint Venture for a value of $16,481,022 (RMB112,498,446). There is no change in fixed asset accounts because it is an intercompany transaction.

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2009

Unaudited

Note 7 – Intangible assets

Intangible assets consist of the following:

	June 30, 2009			December 31, 2008
	Unaudited
Land use right	$	27,476,538		$	27,467,031
Software		344,313			292,693
Subtotal		27,820,851			27,759,724
Accumulated Amortization – Land use right		(3,561,317	)		(3,204,069	)
Accumulated Amortization – software		(42,754	)
Accumulated Amortization subtotal		(3,604,071	)		(3,204,069	)
Totals	$	24,216,780		$	24,555,655

Total amortization expense for the three months ended June 30, 2009 and 2008, amounted to $180,148 and $239,524, respectively, and for six months ended June 30, 2009 and 2008, amounted to $404,564 and $444,670, respectively.

The estimated aggregate amortization expense for each of the five succeeding fiscal years is as follows:

Years	Estimated Amortization Expense		Gross carrying Amount
2009	$	1,000,000	$	23,716,780
2010		1,000,000		22,716,780
2011		1,000,000		21,716,780
2012		1,000,000		20,716,780
2013	$	1,000,000	$	19,716,780

Note 8 – Debt

Short term loans

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

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

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2009

Unaudited

	June 30, 2009		December 31, 2008
	Unaudited
Daqiuzhuang Metal: Loan from banks in China, due various dates from August 2009 to April 2010. Weighted average interest rate 6.66% per annum, either guaranteed by another company or secured by equipment/inventory.	$	25,880,690	$	27,383,022

Longmen Joint Venture: Loan from banks in China, due various dates from July 2009 to June 2010. Weighted average interest rate 5.49% per annum, either guaranteed by another company or secured by equipment/buildings/land use right.		71,316,200		38,875,500

Baotou: Loan from banks in China, due March 2009. Annual interest rate of 12%, Guaranteed by another company and secured by equipment.		-		114,734

Maoming: Loan from banks in China, due January 2009. Annual interest rate of 7.47%, guaranteed by another company.		-		1,467,000

Total – bank loans	$	97,196,890	$	67,840,256

	June 30, 2009		December 31, 2008
	Unaudited
Loan from various unrelated companies and individuals, due various dates from July 2009 to January 2010, and interest rates up to 12% per annum	$	101,360,240	$	87,833,706

Total – other loans	$	101,360,240	$	87,833,706

	June 30, 2009		December 31, 2008
	Unaudited
Qiu Steel: Related party loan from Tianjin Heng Ying and Tianjin Da Zhan, due June 2010. Annual interest rate of 5%.	$	7,339,650	$	7,349,670

Total – related loans	$	7,339,650	$	7,349,670

The Company had various loans from unrelated companies and individuals. The balances amounted to $101,360,240 and $87,833,706 as of June 30, 2009 and December 31, 2008, respectively. Out of the $101,360,240 current period balance, $23,621,232 carries no interest, and the remaining $77,739,008 carries annual interest rates ranging from 7.2% to 12%. $29,394,068 of prior year balance carries no interest and the remaining $58,439,638 are subject to interest rates ranging from 7.2% to 12%. All short term loans from unrelated companies and individuals are due on demand and unsecured.

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2009

Unaudited

Short term notes payable

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

The Company had the following short term notes payable:

	June 30, 2009		December 31, 2008
	Unaudited

Daqiuzhuang Metal: Notes payable from banks in China, due various dates from August 2009 to October 2009. Restricted cash required of $3,984,800 and $15,727,914 for June 30, 2009 and December 31, 2008, respectively and either guaranteed by another company.	$	7,618,000	$	18,630,900

Longmen Joint Venture: Notes payable from banks in China, due various dates from July 2009 to December 2009.. Restricted cash of $161,501,600 and $98,073,410 for June 30, 2009 and December 31, 2008, respectively and either guaranteed by another company or secured by equipment, or no guarantee.		210,432,600		159,536,250

Bao Tou: Notes payable from banks in China, due July 2009. Restricted cash of $5,127,500 and $5,134,500 for June 30, 2009 and December 31, 2008, respectively and guaranteed by buildings.		7,325,000		7,335,000

Maoming: Notes payable from banks in China, due various dates from September 2009 to December 2009. Restricted cash of $29,593,000 and $11,764,512 for June 30, 2009 and December 31, 2008 and guaranteed by buildings and equipments..		48,638,000		20,538,000
Grand totals	$	274,013,600	$	206,040,150

Total interest expense for the three months ended June 30, 2009 and 2008 on the debt listed above amounted to $1,578,766 and $5,710,308 respectively, and for the six months ended June 30, 2009 and 2008, interest expense amounted to $4,668,278 and $8,583,173, respectively.

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2009

Unaudited

Capitalized interest amounted to $5,661,000 and $1,963,886 for the three months ended June 30, 2009 and 2008, respectively, and for the six months ended June 30, 2009 and 2008, capitalized interest amounted to $7,937,911 and $2,775,391.

Note 9 – Customer deposits

Customer deposits represent amounts advanced by customers on product orders. The product normally is shipped within one month after receipt of the advance payment, and the related sale is recognized in accordance with the Company’s revenue recognition policy. As of June 30,2009 and December 31, 2008, customer deposits amounted to $161,007,558 and $148,317,903, including related parties deposits $3,946,437 and $7,216,319, respectively.

Note 10 – Deposits due to sales representatives

Daqiuzhuang Metal and two of Longmen Joint Venture’s subsidiaries, Yuxin Trading and Yuteng Trading, entered into agreements with various entities to act as the Company’s exclusive sales agent in a specified area. These exclusive sales agents must meet certain criteria and are required to deposit a certain amount of money with the Company. In return the sales agents receive exclusive sales rights to a specified area and discounted prices on products they order. These deposits bear no interest and are required to be returned to the sales agent once the agreement has been terminated. The Company had $40,056,218 and $8,149,279 in deposits due to sales representatives outstanding as of June 30, 2009 and December 31, 2008, respectively. Due to increase in demand in first half 2009, the Company received additional deposit amounted $32 million from sales representatives to secure sales quantity. These deposits are refundable in one year based on volume fulfillment and bear interest at 3%-8% per annum.

Note 11 – Convertible notes

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

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

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

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2009

Unaudited

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

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

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

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

Expected volatility of 125%

Expected dividend yield of 0%

Risk-free interest rate of 2.04%

Expected lives of five years

Market price at issuance date of $10.43

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

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

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

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

Re-Set of Conversion Price

Paragraph 7(f) of the Convertible Notes (which were issued on December 13, 2007) provides for adjustment of the conversion price of the Notes, as follows:

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2009

Unaudited

Adjustment. If on the earlier of the (i) one (1) year anniversary of the Initial Effective Date (as defined in the Registration Rights Agreement)and (ii) two (2) year anniversary of the Closing Date (the "Adjustment Date"), the Conversion Price in effect exceeds the Market Price as of the Adjustment Date (the "Adjusted Conversion Price"), the Conversion Price hereunder shall be reset to the Adjusted Conversion Price as of the Adjustment Date. For the avoidance of doubt, the Adjusted Conversion Price, if any, shall not apply to any Conversion Amount converted into Common Stock prior to the Adjustment Date.

The “Market Price” is defined in paragraph 30(v) of the Senior Convertible Notes as:

“Market Price” means, for any given date, the lower of (x) the arithmetic average of the Weighted Average Price of the Common Stock for the thirty (30) consecutive Trading Day period ending on the Trading Day immediately preceding such date and (y) the Weighted Average Price of the Common Stock on the Trading Day immediately preceding such date.

The Initial Registration Statement became effective on May 7, 2008 and thus the Adjustment Date was May 7, 2009. The Weighted Average Price of the Common Stock for the 30 consecutive Trading Day period ended on May 6, 2009 was $4.2511 and, accordingly, in accordance with the existing terms of the Convertible Notes, the conversion price was adjusted on May 7, 2009 to $4.2511.

The derivative liability related to the embedded conversion option was adjusted as of May 7, 2009, based on the revised conversion price. As a result of the reduced conversion price, the derivative liability increased as of May 7, 2009 by $27,104,429, which amount is included in the change in the value of the derivative liability in the Income Statement.

From May 7 to June 30, 2009, $21,700,000 of notes was converted to 5,104,596 shares of common stock at a conversion price of $4.2511. Pursuant to EITF 00-19, the Company valued the conversion option on note conversion date. A total of $24,130,429 of carrying value and derivative liability had been reclassified into equity. According to the convertible note agreement, the Company incurred the make whole interest expense of $6,454,683.

As of June 30, 2009, in accordance with SFAS 133, the fair value of derivative liabilities was recalculated and increased by $26,726,167 during the period, including $1,102,656 for the increase in fair value of the warrants and $25,623,511 for the increase in fair value of the conversion option.

As of June 30, 2009, the balance of derivative liabilities was $11,053,276, which consisted of $2,919,872 for the warrants and $8,133,404 for the conversion option, and the carrying value of the notes was $3,049,619. The effective interest charges on notes totaled $820,232 and $928,556 for the three months ended June 30, 2009 and 2008, respectively, and for the six months ended June 30, 2009 and 2008, the effective interest amounted to $1,847,709 and $1,732,851, respectively.

Note issuance cost was amortized to interest expense for the three months ended June 30, 2009 and 2008 amounted to $22,365 and $11,535 respectively. Note issuance cost was amortized to interest expense for the six months ended June 30, 2009 and 2008 amounted to $43,282 and $20,429, respectively.

The changes in the derivative liability related to the convertible notes, and the warrants that were issued in conjunction with those notes, are summarized as follows:

	Derivative Liability
	Conversion
	Features		Warrants		Total
December 13, 2007	$	25,421,018		9,298,044		34,719,062
Change in value (gain)		-4,576,171		-1,659,583		-6,235,754
December 31, 2007		20,844,847		7,638,461		28,483,308
Change in value (gain)		-1,951,184		-719,580		-2,670,764
March 31, 2008		18,893,663		6,918,881		25,812,545
Change in value (loss)		20,370,777		7,415,855		27,786,632
June 30, 2008		39,264,440		14,334,736		53,599,177
Conversions - liability transferred to equity		-5,759,720				-5,759,720
Change in value (gain)		-21,090,722		-8,794,176		-29,884,898
September 30, 2008		12,413,998		5,540,560		17,954,559
Change in value (gain)		-5,589,893		-2,461,655		-8,051,548
December 31, 2008		6,824,105		3,078,905		9,903,010
Change in value (gain)		-2,852,879		-1,261,690		-4,114,569
March 31, 2009		3,971,226		1,817,215		5,788,441
Conversions - liability transferred to equity		-21,461,333				-21,461,333
Change in value (loss)		25,623,512		1,102,656		26,726,168
June 30, 2009	$	8,133,405		2,919,871		11,053,276

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2009

Unaudited

Note 12 – Supplemental disclosure of cash flow information

Interest paid amounted to $4,071,240 and $5,648,992 for the three months ended June 30, 2009 and 2008, respectively, and for the six months ended June 30, 2009 and 2008, amounted to $6,691,992 and $8,687,340, respectively.

Income tax payments amounted to $1,283,319 and $4,608,462 for the three months ended June 30, 2009 and 2008, respectively, and for the six months ended June 30, 2009 and 2008, amounted to $1,826,398 and $ 5,713,515, respectively.

On January 8, 2008 the Company issued 150,000 shares of common stock at $10.43 per share as additional note issuance cost totaled $1,564,500.

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

On April 14, 2008, the Company, Mr, Zuosheng Yu, (CEO of the Company) and Mr. Zhang Dan Li (BOD member of Long Men Joint Venture) entered into a compensation agreement in which Mr. ZuoSheng Yu agreed to transfer his own 600,000 shares to Mr. Zhang Dan Li in exchange for 15 years of service in the Company. Pursuant to SFAS 123R (Share-Based Payment) share-based payments awarded to an employee of the reporting entity by a related party or other holder of an economic interest in the entity is treated as compensation as if the shareholder has made a capital contribution. The shares are valued at $6.91 on grant date for a total of $4,146,000 and will be amortized over the life of agreement. A total of $69,100 of compensation expense and additional paid in capital has been recorded for the three months ended June 30, 2009, and 2008, respectively, and $138,200 and $69,100 for the six months ended June 30, 2009, and 2008, respectively.

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

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

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

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

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

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2009

Unaudited

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

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

On January 15, 2009, the Company granted convertible notes holders 152,240 shares of common stock at $3.66 per share, as cash payments made for interest. The shares were valued as 90% of the arithmetic average of the Weighted Average Price of the Common Shares on each for the ten consecutive Trading Days immediately preceding the applicable Interest Date.

On May 8, 2009, the Company issued 300,000 shares of common stock to Maoming Hengda Steel’s debtor, Guangzhou Hengda at $6 per share, as cash payments made for settling other short term loan.

From May 7 to June 30, 2009, $21,700,000 of notes was converted to 5,104,596 shares of common stock at a Conversion Price of 4.2511. According to the convertible bond agreement, the Company recorded the make whole interest expense of $6,454,683. As of June 30, 2009, 1,399,759 shares of common stock for it had been issued.

Note 13 - Gain from debt extinguishment and Government grant

Debt extinguishment

For the six months ended June 30, 2009, the Company recorded gain from debt extinguishment totaling $2,930,200. On February 20, 2009, Maoming Hengda, a subsidiary entered into a Debt Waive Agreement with Guangzhou Hengda, pursuant to which Guangzhou Hengda agreed to waive $2,930,200 (RMB20,000,000) of the total $23,955,220 (RMB163,516,860) debt that Maoming Hengda owes to Guangzhou Hengda. The Company determined that the subsequent debt settlement does not constitute a contingency at date of purchase as defined in SFAS 141 “Business Combinations” and thus should not result in a reallocation of the purchase price. The waiver is irrevocable.

Government grant

Based on national industrial policies and environmental protection laws and regulations, in order to reduce energy consumption, emissions Shaanxi Province Development and Reform Commission worked with local industries to eliminate of outdated iron and steel production capacity in form of government grant. Longmen Joint Venture received $4.2 million (RMB29 million) in government grant for compliance in dismantling two blast furnaces. The Company wrote off the residual book value of the furnaces dismantled totaling $0.7 million (RMB5 million), and recorded other income of $3,519,890 for the six months ended June 30, 2009.

Note 14 – Taxes

Income tax

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

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2009

Unaudited

Significant components of the provision for income taxes on earnings and deferred taxes on net operating losses from operation for the three months ended June 30, 2009 and 2008 are as follows:

	June 30, 2009			June 30, 2008
	Unaudited			Unaudited

Current	$	3,229,810			1,292,890
Deferred		(1,221,850	)		(206,100	)
Total income taxes	$	2,007,960			1,086,790

Significant components of the provision for income taxes on earnings and deferred taxes on net operating losses from operation for the six months ended June 30, 2009 and 2008 are as follows:

	June 30, 2009		June 30, 2008
	Unaudited		Unaudited

Current	$	3,394,031		1,959,246
Deferred		-		(422,633	)
Total income taxes	$	3,394,031		1,536,613

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

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

	June 30, 2009			December 31, 2008
	Unaudited
Beginning balance	$	7,487,380		$	399,751
Xi’an Rolling Mill’s ,YuXin, YuTeng, HuaLong and TongXing Net operating loss carry-forward		230,750			4,945,752
Effective tax rate		25	%		24.76	%
Deferred tax asset	$	57,688		$	1,224,626
Long Gang Headquarter’s Net operating loss carry-forward		-14,815,927			36,809,350
Effective tax rate		15	%		15.24	%
Deferred tax asset	$	-2,222,389		$	5,610,223
Exchange difference		-10,175			252,780
Totals	$	5,312,504		$	7,487,380

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2009

Unaudited

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

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

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

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

The following table reconciles the U.S. statutory rates to the Company’s effective tax rate for the six months ended June 30, 2009 and 2008 as follows:

	June 30, 2009			June 30,2008
	Unaudited

U.S. Statutory rates		34.00	%		34.00	%
Foreign income not recognized in USA		(34.00	)%		(34.00	)%

China income taxes		25	%		25.00	%
Tax effect of income not taxable for tax purpose		-1.47	%		(4.03	)%
Effect of different tax rate of subsidiaries operating in other jurisdictions		-3.15	%		(10.32	)%

Total provision for income taxes		20.38	%		10.65	%

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2009

Unaudited

The Company has cumulative undistributed earnings of foreign subsidiaries of approximately $14,733,301 as of June 30, 2009, is included in consolidated retained earnings and will continue to be indefinitely reinvested in international operations. Accordingly, no provision has been made for U.S. deferred taxes related to future repatriation of these earnings, nor is it practicable to estimate the amount of income taxes that would have to be provided if we concluded that such earnings will be remitted in the future.

General Steel Holdings Inc. was incorporated in the United States and has incurred net operating losses for income tax purposes for the six months ended June 30, 2009 and 2008, respectively. The net operating loss carry forwards for United States income taxes amounted to $2,824,982 which may be available to reduce future years’ taxable income. These carry forwards will expire, if not utilized, through 2027. Management believes that the realization of the benefits from these losses appears uncertain due to the Company’s limited operating history and continuing losses for United States income tax purposes. Accordingly, the Company has provided a 100% valuation allowance on the deferred tax asset benefit to reduce the asset to zero. The valuation allowance at June 30, 2009 was $1,245,000. The net change in the valuation allowance for the six months ended June 30, 2009 and year ended December 31, 2008 was an increase of $285,000 and $645,000, respectively. Management will review this valuation allowance periodically and make adjustments as warranted.

Value added Tax

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

VAT on sales and VAT on purchases amounted to $179,247,890 and $165,915,511 for the six months ended June 30, 2009, VAT on sales and VAT on purchases amounted to $173,244,315 and $135,853,629 for the six months ended June 30, 2008, respectively. Sales and purchases are recorded net of VAT collected and paid as the Company acts as an agent for the government. VAT taxes are not impacted by the income tax holiday.

VAT on sales and VAT on purchases amounted to $93,172,074 and $98,244,173 for the three months ended June 30, 2009, VAT on sales and VAT on purchases amounted to $102,270,716 and $69,994,430 for the three months ended June 30, 2008,respectively. Sales and purchases are recorded net of VAT collected and paid as the Company acts as an agent for the government. VAT taxes are not impacted by the income tax holiday.

Taxes payable consisted of the following:

	June 30, 2009			December 31, 2008
	Unaudited
VAT taxes payable	$	(2,803,509	)	$	8,985,278
Income taxes payable		1,793,383			2,509,520
Misc taxes		2,159,950			2,421,838
Totals	$	1,149,824		$	13,916,636

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2009

Unaudited

Note 15 – Earnings per share

The calculation of earnings per share is as follows:

	Three months ended June 30						Six months ended June 30,
	2009			2008			2009			2008
	Unaudited			Unaudited			Unaudited			Unaudited
Income (Loss) attributable to holders of common shares	$	(31,789,212	)	$	(24,271,226	)	$	(24,454,580	)	$	(22,082,766	)
Basic weighted average number of common shares outstanding		39,533,099			34,928,576			37,918,177			34,883,740
Diluted weighted average number of common shares outstanding		39,533,099			34,928,576			37,918,177			34,883,740

Net income (Loss)per share
Basic	$	(0.804	)	$	(0.695	)	$	(0.645	)	$	(0.633	)
Diluted	$	(0.804	)	$	(0.695	)	$	(0.645	)	$	(0.633	)

For the three months and six months ended June 30, 2009, the Company incurred net loss, therefore there is no dilutive effect for its earnings per share.

Note 16 – Related party balances and transactions

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

	For the six months ended June 30,2009		For the six months ended June 30,2008
	Unaudited		Unaudited
Rental Income	$	879,420	$	851,040

	For the three months ended June 30,2009		For the three months ended June 30,2008
	Unaudited		Unaudited
Rental Income	$	439,890	$	431,730

The Company’s short term loan of $1,465,000 from Shenzhen Development Bank is personally guaranteed by the Company’s Chairman, CEO, and majority shareholder Zuosheng Yu (aka Henry Yu).

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

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2009

Unaudited

	For the six months ended June 30,2009		For the six months ended June 30,2008
	Unaudited		Unaudited
Purchase from Hengying and Dazhan	$	15,863,969	$	54,350,613
Sales to Hengying and Dazhan	$	1,024,107	$	15,733,297

	For the three months ended June 30,2009		For the three months ended June 30,2008
	Unaudited		Unaudited
Purchase from Hengying and Dazhan	$	9,034,889	$	25,916,567
Sales to Hengying and Dazhan	$	513,954	$	14,453,484

All transactions with related parties are for normal business activities and are short term in nature. Settlements for the balances are usually in cash. The following charts summarize the related party transactions as of June 30, 2009 and December 31, 2008.

a.	Other receivables - related parties

Name of related parties	Relationship	June 30, 2009		December 31, 2008
		Unaudited
Beijing Wendlar	Chairman of General Steel Holdings, Inc. owns more than 5% in this company	$	219,750	$	376,324
De Long Fen Ti	Longmen JV’s subsidiary (unconsolidated)		353,791		-
Tianjin Jin Qiu Steel Market	Chairman of General Steel Holdings, Inc. owns more than 5% in this company		146,500		146,700
Daishang trading Co., Ltd.	Longmen JV’s subsidiary’s joint venture partner		97,099		-
Maoming Shengze Trading	Chairman of General Steel Holdings, Inc. owns more than 5% in this company		14,650,000		-
Total		$	15,467,140	$	523,024

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2009

Unaudited

b.	Advances on inventory purchases – related parties

Name of related parties	Relationship	June 30, 2009		December 31, 2008
		Unaudited
Liyuan Ximei	Longmen JV’s subsidiary (unconsolidated)	$	7,459,408	$	502,336
Daishang trading Co., Ltd.	Longmen JV’s subsidiary’s joint venture partner		3,584,589		1,872,301
Maoming Shengze Trading	Chairman of General Steel Holdings, Inc. owns more than 5% in this company		4,655,237		-
Total		$	15,699,234	$	2,374,637

c.	Accounts payable due to related parties

Name of related parties	Relationship	June 30, 2009		December 31, 2008
		Unaudited
Long Men Group	General Steel’s joint venture partner	$	21,260,423	$	10,630,309
Henan Xinmi Kanghua	Longmen JV’s subsidiary’s joint venture partner		840,026		1,500,987
Zhengzhou Shenglong	Longmen JV’s subsidiary’s joint venture partner		102,612		-
Baotou Shengda Steel Pipe	Chairman of General Steel Holdings, Inc. owns more than 5% in this company		903,106		1,558,228
ShanXi Fangxin	Longmen JV’s subsidiary’s joint venture partner		1,301,279		1,451,336
Baogang Jianan Group	General Steel’s joint venture partner		156,011		185,664
Jingma Jiaohua	Longmen JV’s subsidiary (unconsolidated)		5,074,114		-
Beijing Wendlar	Chairman of General Steel Holdings, Inc. owns more than 5% in this company.		945,980		-
Total		$	30,583,551	$	15,326,524

d.	Short term loan due to related parties

Name of related parties	Relationship	June 30, 2009		December 31, 2008
		Unaudited
Dazhan	Chairman of General Steel Holdings, Inc. owns more than 5% in this company	$	3,940,850	$	3,946,230
Hengying	Chairman of General Steel Holdings, Inc. owns more than 5% in this company		3,398,800		3,403,440
Total		$	7,339,650	$	7,349,670

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2009

Unaudited

e.	Other payables due to related parties

Name of related parties	Relationship	June 30, 2009		December 31, 2008
		Unaudited
Golden Glister	Chairman of General Steel Holdings, Inc. owns more than 5% in this company	$	600,000	$	600,000
Hengying	Chairman of General Steel Holdings, Inc. owns more than 5% in this company		12,219,646		-
Dazhan			3,486,700		-
Baotou Shengda Steel Pipe	Chairman of General Steel Holdings, Inc. owns more than 5% in this company		110,135		77,013
Beijing Wendlar	Chairman of General Steel Holdings, Inc. owns more than 5% in this company		2,827		-
Total		$	16,419,308	$	677,013

f.	Customer deposits – related parties

Name of related parties	Relationship	June 30, 2009		December 31, 2008
		Unaudited
Dazhan	Chairman of General Steel Holdings, Inc. owns more than 5% in this company	$	3,946,437	$	2,759,964
Haiyan	Longmen JV’s subsidiary (unconsolidated)		-	1,522,355
Maoming Heng Da Materials	Chairman of General Steel Holdings, Inc. owns more than 5% in this company		-		2,934,000
Total		$	3,946,437	$	7,216,319

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2009

Unaudited

Note 17 –Business combinations

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

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

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

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

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

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2009

Unaudited

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

Distribution payable to former shareholders for the above acquisitions amount to $19,193,149 and $18,765,209 as of June 30, 2009 and December 31, 2008, respectively.

Note 18 - Equity

On January 8, 2008 the Company issued 150,000 shares of common stock at $10.43 per share as additional note issuance cost totaled $1,564,500. The shares price is determined as the quoted market price on the date granted.

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

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

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

On October 28, 2008, the company granted Teamlink Investment Limited, 100,000 shares of commons stock at $3.6 per share as consulting service expense $360,000. According to the period of service provided, $60,000 was recorded as expense in 2008 and $300,000 will be amortized within 10 months. $180,000 of public relationship expense had been recorded for the six months ended June 30, 2009.

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2009

Unaudited

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

On January 15, 2009, the Company granted convertible notes holders 152,240 shares of common stock at $3.66 per share, as share payments for interest. The shares were computed as 90% of the arithmetic average of the Weighted Average Price of the Common Shares on each for the ten consecutive Trading Days immediately preceding the applicable Interest Date.

On March 9, 2009, the Company granted senior management and directors 109,250 shares of common stock at $1.85 per share, as compensation. The shares were valued at the quoted market price on the date granted. The Company recorded compensation expense of $202,003 for the six months ended June 30, 2009.

On April 7, 2009, the Company granted senior management and directors 106,750 shares of common stock at $2.77 per share, as compensation. The shares were valued at the quoted market price on the date granted. The Company recorded compensation expense of $295,590 for the six months ended June 30, 2009.

On May 8, 2009, the Company issued 300,000 shares of common stock to Maoming Hengda Steel’s debtor, Guangzhou Hengda at $6 per share, as cash payments made for settling other short term loan.

From May 7 to June 30, 2009, $21,700,000 of notes was converted to 5,104,596 shares of common stock at Conversion Price, $4.2511. According to the convertible bond agreement, the Company recorded the make whole interest expense of $6,454,683. As of June 30, 2009, 1,399,759 shares of common stock for it had been issued. See note 11 for details.

The Company has the following warrants outstanding:

Outstanding as of January 1, 2008	1,388,292
Granted	-
Forfeited	(93,334	)
Exercised	(140,000	)
Outstanding As of December 31, 2008	1,154,958
Granted	-
Forfeited	-
Exercised	-
Outstanding As of June 30, 2009	1,154,958

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2009

Unaudited

Outstanding Warrants						Exercisable Warrants
Exercise Price		Number		Average Remaining Contractual Life		Average Exercise Price		Number		Average Remaining Contractual Life
$	13.51		1,154,958		3.87	$	13.51		1,154,958		3.87

Note 19 – Retirement plan

Regulations in the People’s Republic of China require the Company to contribute to a defined contribution retirement plan for all employees. All Joint Venture employees are entitled to a retirement pension amount calculated based upon their salary at their date of retirement and their length of service in accordance with a government managed pension plan. The PRC government is responsible for the pension liability to the retired staff. The Company is required to contribute 20% of the employees’ monthly base salary. Employees are required to contribute 8% of their base salary to the plan. Total pension expense incurred by the Company amounted to $780,597 and $818,091 for the three months ended June 30, 2009, and 2008, respectively, and $1,592,903 and $1,331,057 for the six months ended June 30, 2009, and 2008, respectively.

Note 20 – Statutory reserves

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

Surplus reserve fund

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

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

Note 21 – Commitment and contingencies

Hancheng Tongxing Metallurgy Co., Ltd., one subsidiary of Longmen Joint Venture, is obligated to contribute $32,962,500 (RMB225 million), as registered capital to Shaanxi Longmen Coal and Chemical Co., Ltd by the end of 2010. Tongxing had contributed $6,592,500 as of June 30, 2009.

Daqiuzhuang Metal provides dormitory facilities for its employees under a 10 year rental contract. The agreement began January 2006 and required full prepayment for the 10 year period totaling $466,200.

Daqiuzhuang Metal rented land for 50 years starting September 2005. Total amount of the rent over the 50 years period is approximately $1,044,728 (or RMB8,067,400).

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2009

Unaudited

Baotou Steel Pipe Joint Venture has 5 years rental agreement with Bao Gang Jian An for property and buildings. The agreement began June 2007 for $263,700 (or RMB1,800,000) per year.

As of June 30, 2009, total future minimum lease payments for the unpaid portion under an operating lease were as follows:

Year ended December 31,	Amount
2009	$	856,773
2010		263,700
2011		263,700
2012		131,850
2013		-
Thereafter		-
Total	$	1,516,023

Total rental expense for the six months ended June 30, 2009 and 2008, amounted to $170,120 and $164,630, respectively, and total rental expense amounted to $85,021 and $98,798 for the three months ended June 30, 2009 and 2008, respectively.

Long Men Joint Venture is constructing two blast furnaces in 2008, the total contract cost was $257,343,816 of which $239,310,567 was paid, and $18,033,249 will be paid within one year.

Note 22 – Segments

The Company sells steel which are used by customers in various industries. The Company’s chief operating decision-makers (i.e. chief executive officer and his direct reports) review financial information presented on a consolidated basis, accompanied by disaggregated information about revenues by product lines for purposes of allocating resources and evaluating financial performance. There are no segment managers who are held accountable for operations, operating results and plans for levels or components below the consolidated unit level. Based on qualitative and quantitative criteria established by SFAS 131, “Disclosures about Segments of an Enterprise and Related Information”, the Company considers itself to be operating within one reportable segment.

The Company does not have long-lived assets located in foreign countries. In accordance with the enterprise-wide disclosure requirements of SFAS 131, the Company's net revenue from external customers by main product lines is as follows:

		For the three months ended					For the six months ended
(in thousands)		2009			2008			2009			2008
Products	Unaudited			Unaudited			Unaudited			Unaudited
Re-bar		$	364,767		$	335,781		$	657,482		$	592,233
Hot-Rolled Sheets			13,878			48,348			26,577			82,366
High Speed Wire			26,487		NA				43,737		NA
Spiral-Welded Steel Pipe			3,815			2,900			3,946			3,996
Total sales revenue		$	408,947		$	387,029		$	731,742		$	678,595

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2009

Unaudited

Note 23 – Subsequent Event

The Company has performed an evaluation of subsequent events through August 7th, 2009, which is the date of financial statements issuance. In July, 2009, $4,940,000 of notes was converted to 1,162,055 shares of common stock at a conversion price of $4.2511.

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

Forward-Looking Statements:

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

Management Comments

CONTINUED GROWTH

Sales volume and revenue reached new highs. Sales volume for the three months ended June 30, 2009 increased 62.7% to 956,321 metric tons compared to 587,855 metric tons for the same period last year.

Sales volume for the six months ended June 30, 2009 increased 50.4% to 1.67 million metric tons compared to 1.11 million metric tons for the same period last year.

Sales revenue for the three months ended June 30, 2009 increased 5.7% to $408.9 million compared to $387.0 million for the same period last year.

Sales revenue for the six months ended June 30, 2009 increased 7.8% to $731.7 million compared to $678.6 million for the same period last year.

Gross Profit for the three months ended June 30, 2009 was $22.5 million.

Income from operations for the three months ended June 30, 2009 was a gain of $12.9 million.

Infrastructure projects and real estate are drivers for the record-breaking, profitable growth in our largest market, Shaanxi province where we hold dominant market share for construction steel.

The global economic slowdown has had a relatively mild impact in the developing central and western regions of China (such as Shaanxi province), due to these economies having low reliance on exports. In addition, these economies have received a boost from government infrastructure stimulus spending of which our segment of the steel industry (construction steel) is a direct beneficiary.

GLOBAL ECONOMIC SLOWDOWN

North America and Europe continue to experience economic slowdown, and rising unemployment. The result is weakened consumer demand from the developed countries. Many Chinese companies dependent on exports or supplying export-related industries have seen their demand dramatically reduced.

According to Mysteel.com, a leading Chinese steel industry information provider, Chinese steel exports have dropped 65.4% in the first half of 2009. This has changed China from being a net exporter of steel to being a net importer of steel.

GENERAL STEEL AND THE GLOBAL ECONOMIC SLOWDOWN

Our subsidiaries have varying exposure to the global economic slowdown:

Longmen Joint Venture

Longmen Joint Venture, our largest subsidiary, comprises approximately 90% of our total revenue. Its focuses on supplying construction steel to the less developed markets of Shaanxi and Sichuan provinces in central China. The economies in this region have been relatively sheltered from the global economic slowdown as witnessed by our record growth in volume and revenue in this region. Selling prices for construction steel in Shaanxi province command a premium compared to other regions of China due to strong demand.

Our record growth this quarter is largely attributed to:

Government economic stimulus package with a key emphasis on infrastructure-related projects in central and western China;

Government “Go West” incentives to promote development in central and western China;

Recovery of the real estate sector in central and western China; and,

Exceptional execution by our Longmen Joint Venture management team bringing new capacity on-line through our two new 1,280 m3 blast furnaces.

Maoming

Maoming focuses on supplying construction steel in western Guangdong and Guangxi provinces. This region has a large population of factories dependent upon exports and has been hit hard by the global economic slowdown.

At the time we purchased this state-of-the-art construction steel facility in mid 2008 at 27.6% discount to net asset value, it had be running at only approximately 10% of capacity. Our strategy was always to bring value to our company by increasing the utilization of these assets.

In sticking with our strategy, management has relocated our rebar processing line from Maoming to our Longmen Joint Venture. This move to the Shaanxi market, which has healthier economics of strong demand, and higher rebar selling prices will increase utilization of this asset to nearly full capacity.

We will continue to process and sell high-speed wire at our Maoming facility. We have reached record production this quarter of 71,536 metric tons high-speed wire and June 2009 marks an important milestone as gross margin turn positive for the subsidiary.

The ability to move assets to between regional markets to take advantage of better economics is a good example of synergies that have developed between our subsidiaries.

Daqiuzhuang Metal

Daqiuzhuang Metal produces hot-rolled sheets and sells them throughout China. This sector of the steel industry has been heavily impacted by the global economic slowdown. Export demand for cold-rolled sheets has dropped dramatically and now cold-rolled sheet manufacturers are redirecting their excess capacity for sale in the domestic market.

Cold-rolled sheets have superior qualities to hot-rolled sheets and have historically sold at a premium to hot-rolled sheets. Daqiuzhuang Metal created a market niche by creating hot-rolled sheets with similar properties of cold-rolled sheets sold at a price higher than traditional hot-rolled sheets, but at a discount to cold-rolled sheets. With exporters of cold-rolled sheets redirecting their product to the domestic market, the excess supply has brought down the price of cold-rolled sheets to a level that competes with hot-rolled sheets. This has put pressure our hot-rolled sheet business.

This business has been impacted by the global economic slowdown, but in the second quarter we have seen recovery in prices and increase in shipment volume.

Baotou Steel Pipe Joint Venture

Baotou Steel Pipe Joint Venture produces spiral-weld steel pipes for the energy sector primarily to transport oil and steam. The energy sector in China continues to invest and expand its energy infrastructure. As a result, we have not experienced a slowdown in this business during global economic slowdown, and are experiencing competition for raw materials due to demand generated by government driven infrastructure projects.

China is a country comprised of many distinct economies with individual dynamics. The same can be said of the Chinese steel industry, which is comprised of different segments with their own micro-trends.

Our largest subsidiary (comprising 90% of our revenue), Longmen Joint Venture is located in the developing region of central China. The GDP of Shaanxi province, our main market, has grown 13.2% in the first half of 2009.

Our company’s main product is construction steel (comprising 96% of our first half 2009 revenue). The construction steel sector of the Chinese steel industry currently enjoys favorable dynamics of demand and price.

Being in the right place; with the right product; at the right time are good reasons to be optimistic about the future.

CONVERTIBLE BOND RESET AND CONVERSIONS

In December of 2007 we obtained $40 million by issuing a Convertible Bond (CB). The money from this CB was ultimately used to fund our acquisition of Longmen JV (For details on our Convertible bond, see notes of our financial statements).

According to the terms of our CB, on May 7, 2009, the conversion price of $12.47 was reset to the market price, which is defined as the lower of $12.47 or the average of the weighted average price of our common stock for 30 consecutive days preceding May 7, 2009. This resulted in our conversion price being reset to $4.2511.

During the second quarter of 2009, our CB holders converted $21.7 million of debt into equity. As of August 7, 2009 a total of $33.39 million of CB debt have been converted to equity. We are glad to have our CB holders convert: our debt is reduced and our public float has increased.

Considering the funds from our CB were used to purchase controlling interest in Longmen JV (which provides 90% of our total revenue), this CB played an important role in executing our growth strategy. The acquisition of Longmen JV was transformational to the company.

MERGER AND ACQUISITIONS

On September 3, 2008, we announced a letter of intent for a joint venture with Yantai Steel Pipe Company. Twelve days later Lehman Brothers filed for bankruptcy protection, starting a chain reaction, which sent the global financial system into temporary chaos.

With all the uncertainty brought about by the ensuing financial crisis, we decided with our partners that it would be wise to wait for more clarity about the macro-environment before moving forward with this target acquisition. Nothing has changed about our vision for Yantai Steel Pipe Co., We have finished our due diligence, and we are in the period of negotiating contractual terms.

Nothing has changed regarding our merger and acquisition (M&A) strategy.

We continue to move forward with our two-pronged growth strategy of investment in our existing operations and growth via M&A activities.

SUMMARY

Our record-breaking volume and sales during global economic slowdown makes a few points stand out:

Our two-pronged growth strategy of upgrading our existing operations and growth via M&A activities is clearly working;

We are a direct beneficiary of the China economic stimulus infrastructure spending program; and,

The developing regions of China are growing and are relatively less impacted by the global economic slowdown.

The operating performance of our iron and steel business is the heart of General Steel Holdings, Inc. Our future is directly tied to our ability to generate positive cash flow from operations. It is important to separate non-operating, non-cash items from our GAAP Net Earnings to fully understand and evaluate the performance of our company.

Company Overview

General Steel Holdings, Inc. (“General Steel”), headquartered in Beijing, China, operates a diverse portfolio of Chinese steel companies. Our companies serve various industries and produce a variety of steel products including: rebar, hot-rolled sheets, spiral-weld pipes and high-speed wire. Our aggregate production capacity of steel products is 6.3 million metric tons per year, of which the majority is rebar. Individual industry segments have unique demand drivers, such as rural income, infrastructure construction and energy consumption. Domestic economic conditions are an overall driver for all our products.

Our vision is to become one of the largest non-government owned steel companies in China.

Our mission is to acquire Chinese steel companies and increase their profitability and efficiencies with the infusion of applied western management practices, advanced production technologies and capital resources.

Our strategy is to grow through aggressive mergers, joint ventures and acquisitions targeting state-owned enterprise steel companies and selected entities with outstanding potential. We have executed this strategy and consummated controlling interest positions in three joint ventures. We are actively pursuing a plan to acquire additional assets.

We presently have controlling interest in four steel subsidiary companies:

•

Tianjin Daqiuzhuang Metal Sheet Co., Ltd. (Daqiuzhuang Metal);

•

Baotou Steel - General Steel Special Steel Pipe Joint Venture Co., Ltd. (Baotou Steel Pipe Joint Venture);

•

Shaanxi Longmen Iron and Steel Co., Ltd. (Longmen Joint Venture); and

•

Maoming Hengda Steel Group Limited (Maoming).

Steel Operating Companies

• Tianjin Daqiuzhuang Metal Sheet Co., Ltd. (“Daqiuzhuang Metal”)

Tianjin Daqiuzhuang Metal Sheet Co., Ltd. (“Daqiuzhuang Metal”), started its operation in 1988. Daqiuzhuang Metal’s core business is the manufacturing of high quality hot-rolled carbon and silicon steel sheets which are mainly used in the production of small agricultural vehicles and other specialty markets.

Daqiuzhuang Metal has ten steel sheet production lines capable of processing approximately 400,000 tons of 0.75-2.0 mm hot-rolled steel sheets per year. Products are sold through a nation-wide network of 35 distributors and three regional sales offices.

Daqiuzhuang Metal uses a traditional rolling mill production sequence, such as heating, rolling, cutting, annealing, and flattening to process and cut coil segments into steel sheets. Sheets produced at the facility have a length of approximately 2,000mm; a width of approximately 1,000mm, and a thickness ranging from 0.75-2.0mm. Limited size adjustments can be made to meet order requirements. Products sell under the registered “Qiu Steel” brand name.

On May 14, 2009 Daqiuzhuang Metal changed it’s official name from “Tianjin Daqiuzhuang Metal Sheet Co. Ltd.” to “General Steel (China) Co. Ltd.” to better reflect it’s role as a merger and acquisition platform for steel company investments in China.

• Baotou Steel - General Steel Special Steel Pipe Joint Venture Co., Ltd. (“Baotou Steel Pipe Joint Venture”)

On April 27, 2007, Daqiuzhuang Metal and Baotou Iron and Steel Group Co., Ltd. ("Baotou Steel") entered into an Amended and Restated Joint Venture Agreement (the "Agreement"), amending the Joint Venture Agreement entered into on September 28, 2005 ("Original Joint Venture Agreement"). The Amended and Restated Joint Venture Agreement increased Daqiuzhuang Metal's ownership interest in the Joint Venture to 80%. The joint venture company’s name is Baotou Steel - General Steel Special Steel Pipe Joint Venture Company Limited (“Baotou Steel Pipe Joint Venture”).

Baotou Steel Pipe Joint Venture received its business license on May 25, 2007. It has four production lines capable of producing 100,000 tons of double spiral-weld pipes. These pipes are used in the energy sector primarily to transport oil and steam. Pipes produced at the mill have a diameter ranging from 219-1240mm; a wall thickness ranging from 6-13mm; and a length ranging from 6-12m. Presently, Baotou Steel Pipe Joint Venture sells its products using an internal sales force to customers in the Inner Mongolia Autonomous Region and the northwest region of China.

This joint venture started production and testing operations in the second quarter 2007 and began to generate revenue in the third quarter 2007.

• Shaanxi Longmen Iron and Steel Co., Ltd. (“Longmen Joint Venture”)

Effective June 1, 2007 through two subsidiaries, Daqiuzhuang Metal and Tianjin Qiu Steel Investment Co., Ltd., we entered into a joint venture agreement with Shaanxi Longmen Iron & Steel Group Co., Ltd. (“Long Steel Group”) to form Shaanxi Longmen Iron and Steel Co., Ltd. (“Longmen Joint Venture”). Through our two subsidiaries, we invested approximately $39 million cash and collectively hold approximately 60% of the Longmen Joint Venture.

Long Steel Group, located in Hancheng city, Shaanxi province, in China’s central region, was founded in 1958 and incorporated in 2002.

Long Steel Group operates as a fully-integrated steel production facility. Less than 10% of steel companies in China have fully-integrated steel production capacity.

Our Longmen Joint Venture, assumed existing operating units of the Long Steel Group. The Long Steel Group contributed most of its working assets to the Longmen Joint Venture.

Currently, the Longmen Joint Venture has four branch offices, seven subsidiaries under direct control and eight entities in which we have non controlling interest. It employs approximately 5,750 full-time workers.

Transportation Facility: The Company’s subsidiary, Shaanxi Longmen Iron and Steel Co., Ltd. (“Longmen JV”), operates transportation services through its Changlong Branch, located at Hancheng city, Shaanxi province. Changlong Branch owns 126 vehicles and provides transportation services exclusively to Longmen JV.

Coke Operation: The Company, through its subsidiary, Longmen JV, owns 22.76% of Hancheng Tongxing Metallurgy Co., Ltd. (“Tongxing”). Located in Hancheng city, Shaanxi province, Tongxing produces approximately 200,000 metric tons of second grade coke per month. Tongxing sells all of its output to Longmen JV.

The Company does not own iron palletizing facility.

Longmen Joint Venture’s products are categorized within the steel industry as “longs” (referencing their shape). Rebar is generally considered a regional product because its weight and dimension make it ill-suited for cost-effective long-haul ground transportation. By our estimates, the provincial market demand for rebar is six - eight million metric tons per year. Slightly more than half of this demand radiates from Xi’an, the province capital, located 180km from the Longmen Joint Venture main site. We estimate that in Xi’an we have a 72% market share according to Xi’an Steel Market Statistics dated April 7, 2009.

An established regional network of 24 agents and two sales offices sell the Longmen Joint Venture’s products. All products sell under the registered brand name of “Yulong” which enjoys strong regional recognition and awareness. Rebar and billet products carry ISO 9001 and 9002 certification and many other products have won national quality awards. Products produced at the facility have been used in the construction of the Yangtze River Three Gorges Dam, Xi’an International Airport, the Xi Han, Xi Tong and Xi Da provincial expressways, and are currently being used in the construction of the Xi’an city subway system.

On September 24, 2007, Longmen Joint Venture acquired controlling interest in two subsidiaries of Long Steel Group: Longmen Iron and Steel Group Co., Ltd. Environmental Protection Industry Development Co., Ltd. and Longmen Iron and Steel Group Co., Ltd. Hualong Fire Retardant Materials Co., Ltd.

The Longmen Joint Venture entered into an equity transfer agreement with Long Steel Group to acquire its 74.92% ownership interest in its subsidiary, Longmen Iron and Steel Group Co., Ltd. Environmental Protection Industry Development Co., Ltd. (“EPID”). The Joint Venture paid $2.4 million (RMB 18,080,930) in exchange for the ownership interest. The facility utilizes solid waste generated from the steel making process to produce construction products including, building blocks, landscape tiles, curb tops, ornamental tiles.

At the same time, the Longmen Joint Venture also entered into a second equity agreement with the Long Steel Group to acquire its 36% ownership interest in its subsidiary, Longmen Iron and Steel Group Co., Ltd. Hualong Fire Retardant Materials Co., Ltd. (“Hualong”). The Joint Venture paid $430,000 (RMB 3,287,980) in exchange for the ownership interest. The Joint Venture is the largest shareholder in the company. The facility produces fire-retardant materials used in various processes in the production of steel.

On January 11, 2008, Longmen Joint Venture completed its acquisition of a controlling interest in Hancheng Tongxing Metallurgy Co., Ltd. (“Tongxing”). Longmen Joint Venture contributed its land use right of 21.45 hectares (approximately 53 acres) with an appraised value of approximately $4.1 million (RMB 30,227,333). Pursuant to the agreement, the land will be converted into shares valued at approximately $3.1 million (RMB 22,744,419), providing the Joint Venture a stake of 22.76% ownership in Tongxing and making it Tongxing’s largest and controlling shareholder. Tongxing has two core operating areas: coking coal production and rebar processing. Its coking coal operations have an annual production capacity of 300,000 metric tons. Its rebar processing facility has an annualized rolling capacity of 300,000 metric tons.

• Maoming Hengda Steel Group Limited (Maoming)

On June 25, 2008, through our subsidiary Tianjin Qiu Steel Investment, we acquired 99% of Maoming Hengda Steel Group, Limited (“Maoming”) for RMB 50 million (approximately $7.3 million). Maoming’s core business is the production of high-speed wire and rebar, products used in the construction industry. Located on 140 hectares (approximately 346 acres) in Maoming city, Guangdong province, the facility has two production lines capable of producing 1.8 million metric tons of 5.5-16mm diameter high-speed wire and 12-38mm diameter rebar annually. The products are sold through nine distributors targeting customers in Guangxi province and the western region of Guangdong province.

The facility had been operating at approximately 10% of capacity due to, we believe, a redirected corporate focus of the previous owners.

Operating Information Summary by Subsidiaries

	Daqiuzhuang Metal	Baotou Steel Pipe Joint Venture	Longmen Joint Venture	Maoming
Annual Production Capacity (metric tons)	400,000	100,000	4 million	1.8 million
Main Products	Hot-rolled Sheet	Spiral-weld pipe	Rebar	High-speed wire
Main Application	Light Agricultural Vehicles	Energy transport	Infrastructure and Construction	Infrastructure and Construction

Stock listing

Our stock trades on the NYSE under the ticker symbol “GSI”.

Factors affecting our operating results

Demand for our products

Overall, domestic economic growth is an important demand driver for our products. Currently, China is experiencing an economic downturn from its past eight years of record growth. Nevertheless, according to estimates issued by Morgan Stanley on April 27, 2009, it estimates that China’s economy will still grow by approximately 7.0% in 2009, well above many western developed economies. Industry demand drivers for our products include construction and infrastructure growth, rural income growth and energy demand.

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

At Daqiuzhuang Metal, rural income growth drives demand for our hot-rolled carbon sheets. According to the Asian Development Bank statistics, well over 60% of the nation’s 1.3 billion total population is comprised of low-income, rural farmers. Our steel sheets are used in the construction of light agricultural vehicles targeted for sale to low-income, rural farmers. We believe our sheets are lighter and of greater ductility than those of our competitors and are preferred by manufacturers of light agricultural vehicles. According to the 11th Five-Year NESDP (2006-2010), raising the level of rural income is a top economic and social goal for the country. Many government initiatives, including removal of certain agricultural and local product taxes, have been implemented to spur rural income development. The government expects annual rural income to grow between 5% and 10% through 2010. Transportation asset growth slightly lags behind the growth in rural net income, so we anticipate demand for light agricultural vehicles to continue to grow between 4.7% and 9.6% throughout 2010.

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

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

Supply of raw materials

Iron ore

Our primary raw materials consist of iron ore, coke, hot-rolled steel coil and steel billets. Daqiuzhuang Metal and Baotou Steel Pipe Joint Venture use hot-rolled steel coil as their main raw material. Longmen Joint Venture uses iron ore and coke as its main raw material. Maoming uses steel billets as its raw material. Iron ore is the main raw material used to produce hot-rolled steel coil and steel billets. As a result, the price of iron ore and coke are the primary raw material cost driver for our products.

Longmen Joint Venture represents 4 million tons of our aggregate 6.3 million metric tons annual production capacity. At Longmen Joint Venture, approximately 90% of the production costs are attributable to the purchase of raw materials, with iron ore being the largest component of the purchase.

According to the China Iron and Steel Association, approximately 60% of the domestic steel industry’s demand for iron ore must be filled by imports. At our Longmen Joint Venture, we purchase iron ore from four primary sources: the Mulonggou mine (owned by the Longmen Joint Venture), the Daxigou mine (owned by our joint venture partner), domestic sources and from imports. The Daxigou mine has 300 million metric tons of proven iron ore reserves. According to the terms of our joint venture agreement with the strategic partner, we have first rights of refusal for sales and development from this mine.

We currently source approximately 15% of our iron ore from the Mulonggou and Daxigou mines, 70%-75% from domestic mines and remaining amount from imports. The Longmen JV sources iron ore from the Mulonggou and Daxigou mines below market prices due to its shareholding relationships. We believe gaining greater direct control over our key raw material supply is important for margin and secured source protection.

Coke

After iron ore, coke is our second most largely consumed raw material. It takes approximately 550 to 600kg of coke to make one metric ton of pig-iron.

Our Longmen facility is located in the center of China’s coal belt. All coke used at Longmen Joint Venture is sourced from the town in which Longmen Joint Venture is located. This ensures dependable supply and minimum transportation costs for this key raw material.

The sources and/or major suppliers of the Company’s raw materials are as follows:

Shaanxi Longmen Iron and Steel Co., Ltd. (Longmen Joint Venture)

Major Suppliers

Name of the Supplier	Raw Material Purchased	% of Total Raw Material Purchased			Relationship with GSI
Shaanxi Longmen Iron & Steel Group Co., Ltd.	Iron Ore		12.2	%	Related Party
Shaanxi Haiyan Coal Chemical Industry Co., Ltd	Coke		7.8	%	Related party
Shaanxi Huanghe Material Co., Ltd	Coke		7.5	%	Others (non-related party)
Yunnan Jingliyuan Industrial Co., Ltd	Alloy		2.4	%	Others (non-related party)
Shaanxi Jinhu Industrial and Commercial Co., Ltd	Iron Ore		2.2	%	Others (non-related party)
	Total		32.1	%

Tianjin Daqiuzhuang Metal Sheet Co., Ltd. (Daqiuzhuang Metal)

Major Suppliers

Name of the Supplier	Raw Material Purchased	% of Total Raw Material Purchased			Relationship with GSI
Tianjin Hengying Trade Co., Ltd	Hot roll coil		46.7	%	Related party
Tianjin Dazhan Industrial Co., Ltd	Hot roll coil		26.7	%	Related party
Tianjin Rongchengxiang Iron & Steel Group	Hot roll coil		13.3	%	Others (non-related party)
General Qiu Steel Pipe Co., Ltd	Hot roll coil		7.6	%	Others (non-related party)
Shenghua Xinyuan	Hot roll coil		3.4	%	Others (non-related party)
	Total		97.7	%

Baotou Steel - General Steel Special Steel Pipe Joint Venture Co., Ltd. (Baotou Steel Pipe Joint Venture)

Major Suppliers

Name of the Supplier	Raw Material Purchased	% of Total Raw Material Purchased			Relationship with GSI
Tianjin Jinchang Import Co., Ltd	Steel coil		35	%	Others (non-related party)
Tianjin Fulida Steel Pipe Co., Ltd	Steel pipe		16	%	Others (non-related party)
Tianjin Zhaoliang Trade Co., Ltd	Billet		34	%	Others (non-related party)
Tianjin Yingbo Yixin Trade Co., Ltd	Billet		5	%	Others (non-related party)
Baotou Huiyuan Trade Co., Ltd	Steel coil		4	%	Others (non-related party)
	Total		94	%

Maoming Hengda Steel Group Limited (Maoming)

Major Suppliers

Name of the Supplier	Raw Material Purchased	% of Total Raw Material Purchased			Relationship with GSI
Guangxi Shenglong Metallurgy Co. Ltd	Steel billet		36.5	%	Others (non-related party)
China Railway Material Commercial Corporation Tianjin Office	Billet		32.6	%	Others(non-related party)
Maoming Shengze Trading Co., Ltd	Billet		27.1	%	Related party
Maoming Zhengmao Develop Co., Ltd	Heavy oil		1.6	%	Others (non-related party)
Maoming Dazhongmao Petrochemical Co., Ltd	Heavy oil		0.9	%	Others (non-related party)
	Total		98.7	%

Industry consolidation

It is the goal of the central government to consolidate 50% of domestic production among the top ten steel companies by 2010 and 70% by 2020. Throughout 2008, it steadily heightened its consolidation effort. The following list highlights a few of the major steel company consolidation done during the year.

· Hubei-based Wuhan Iron & Steel Group acquired Liuzhou Iron & Steel Group and established Guangxi Iron & Steel Group for the purpose of building a new mill in Fangchenggang city, Guangxi province.

· Shanghai-based Baosteel acquired and is recapitalizing Guangzhou Iron & Steel Enterprises Group and Shaoguan Steel Co. Ltd. with the goal of building a new facility in Guangdong province.

· Shandong Iron & Steel Group was formed in Shandong province through the mergers of Laiwu Steel Group and Jinan Iron & Steel Group.

· Hebei Iron & Steel Group was formed through the merger of Tangshan Iron & Steel Group and Handan Iron & Steel Group in Hebei province.

All the above mentioned major mergers and acquisitions have been government-directed. In addition, Tangshan Bohai Steel Group and Tangshan Changcheng Steel Group were formed in late December. These two groups were formed from 39 local private mills in Tangshan city in Hebei province.

On January 14, 2009, the central government approved the steel industry revitalization plan. The plan requires the industry to constrict overall production, eliminate backward capacity and strengthen its technical innovation. The revitalization plan also encourages enterprises to accelerate the merger process so as to form a more concentrated industry structure and enhance the overall competitiveness.

Operating Results

Sales Revenue

Three months ended June 30, 2009 compared with three months ended June 30, 2008

Sales revenue for the three months ended June 30, 2009 increased 5.7% to $408.9 million compared to $387 million for the same period last year.

Sales Revenue	2nd Quarter 2009							2nd Quarter, 2008							Change			Change
	Volume		Revenue		%			Volume		Revenue		%			Volume %			Revenue %
Longmen JV		843,291	$	364,767,407		90	%		517,200	$	335,781,209		87	%		63.0	%		8.6	%
Maoming		76,238	$	26,486,603		6	%	NA		NA			0	%
Daqiuzhuang Metal		28,579	$	13,878,409		3	%		66,148	$	48,348,198		12	%		-56.8	%		-71.3	%
Baotou Steel Pipe JV		8,213	$	3,814,728		1	%		4,507	$	2,899,529		1	%		82.2	%		31.6	%
Total		956,321	$	408,947,147		100	%		587,855	$	387,028,936		100	%		62.7	%		5.7	%

The increase in sales revenue is predominantly due to sales volume increase of 63% at our Longmen JV; 82% volume increase at our Baotou Steel Pipe JV which offset lower selling prices and declines at Daqiuzhuang Metal.

The Sales Revenue increase is also attributed to our Maoming acquisition, which was acquired June 25, 2008. Sale Revenue for the three months ended June 30, 2009 reflects full three months of operations whereas this subsidiary did not exist for the same period last year.

Longmen Joint Venture - Comprised 90% of second quarter total sales. These sales were fueled by stable demand for construction steel in our addressable markets and increased production capacity contributed by our two new 1,280 cubic meter blast furnaces.

Maoming - Comprised 6% of second quarter total sales. This subsidiary was acquired June 25, 2008 so there is no comparable statistic to the same period last year.

Daqiuzhuang Metal – Due to economic slowdown, demand for energy hot-rolled sheets has dropped compounded by large excess capacity of cold-rolled sheets which can be used as a replacement product.

Baotou Steel Pipe JV – Increase activity due to China’s investment in energy infrastructure.

Six months ended June 30, 2009 compared with six months ended June 30, 2008

Sales revenue for the six months ended June 30, 2009 increased 7.8% to $731.7 million compared to $678.6 million for the same period last year.

SALES REVENUE	Six months ending
	June 30, 2009							June 30, 2008							Change			Change
	Volume		Revenue		%			Volume		Revenue		%			Volume %			Revenue %
Longmen JV		1,492,618	$	657,482,097		89	%		986,800	$	592,233,021		87	%		51.3	%		11.0	%
Maoming		118,607	$	43,736,596		6	%	NA		NA			0	%
Daqiuzhuang Metal		53,434	$	26,576,519		4	%		119,887	$	82,365,588		12	%		-55.4	%		-67.7	%
Baotou Steel Pipe JV		8,981	$	3,945,831		1	%		6,339	$	3,996,326		1	%		41.7	%		-1.3	%
Total		1,673,640	$	731,741,043		100	%		1,113,026	$	678,594,935		100	%		50.4	%		7.8	%

The increase in sales revenue is predominantly due to sales volume increase of 51% at our Longmen’s JV; 42% volume increase at our Baotou Steel Pipe JV which offset lower selling prices and declines at Daqiuzhuang Metal.

The Sales Revenue increase is also attributed to our Maoming acquisition, which was acquired June 25, 2008. Sale Revenue for the six months ended June 30, 2009 reflects full six months of operations whereas this subsidiary did not exist for the same period last year.

Gross Profit

Three months ended June 30, 2009 compared with three months ended June 30, 2008

Gross profit for the three months ended June 30, 2009 decreased 1.6% to $22.5 million from $22.9 million for the same period last year.

GROSS PROFIT	Three months ended
	June 30, 2009						June 30, 2008
				Gross Profit					Gross Profit
	Gross Profit			Margin %			Gross Profit		Margin %
Longmen JV	$	24,658,885			6.76	%	$	21,164,269		6.30	%
Maoming	$	(1,329,831	)		-5.02	%	NA
Daqiuzhuang Metal	$	(825,470	)		-5.95	%	$	1,701,567		3.52	%
Baotou Steel Pipe JV	$	(4,891	)		-0.13	%	$	2,969		0.10	%
Total	$	22,498,693			5.50	%	$	22,868,805		5.91	%

Longmen Joint Venture

The Gross Profit Margin of our largest subsidiary, Longmen JV, has improved due to healthy business fundamentals boosted by government economic stimulus infrastructure spending.

Maoming

Our Maoming subsidiary was acquired on June 25, 2008 so there is not a comparable number for the same period last year. The previous owners had never run the facilities at more than 10% utilization.

We have been steadily increasing the production volume at our Maoming facility to improve the financial results of the subsidiary. In the second quarter, production reached 76 thousand tons and for the month of June, Gross Profit at Maoming turned positive and the subsidiary achieved breakeven operating results, an important step point for the company.

Below is a month-by-month breakdown of Maoming second quarter gross profit. Note the swing to positive Gross Profit in June 2009.

Maoming Gross Profit	Second Quarter 2009
- by month	April			May			June
Revenue	$	9,105,291		$	9,206,623		$	8,174,689
Cost of Sales	$	10,105,931		$	9,791,339		$	7,919,164
Gross Profit	$	-1,000,639		$	-584,717		$	255,525
Gross Profit Margin %		-11.0	%		-6.4	%		3.1	%

Daqiuzhuang Metal

Daqiuzhuang Metal is impacted by the global economic slowdown specifically weak demand and competition from cold rolled steel sheets. Second quarter has seen some recovery in demand and prices, most notably in June.

Baotou Steel Pipe JV

Gross Margins have been impacted by increase in raw material prices. Our policy is to minimize inventory. This means that we purchase raw materials only after we have a firm customer order in hand. In the second quarter, we got caught with a contract where raw material prices rose immediately following the signing of a customer order impacting our gross margin.

Six months ended June 30, 2009 compared with six months ended June 30, 2008

Gross profit for the six months ended June 30, 2009 decreased 1.2% to $35.4 million from $35.9 million for the same period last year.

GROSS PROFIT	Six months ended
	June 30, 2009						June 30, 2008
				Gross Profit					Gross Profit
	Gross Profit			Margin %			Gross Profit		Margin %
Longmen JV	$	39,395,264			5.99	%	$	32,188,422		5.44	%
Maoming	$	(3,572,009	)		-8.17	%	NA
Daqiuzhuang Metal	$	(403,641	)		-1.52	%	$	3,625,872		4.40	%
Baotou Steel Pipe JV	$	1,198			0.03	%	$	36,626		0.92	%
Total	$	35,420,812			4.84	%	$	35,850,920		5.28	%

The financial crisis, collapse of banks, and ensuing global economic slowdown have made year-to-year comparisons like comparing apples to oranges. We believe looking at Gross Profit quarter-to-quarter provides more insight into our business. See below,

GROSS PROFIT	2nd Quarter 2009						1st Quarter 2009						4th Quarter 2008
				Gross Profit						Gross Profit						Gross Profit
	Gross Profit			Margin %			Gross Profit			Margin %			Gross Profit			Margin %
Longmen JV	$	24,658,885			6.76	%	$	14,736,378			4.99	%	$	(17,179,872	)		-7.33	%
Maoming	$	(1,329,831	)		-5.02	%	$	(2,242,177	)		-13.00	%	$	(2,621,672	)		-29.45	%
Daqiuzhuang Metal	$	(825,470	)		-5.95	%	$	421,828			3.32	%	$	(2,815,061	)		-19.47	%
Baotou Steel Pipe JV	$	(4,891	)		-0.13	%	$	6,090			4.65	%	$	1,041,070			30.08	%
Total	$	22,498,693			5.50	%	$	12,922,119			4.0	%	$	(21,575,535	)		-8.26	%

Selling, General and Administrative Expenses

Three months ended June 30, 2009 compared with three months ended June 30, 2008

Selling, general and administrative expenses, such as executive compensation, office expenses, legal and accounting charges, travel charges, and various taxes were $9.6 million for the three months ended June 30, 2009, compared to $9.5 million for the same period of 2008.

Six months ended June 30, 2009 compared with six months ended June 30, 2008

Selling, general and administrative expenses $18.7 million for the six months ended June 30, 2009, compared to $16 million for the same period of 2008. This increase is attributed the addition of Maoming subsidiary which did not exist for the same period last year and 51% increase of sales volume at our Longmen Joint Venture.

Other income (expense)

Three months ended June 30, 2009 compared with three months ended June 30, 2008

Other income (expense) for the three months ended June 30, 2009 was an expense of $34.4 million compared to expense of $32.5 million for the same period last year.

	Three months ended
	June 30, 2009		June 30, 2008
OTHER INCOME (EXPENSE), NET
Interest income	$	763,764	$	877,099
Interest/finance expense		-4,854,138		-6,289,868
Convertible note make whole interest		-6,454,683
Change in fair value of derivative liabilities		-26,726,167		-27,786,632
Income from equity investments		2,752,664
Other nonoperating income( expense), net		142,348		649,871
Total other income (expense), net	$	-34,376,212	$	-32,549,530

Six months ended June 30, 2009 compared with six months ended June 30, 2008

Other income (expense) for the six months ended June 30, 2009 was an expense of $25.4 million compared to expense of $34.9 million for the same period last year.

	Six months ended
	June 30, 2009		June 30, 2008
OTHER INCOME (EXPENSE), NET
Interest income	$	1,642,397	$	1,457,417
Interest/finance expense		-7,792,916		-12,276,375
Convertible note make whole interest		-6,454,683
Change in fair value of derivative liabilities		-22,611,599		-25,115,869
Gain from debt extinguishment		2,930,200
Government grant		3,519,890
Income from equity investments		2,698,032
Other nonoperating income( expense), net		652,564		1,019,142
Total other income (expense), net	$	-25,416,115	$	-34,915,685

- Interest Income: interest received from deposits held in banks

- Interest /finance expense: interest paid on bank loans, on early redemption of Notes Receivables various bank fees

- Notes converted – make-whole expense: non cash incentive written in our convertible bond agreement for early conversion by our note holders

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

- Gain from debt extinguishment: RMB 20 million debt extinguishment by Hengda Group. Not only does the debt extinguishment add to our profitability, it also reduces cash that needs to be paid out.

- Government grant: In order to reduce energy consumption emissions, Shaanxi Province Development and Reform Commission worked with local industries to eliminate outdated iron and steel production facilities. During first quarter 2009 Longmen Joint Venture received RMB 29 million in government incentives for compliance in dismantling two small blast furnaces, less RMB 5 million residual book value of the furnaces.

- Income from equity investments: entities in which we do not have controlling interest and do not consolidate their results into our financial statements

- Other non-operating income (expense), net: Rental income collected by Daqiuzhuang Metal offset by disposal of obsolete equipment at our Longmen JV.

Net income attributable to General Steel Holdings Inc.

Three months ended June 30, 2009 compared with three months ended June 30, 2008

Net income attributable to General Steel Holdings Inc. for the three months ended June 30, 2009 was a loss of $31.8 million compared to a loss of $24.3 million for the same period of last year.

	Three months ended
	June 30, 2009		June 30, 2008
NET LOSS BEFORE NONCONTROLLING INTEREST	$	-23,449,536	$	-20,270,736

LESS:Net income attributable to the noncontrolling interest		8,339,676		4,000,490

NET LOSS ATTRIBUTABLE TO GENERAL STEEL	$	-31,789,212	$	-24,271,226

The main factors for the Net loss are non-operating; non-cash expenses associated with our December 2007 Convertible Bond.

Six months ended June 30, 2009 compared with six months ended June 30, 2008

	Three months ended
Non-operating, non-cash expenses assocated with our December 2007 Convertible Bond	June 30, 2009		June 30, 2008
Convertible note make whole interest	$	-6,454,683
Change in fair value of derivative liabilities		-26,726,167	$	-27,786,632
Total expenses associated with our December 2007 Convertible Bond	$	-33,180,850	$	-27,786,632

NOTE: These are non-operating; non-cash expenses

	Six months ended
	June 30, 2009		June 30, 2008
NET LOSS BEFORE NONCONTROLLING INTEREST	$	-12,121,652	$	-16,637,420

LESS:Net income attributable to the noncontrolling interest		12,332,928		5,445,346

NET LOSS ATTRIBUTABLE TO GENERAL STEEL	$	-24,454,580	$	-22,082,766

Net income attributable to General Steel Holdings Inc. for the six months ended June 30, 2009 was a loss of $24.5 million compared to a loss of $22.1 million for the same period of last year.

The main factors for the GAAP Net Income loss are non-operating; non-cash expenses associated with our December 2007 Convertible Bond.

Earnings per share

Three months ended June 30, 2009 compared with three months ended June 30, 2008

	Three months ended
Earnings per share	June 30, 2009			June 30, 2008
NET LOSS ATTRIBUTABLE TO GENERAL STEEL	$	-31,789,212		$	-24,271,226

WEIGHTED AVERAGE NUMBER OF SHARES
Basic		39,533,099			34,928,576
Diluted		39,533,099			34,928,576

EARNING PER SHARE
Basic	$	(0.804	)	$	(0.695	)
Diluted	$	(0.804	)	$	(0.695	)

The main factors for the GAAP earning per share loss are non-operating; non-cash expenses associated with our December 2007 Convertible Bond.

Six months ended June 30, 2009 compared with six months ended June 30, 2008

	Six months ended
Earnings per share	June 30, 2009			June 30, 2008
NET LOSS ATTRIBUTABLE TO GENERAL STEEL	$	-24,454,580		$	-22,082,766

WEIGHTED AVERAGE NUMBER OF SHARES
Basic		37,918,177			34,883,740
Diluted		37,918,177			34,883,740

EARNING PER SHARE
Basic	$	(0.645	)	$	(0.633	)
Diluted	$	(0.645	)	$	(0.633	)

The main factors for the GAAP earning per share loss are non-operating; non-cash expenses associated with our December 2007 Convertible Bond.

The management of General Steel Holdings uses non-GAAP adjusted net earnings to measure the performance of the Company’s business internally by excluding non-recurring items as well as non-cash charges related to the Company’s 2007 convertible notes. The Company’s management believes that these non-GAAP adjusted financial measures allow the management to focus on managing business operating performance because these measures reflect the essential operating activities of General Steel Holdings and provide a consistent method of comparison to historical periods. The Company believes that providing the non-GAAP measures that management uses internally to its investors is useful to investors for a number of reasons. The non-GAAP measures provide a consistent basis for investors to understand General Steel Holding’s financial performance in comparison to historical periods without variation of non-recurring items and non-operating related charges. In addition, it allows investors to evaluate the Company's performance using the same methodology and information as that used by the management. Non-GAAP measures are subject to inherent limitations because they do not include all of the expenses included under GAAP and because they involve the exercise of judgment of which charges are excluded from the non-GAAP financial measure. However, the management of General Steel Holdings compensates for these limitations by providing the relevant disclosure of the items excluded.

The following table provides the non-GAAP financial measure and a reconciliation of the non-GAAP measure to the GAAP net income.

	Three months ended
	June 30, 2009			June 30, 2008
NET LOSS ATTRIBUTABLE TO GENERAL STEEL	$	(31,789,212	)	$	(24,271,226	)
less - Non-operating, non-cash expenses associated with our December 2007 Convertible Bond
Notes converted-make-whole interest		(6,454,683	)
Change in fair value of derivative liabilities		(26,726,167	)		(27,786,632	)
ADJUSTED NET INCOME	$	1,391,638		$	3,515,406

WEIGHTED AVERAGE NUMBER OF SHARES
Basic		39,533,099			34,928,576
Diluted		39,533,099			34,928,576

ADJUSTED EARNING PER SHARE
Basic	$	0.035		$	0.101
Diluted	$	0.035		$	0.101

	Six months ended
	June 30, 2009			June 30, 2008
NET LOSS ATTRIBUTABLE TO GENERAL STEEL	$	(24,454,580	)	$	(22,082,766	)
less - Non-operating, non-cash expenses associated with our December 2007 Convertible Bond
Notes converted-make-whole interest		(6,454,683	)
Change in fair value of derivative liabilities		(22,611,599	)		(25,115,869	)
ADJUSTED NET INCOME	$	4,611,702		$	3,033,103

WEIGHTED AVERAGE NUMBER OF SHARES
Basic		37,918,177			34,883,740
Diluted		37,918,177			34,883,740

ADJUSTED EARNING PER SHARE
Basic	$	0.122		$	0.087
Diluted	$	0.122		$	0.087

For the three months ended June 30, 2009 the adjusted net income of $1.40 million, or the adjusted EPS of $0.035 per share, for the second quarter of 2009 in the table above excluded a $26.7 million non-cash charge due to change in fair value of derivatives and a $6.45 million make whole interest due to notes converted. This adjusted net income compared, on the same basis, with the net income of $3.51 million, or $0.101 per share, in the second quarter of 2008.

For the six months ended June 30, 2009 the adjusted net income of $4.61 million, or the adjusted EPS of $0.122 per share, for the first two quarters of 2009 in the table above excluded a $22.6 million non-cash charge due to change in fair value of derivatives and a $6.45 million make whole interest due to notes converted. This adjusted net income compared, on the same basis, with the net income of $3.03 million, or $0.087 per share, for the first two quarters of 2008.

Income taxes

The Company did not carry on any business and did not maintain any branch office in the United States during the three months ended June 30, 2009 and 2008. Therefore, no provision for withholding or U.S. federal or state income taxes or tax benefits on the undistributed earnings and/or losses of the Company has been made.

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

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

For the three months ended June 30, 2009, we had a tax expense of $2.0 million and for the six months ended June 30, 2009 we had a tax expense of $3.4 million.

Noncontrolling Interest

Noncontrolling interest mainly consists of Long Steel Group’s 40% interest in Longmen Joint Venture, Baotou Iron and Steel Group’s 20% interest in Baotou Steel Pipe Joint Venture and 1% interest in Maoming by another entity.

Accounts Receivable

Accounts receivable and accounts receivable-related party were $16.0 million as of June 30, 2009 compared to $8.3 million on December 31, 2008.

We recognize revenue when we ship out products and pass the titles of the products to our customers and distributors. We extended short-term credit to our customers and distributors with good reputations and long-term business relationships. We have not experienced any bad debt in these accounts. Also, we review our accounts receivable on a regular basis to determine if the bad debt allowance is adequate and adjust the allowance amount if needed. We believe the accounts receivable amount is collectible. Nevertheless, to be conservative and prudent in our management practice, as of June 30, 2009, we reserved $0.6 million for bad debt allowance based on our reasonable estimate.

Liquidity and capital resources

The steel business is capital intensive and we utilize leverage greater than our industry peers which enables us to generate revenue compared to our shareholder equity at a rate higher than our industry peers. We utilize leverage in the form of credit from banks, vendor financing, customer deposits and others. This blended form of financing reduces our reliance on any single source.

In evaluating the extent of leverage employed by the company, it should be noted that certain assets offset related liabilities.

Restricted cash is held in banks as collateral for Notes Payables.

Inventory is used to fulfill Customer Deposits.

Short term notes payable

As of June 30, 2009 we had $274 million in short term notes payables liabilities which are secured by restricted cash of $200.2 million and other assets. These are lines of credit extended by banks for a maximum of 6 months and used to finance working capital. The short-term notes payables must be paid in full at maturity and credit availability is most likely continued upon payment at maturity. There are no additional significant financial covenants.

Short-term notes payable are the lowest cost form of financing available in China. We pay zero interest on this type of credit. This is a monetary tool used by China’s central bank to inject liquidity into the Chinese monetary system,

Short term loans – banks

As of June 30, 2009 we had $97.2 million in short term bank loans. These are bank loans with a one year maturity and must be paid in full upon maturity. There are no additional significant financial covenants tied to these loans. Chinese banks have not been impacted as heavily by the financial crisis as US banks and current creditors will most likely renew their lending to us after our loans mature as they have in the past.

We are able to repay our short term notes payables and short term bank loans upon maturity using available capital resources.

For more details about our debts, please see note 8 in our notes of the financial statements.

Convertible Notes

The Warrants grant the Buyers the right to acquire shares of common stock at $13.51 per share, subject to customary anti-dilution adjustments. The Warrants may be exercised at any time on or after May 13, 2008, but not after May 13, 2013, the expiration date of the Warrants. In connection with this transaction, the Company and the Buyers entered into a registration rights agreement. The Company agreed to register within 60 calendar days common stock issuable to the Buyers for resale on a registration statement to be effective by 90 calendar days or 120 days if the registration statement is subject to a full review by the U.S. Securities and Exchange Commission. The Company is required to register at least 120% of the sum of shares issuable upon conversion of the Notes, the exercise of the Warrants and the payment of interest accrued on the Notes. The registration rights are subject to customary exceptions and qualifications and compliance with certain registration procedures. The Company was required to file the registration statement on February 11, 2008. The Company filed the registration statement on February 13, 2008, which was two days after the required filing date. The Company reached an agreement with all note holders to waive the related penalty of $427,000.

In connection with this transaction, the Company and Zuo Sheng Yu, the Chief Executive Officer, and Victory New Holding Limited entered into a voting agreement (the “Voting Agreement”), pursuant to which such shareholders agree to vote in favor of the approval of this transaction. Certain management members of the Company also entered into a lock-up agreement with the Company pursuant to which each of such management members agrees not to sell or offer to sell the Common Stock held by such a management member for one year after the initial effective date of the resale Form S-3 Registration Statement described above.

According to the terms of the Notes, on May 7, 2009, the conversion price of $12.47 was reset to the market price, which is defined as the lower of $12.47 or the average of the weighted average price of our common stock for 30 consecutive days preceding May 7, 2009. This resulted in our conversion price being reset to $4.2511.

During the second quarter of 2009, our Notes holders converted $21.7 million of debt into equity. Combined with conversions earlier and subsequent to the end of second quarter, a total of $33.39 million of Notes debt have been converted to equity. We are glad to have our Notes holders convert: our debt is reduced and our public float has increased.

Cash-flow

Operating activities

Net cash provided by operating activities for the six months ended June 30, 2009 was $29.0 million compared to cash used in operating activities of $36.5 million in the same period of 2008. This change was mainly due to the combination of the following factors:

Cash inflow after the adjustments of some non-cash items to the net income such as depreciation and amortization, (Gain) Loss from debt extinguishment, (Gain) Loss on disposal of equipment, stock issued for service and compensation, amortization of deferred note issuance cost, amortization of discount on convertible notes, Change in fair value of derivative instrument, make whole expense on note conversion, income from investment and deferred tax assets, totaled of $36.3 million.

Cash outflow resulting from accounts receivable, notes receivable, other receivables and other receivables-related parties, dividend receivable, inventory and advance on inventory purchase, pre-paid expenses which was $104.3 million, compared to the same period last year an outflow of $67.8 million. The increase of $36.5 million is mainly due to inventory.

Cash inflow due to the increase in accounts payable, other payables, accrued liabilities, customer deposits, dividend payable and tax payable totaled of $109.1 million compared to the same period last year an inflow of $84.1 million. The increase of $25.0 million is mainly due to increase in accounts payable.

Investing activities

Net cash used in investing activities was $26.4 million for six months of 2009 compared to $97.1 million used in the same period of 2008. This reduction in cash outflow is mainly to increase in the received deposits due to sales representatives and reduction of equipment purchases.

Financing activities

Net cash provided by financing activities was $46.4 million for six months of 2009 compared to $42 million in the same period of 2008. This increase is mainly due to increase in borrowing on short term loan others.

Shelf Registration SEC Form S-3

On January 15, 2009, we filed a shelf registration statement SEC Form S-3, which is effective for a term of three years.

We may from time to time sell common stock, in one or more offerings, for an aggregate initial offering price of $60,000,000. We may sell the common stock to or through underwriters, directly to investors or through agents.

Each time we offer common stock, we will provide a prospectus supplement containing more specific information about the particular offering and attach it to this prospectus. The prospectus supplements may also add, update or change information contained in this prospectus. This prospectus may not be used to offer or sell securities without a prospectus supplement which includes a description of the method and terms of the offering.

Impact of inflation

We are subject to commodity price risks arising from price fluctuations in the market prices of the raw materials. We have generally been able to pass on cost increases through price adjustments. However, the ability to pass on these increases depends on market conditions influenced by the overall economic conditions in China. We manage our price risks through productivity improvements and cost-containment measures. We do not believe that inflation risk is material to our business or our financial position, results of operations or cash flows.

Compliance with environmental laws and regulations

Longmen Joint Venture:

Since 2002, our joint venture partner, Long Steel Group, has invested $76 million (RMB 580 million) in a series of comprehensive projects to reduce its waste emissions of coal gas, water, and solid waste. In 2005 it received ISO 14001 certification for its overall environmental management system. Long Steel Group has received several awards from the Shaanxi provincial government for its increasing effort in environmental protection.

Long Steel Group has spent more than $4.3 million (RMB 33 million) on a comprehensive waste water recycling and water treatment system. The 2,000m3/h treatment capacity system was implemented at the end of 2005. In the first quarter of June 30, 2009, new water consumption per metric ton of steel produced was 1.1 metric ton.

Long Steel Group has one 10,000m3 coke-oven gas tank and one 50,000m3 blast furnace coal gas tank to collect the residual coal gas produced from its own facility and that of surrounding enterprises. Long Steel Group also has a thermal power plant with two 25KW dynamos that uses the residual coal gas from the blast furnaces and converters as fuel to generate power.

Long Steel Group also has several plants to further process solid waste generated from the steel making process into useful products such as construction materials, building blocks, porcelain tiles, curb tops, ornamental tiles, etc. The plants are capable of processing 400,000 metric tons of solid waste and generate revenue of more than $2.6 million (RMB 20 million) each year.

Daqiuzhuang Metal:

Based on the equipment, technologies and measures adopted, Daqiuzhuang Metal is not considered a high-pollutant factory in China. The production process does not need much water and produces only a minimal amount of chemical waste. Daqiuzhuang Metal uses gas-fired reheat furnaces recommended by the State Environmental Protection Agency to heat raw materials and semi-finished products.

In 2005, Daqiuzhuang County ordered an environmental clean-up campaign and required harmful waste water discharge to be reduced. In order to meet these requirements, we invested $94,190 to remodel our industrial water recycling system to reduce new water consumption and industrial water discharge.

This wastewater recycling system is able to process 350 metric tons of wastewater daily. We can realize yearly savings using this system of approximately $10,000.

We believe that future costs relating to environmental compliance will not have a materially adverse effect on the Company’s financial position. There is always the possibility, however, that unforeseen changes, such as new laws or enforcement policies, could result in materially adverse costs.

Off-balance sheet arrangements

There were no off-balance sheet arrangements in the first quarter of 2009.

Critical Accounting Policies

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

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

Revenue recognition

Use of estimates

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

Derivative Instrument

The Company entered into a Securities Purchase Agreement (the “Agreement”) with certain institutional investors (the “Buyers”). Pursuant to the Agreement, the Company agreed to sell to the Buyers (i) senior convertible notes in the aggregate principal amount of $40,000,000 (“Notes”) and (ii) warrants to purchase an additional aggregate amount of 1,154,958 shares of Common Stock of the Company (the “Warrants”). Both the Warrants and the conversion option embedded in the Notes meet the definition of a derivative instrument in SFAS 133, Accounting for Derivative Instruments and Hedging Activities. Therefore these instruments are accounted for as derivative liabilities and periodically marked-to-market. The change in the value of the derivative liabilities is charged against or credited to income.

Financial instruments

Fair value measurements

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

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

As of June 30, 2009, the outstanding principal amounted to $11,550,000, and the carrying value of the convertible note amounted to $3,049,619. The Company used Level 3 inputs for its valuation methodology for the convertible note, and their fair values are determined using cash flows discounted at relevant market interest rates in effect at the period close since there is no observable market price. The embedded warrants and conversion feature are valued by using level two inputs to the Binomial Model and determined that the fair value amounted to approximately $11.05 million due to the decrease in the Company’s common stock price.

Noncontrolling interest

As a result of adoption of SFAS 160, we reclassified noncontrolling interests in the amounts of $65.0 million and $54.6 million from the mezzanine section to equity in the June 30, 2009 and December 31, 2008 balance sheets, respectively

New Accounting Pronouncements

Contractual obligations and commercial commitments

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

The following tables summarize our contractual obligations as of June 30, 2009, and the effect these obligations are expected to have on our liquidity and cash flows in future periods.

	Payment due by period
				Less than
Contractual obligations		Total		1 year		1-3 years		4- 5 years
	Dollars amounts in thousands
Bank loans (1)		$	97,197	$	97,197			$
Notes payable			274,014		274,014
Deposits due to sales representatives			40,056		40,056
Lease with Bao Gang			792		264		528
Blast Furnace construction			18,033		18,033
Convertible notes ( Principal plus Interest )			14,933		703		2,151		12,079
Total		$	445,025	$	430,267	$	2,679	$	12,079

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Commodity Price Risk and Related Risks

In the normal course of our business, we are exposed to market risk or price fluctuations related to the purchase, production or sale of steel products over which we have little or no control. We do not use any derivative commodity instruments to manage the price risk. Our market risk strategy has generally been to obtain competitive prices for our products and allow operating results to reflect market price movements dictated by supply and demand. Based upon an assumed 2009 annual production capacity of 6.3 million metric tons, a $1 change in the annual average price would change annual pre-tax profits by approximately $6.3 million.

Interest Rate Risk

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

Foreign Currency Exchange Rate Risk

Our operating units, Daqiuzhuang Metal, Longmen Joint Venture and Baotou Steel Pipe Joint Venture and Maoming, are all located in China. They produce and sell all of their products domestically in the P.R.C. They are subject to the foreign currency exchange rate risks due to the effects of fluctuations in the Chinese Renminbi on revenues and operating costs and existing assets or liabilities. We have not generally used derivative instruments to manage this risk. Generally, a ten percent (10%) decrease in Renminbi exchange rate would result in a $0.5 million decrease to income.

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

We maintain disclosure controls and procedures designed to ensure that information required to be disclosed in reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the specified time periods, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) or 15d-15(e)) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of that date, our disclosure controls and procedures were not effective at the reasonable assurance level because of the identification of material weaknesses in our internal control over financial reporting discussed below, which we view as an integral part of our disclosure controls and procedures.

Internal Control Over Financial Reporting

As discussed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2008, we identified the following material weaknesses in our internal controls over accounting:

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

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

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

We are continuing to build our accounting resources and implement related party transaction review processes in response to the weaknesses. While we continue to develop and implement new control processes and procedures to address these weaknesses, we have determined that further improvements are required in our accounting processes before we can consider the material weakness remediated.

Changes in Internal Control Over Financial Reporting

Other than the remediation efforts described below, there have been no changes in our internal control over financial reporting that have materially affected, or are likely to materially affect, our internal control over financial reporting.

We continue to undertake steps to strengthen our controls over accounting, including:

Increasing preparation and review on related party transactions

Hiring more staff accountants who have appropriate knowledge about the U.S. financial reporting requirements

Enhancing job responsibilities and procedures for staff at all levels

Strengthening communications between senior management and subsidiary level management

Our material weaknesses in controls over accounting will not be considered remediated until new internal controls are operational for a period of time and are tested, and management and our independent registered public accounting firm conclude that these controls are operating effectively. Due to the nature of and time necessary to effectively remediate the material weaknesses identified to date, we have concluded that material weaknesses in our internal control over reclassification and elimination of related party transactions continues to exist as of June 30, 2009.

PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

From time to time, we are subject to certain legal proceedings, claims and disputes that arise in the ordinary course of our business. Although we cannot predict the outcomes of these legal prceedings, we do not believe these actions; in the aggregate will have a material adverse impact on our financial position, results of operations or liquidity.

ITEM 1A. RISK FACTORS

Our business, financial condition and results of operations are subject to various risks, including those discussed below, which may affect the value of our securities.

Risks Related to Our Business

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

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

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

· Quality;

· Price/cost competitiveness;

· System and product performance;

· Reliability and timeliness of delivery;

· New product and technology development capability;

· Excellence and flexibility in operations;

· Degree of global and local presence;

· Effectiveness of customer service; and

· Overall management capability.

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

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

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

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

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

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

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

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

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

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

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

· Maintain adequate control of our expenses;

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

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

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

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

· Our financial condition and results of operations;

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

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

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

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

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

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

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

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

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

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

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

Our revenue is dependent, in large part, on significant contracts with a limited number of large customers. On June 30, 2009, approximately 13.4% of our sales were to five customers and these customers accounted for 0% of total account receivables. We believe that revenue derived from our current and future large customers will continue to represent a significant portion of our total revenue. Our inability to continue to secure and maintain a sufficient number of large contracts or the loss of, or significant reduction in purchases by, one or more of our major customers would have the effect of reducing our revenues and profitability.

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

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

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

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

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

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

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

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

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

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

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

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

We depend on acquiring companies to fulfill our growth plan.

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

We depend on bank financing for our working capital needs.

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

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

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

There have been historical deficiencies with our internal controls which require further improvements, and we are exposed to potential risks from legislation requiring companies to evaluate controls under Section 404 of the Sarbanes-Oxley Act of 2002.

While we believe that we currently have adequate internal control procedures in place, we are still exposed to potential risks from legislation requiring companies to evaluate controls under Section 404 of the Sarbanes-Oxley Act of 2002. Under the supervision and with the participation of our management, we have evaluated our internal controls systems in order to allow management to report on, and our registered independent public accounting firm to attest to, our internal controls, as required by Section 404 of the Sarbanes-Oxley Act. We have performed the system and process evaluation and testing required in an effort to comply with the management certification and auditor attestation requirements of Section 404. As a result, we have incurred additional expenses and a diversion of management’s time. If we are not able to continue to meet the requirements of Section 404 in a timely manner or with adequate compliance, we might be subject to sanctions or investigation by regulatory authorities, such as the SEC or the NYSE Market. Any such action could adversely affect our financial results and the market price of our stock.

We do not presently maintain product liability insurance in China, and our property and equipment insurance does not cover the full value of our property and equipment, which leaves us with exposure in the event of loss or damage to our properties or claims filed against us.

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

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

Risks Related to Operating Our Business in China

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

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

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

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

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

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

Inflation in China could negatively affect our profitability and growth.

While the Chinese economy has experienced rapid growth, such growth has been uneven among various sectors of the economy and in different geographical areas of the country. Rapid economic growth can lead to growth in the money supply and rising inflation. If prices for our products rise at a rate that is insufficient to compensate for the rise in the costs of supplies, it may have an adverse effect on profitability. In order to control inflation in the past, the Chinese government has imposed controls on bank credits, limits on loans for fixed assets and restrictions on state bank lending. Such an austerity policy can lead to a slowing of economic growth.

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

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

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

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

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

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

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

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

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

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

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

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

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

Since 1994, China pegged the value of the Renminbi to the U.S. dollar. We do not believe that this policy has affected our business. However, there have been indications that the Chinese government may be reconsidering its monetary policy in light of the overall devaluation of the U.S. dollar against the Euro and other currencies during the last two years. In July 2005, the Chinese government revalued the Renminbi by 2.1% against the U.S. dollar, moving from Renminbi 8.28 to Renminbi 8.11 per dollar. If the pegging of the Renminbi to the U.S. dollar is loosened, we anticipate that the value of the Renminbi will appreciate against the dollar with the consequences discussed above. As of June 30, 2009, the exchange rate of the Renminbi to the U.S. dollar was 6.83 yuan to 1 dollar.

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

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

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

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

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

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

Risks Related to Our Common Stock

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

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

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

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

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

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

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

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

We registered the shares of our common stock issuable upon conversion of approximately $40,000,000 worth of senior convertible notes convertible into 4,170,009 shares of our common stock with a conversion price of $12.47 per share and applicable interest rates and upon the exercise of warrants to purchase an additional aggregate amount of 1,154,958 shares of our common stock at an exercise price of $13.51 per share, both issued in December 2007. The issuance of shares of our common stock upon conversion of the notes and exercise of the warrants will dilute current shareholders’ holdings in our company. The senior convertible notes have a five year term through December 12, 2012, and the warrants are exercisable from May 13, 2008, to May 13, 2013. The conversion price was reset to $4.2511 to the Market Price on May 7, 2009 because the conversion price was higher than the Market Price pursuant to the notes and warrants agreements. Market Price means, for any given date, the lower of (x) the arithmetic average of the Weighted Average Price of the Common Stock for the thirty (30) consecutive Trading Day period ending on the Trading Day immediately preceding such date and (y) the Weighted Average Price of the Common Stock on the Trading Day immediately preceding such date.

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

Issued 106,750 shares of common stock as interim incentives to senior and mid-level management

On April 7, 2009, the Company granted senior management and directors 106,750 shares of common stock at $2.77 per share, as incentive compensation. The shares were valued at the quoted market price on the date granted. The Company recorded compensation expense of $295,590 for the three months ended June 30, 2009.

The Company awarded unregistered securities to keep with other issuer’s practice and for employee retention purposes.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

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

Not applicable.

ITEM 5. OTHER INFORMATION

As of August 7, 2009 a total of $33.39 million of CB debt have been converted to equity.

ITEM 6. EXHIBITS

(a)

Exhibits

31.1		Certification of the CEO pursuant to 18 U.S.C. Section 1350 adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, as filed herewith.

31.2		Certification of the CFO pursuant to 18 U.S.C. Section 1350 adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, as filed herewith.

32.1		Certification of the CEO pursuant to 18 U.S.C. Section 1350 adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, as filed herewith.

32.2		Certification of the CFO pursuant to 18 U.S.C. Section 1350 adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, as filed herewith.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	General Steel Holdings, Inc.

Date: August 10, 2009	By: /s/ Zuosheng Yu
	Zuosheng Yu
	Chief Executive Officer and Chairman

Date: August 10, 2009	By: /s/ John Chen
	John Chen
	Director and Chief Financial Officer

Positive
Negative
Uncertain
Constraining
Legalese
Litigious
Readability	8th grade Avg

General Steel (GSIH) Inactive 10-Q2009 Q2 Quarterly report

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