Special Note Regarding Forward Looking Statements

This Quarterly Report on Form 10-Q, including the following "Management's Discussion and Analysis of Financial Condition and Results of Operations," contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such statements include, among others, those concerning our expected financial performance and strategic and operational plans, as well as all assumptions, expectations, predictions, intentions or beliefs about future events. You are cautioned that any such forward-looking statements are not guarantees of future performance and that a number of risks and uncertainties could cause actual results of the Company to differ materially from those anticipated, expressed or implied in the forward-looking statements. The words "believe," "expect," "anticipate," "project," "targets," "optimistic," "intend," "aim," "will" or similar expressions are intended to identify forward-looking statements. All statements other than statements of historical fact are statements that could be deemed forward-looking statements. Risks and uncertainties that could cause actual results to differ materially from those anticipated include risks related to new and existing products; any projections of sales, earnings, revenue, margins or other financial items; any statements of the plans, strategies and objectives of management for future operations; any statements regarding future economic conditions or performance; uncertainties related to conducting business in China; any of the factors and risks mentioned in the "Risk Factors" sections of our Annual Report on Form 10-K for the year ended June 30, 2008 and subsequent SEC filings. The Company assumes no obligation and does not intend to update any forward-looking statements, except as required by law.

Use of Terms

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

Overview

We are one of the leading private manufacturers of steel finishing fabrication products in China. We utilize a variety of processes and technological methodologies to convert steel manufactured by third parties into steel finishing fabrication products. Our product offerings are focused on higher value-added finished steel products: hot-dip galvanized steel ("HDG Steel"), and prepainted galvanized steel ("PPGI"), which comprised approximately 28.36% and 32.84% of our total revenue in fiscal year 2008, respectively. In addition, we produce acid pickled steel ("AP Steel") and cold-rolled steel, which represent the less processed of our finished products and a large portion of both are used for our production of HDG Steel and PPGI products. The vertical integration of our operations has allowed us to benefit from the higher and more stable margins for our HDG Steel and PPGI products.

Our revenue increased from $190.59 million in fiscal year 2006 to $418.03 million in fiscal year 2008, representing a compounded growth rate of approximately 119.33%. These significant increases reflect our success in expanding our production lines and our increasing market penetration. We continually seek to broaden our market reach by introducing new production lines and improve our profit margin by vertical integration. Our AP Steel production line and cold-rolled steel production line went into operation on October 2006 and January 2007, respectively. Jiangsu Cold-Rolled's new HDG Steel production line which is capable of galvanizing both hot-rolled and cold-rolled steel with both zinc and aluminum started production on October 1, 2008. A substantial portion of our AP Steel products and cold-rolled steel were used for the production of our HDG Steel and a portion of our HDG Steel products were used for the production of our PPGI products, this vertical integration helped to improve our profit margin.

First Fiscal Quarter Financial Performance Highlights

We continued to experience strong demand for our products during the first fiscal quarter of 2009 and growth in our revenue and net income. During this quarter, our operations become more vertically integrated as we used a larger portion of our AP Steel and cold-rolled products for the production of HDG Steel and PPGI products, and a majority of the HDG Steel products were used for the production of PPGI products. This enhanced vertical integration allowed us to achieve a higher gross margin in the three months ended September 30, 2008 compared to the same period in the previous year. In addition, revenue generated from sales of PPGI products, which are our higher-margin, higher-end products, also increased in this quarter. The following are some financial highlights for the first fiscal quarter of 2009:

· Revenue: Revenue increased $2.29 million, or 2.30%, to $101.78 million for the three months ended September 30, 2008 from $99.49 million for the same period last year.

· Gross Margin: Gross margin was 13.21% for the three months ended September 30, 2008, as compared to 11.44% for the same period last year.

· Net Income: Net income increased $3.50 million, or 52.89%, to $10.12 million for three months ended September 30, 2008, from $6.62 million for the same period of last year.

· Fully diluted net income per share: Fully diluted net income per share was $0.27 for three months ended September 30, 2008, as compared to $0.17 for the same period last year.

Recent Development

Jiangsu Cold-Rolled's new 400,000 metric ton HDG steel production line started operations on October 1, 2008. The new HDG steel production line is capable of galvanizing both hot-rolled and cold-rolled steel with both zinc and aluminum. As a result of the addition of the new HDG production line, our production capacity of HDG products will increase from 200,000 metric tons per year to 600,000 metric tons per year.

Revenue

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

Our operations consist of two business segments: Changshu Huaye and Jiangsu Cold-rolled, which are our two principal manufacturing facilities. Changshu Huaye currently manufactures HDG Steel and PPGI products. In the three months ended September 30, 2008 and 2007, Changshu Huaye generated revenue of $76.63 million and $64.15 million, which represented 75.29% and 64.48% of our total revenue, respectively. Jiangsu Cold-rolled currently manufactures AP Steel and cold-rolled steel. In the three months ended September 30, 2008 and 2007, after eliminating the inter-company sales, Jiangsu Cold-Rolled generated revenue of $25.14 million and $35.34 million, which represented 24.71% and 35.52% of our total revenue, respectively. Jiangsu Cold-Rolled's HDG Steel production line, which can produce both HDG of cold-rolled steel and hot-rolled steel started production on October 1, 2008. We expect that Jiangsu Cold-Rolled's revenue will increase after its new HDG Steel production line starts operation.

Currently, a portion of our products are sold through our affiliate Shanghai Huaye. Approximately 26.93% of our revenue was derived from Shanghai Huaye and its affiliates in the three months ended September 30, 2008, decreased from 41.92% in the same period last year. We plan to further increase our direct sales to end customers in order to increase our margins.

Cost of Revenue

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

Our direct costs of manufacturing are generally highest when we first introduce a new product due to higher start-up costs associated and higher raw material costs. As production volume increases, we typically improve our manufacturing efficiencies and are able to strengthen our purchasing power by buying raw materials in greater quantities. Our AP Steel production line and cold-rolled steel production line, which started operation in fiscal year 2007, had a relatively high cost of production in fiscal year 2007. As these two production lines started operating at normal levels, our manufacturing efficiency improved in fiscal year 2008.

In the three months ended September 30, 2008, approximately 54.46% of our procurement was conducted through Shanghai Huaye. Due to the size of Shanghai Huaye, it has stronger bargaining power than us and our arrangement with Shanghai Huaye helps us get relatively lower purchase prices from suppliers.

Gross Profit and Gross Margin

Gross profit is equal to the difference between our revenue and the cost of revenue. Gross margin is equal to gross profit divided by revenue. In the three months ended September 30, 2008, gross margin for domestic and international sales were approximately 12.90% and 15.58%, respectively. On a segment basis, Changshu Huaye and Jiangsu Cold-Rolled's gross margins were 15.58% and 5.48% in the three months ended September 30, 2008, respectively. Changes in our gross margin are primarily driven by changes in our product mix and our vertical integration strategy.

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

In fiscal year 2007, our AP Steel production line and cold-rolled steel production line went into operation. Commencing January 2007, we have implemented the vertical integration strategy under which a large portion of our AP Steel and cold-rolled steel products were used internally as raw materials for our HDG Steel products. The AP Steel and cold-rolled steel products used for our PPGI products and HDG products increased to approximately 81.97% in the three months ended September 30, 2008 from approximately 61.71% during the same period in 2007. In addition, we also used a majority of our HDG Steel products as raw materials for our PPGI products. This vertical integration of our operations has allowed us to benefit from the higher and more stable margins for our HDG Steel and PPGI products.

Operating Expenses

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

General and Administrative Expenses

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

Selling Expenses

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

Our selling expenses are generally affected by the amount of international sales and our sales to unrelated parties. The transportation costs for our international sales are generally higher than domestic sales. Our export sales accounted for 11.77% of our revenue in the three months ended September 30, 2008 as compared to 4.08% for the same period last year. In addition, when we sell products to Shanghai Huaye and its affiliates, Shanghai Huaye generally arranges and bears the cost of the transportation. In contrast, when we sell products to unrelated parties, we generally bear the transportation costs, but we are able to charge a higher price.

Provision for Income Taxes

United States

Sutor Technology Group Limited is subject to United States federal income tax at a tax rate of 34%. No provision for income taxes in the United States has been made as Sutor Technology Group Limited had no taxable income in fiscal year 2008.

BVI

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

PRC

Before the implementation of the New EIT Law, Foreign Invested Entities ("FIE") established in the PRC were generally subject to an enterprise income tax ("EIT") rate of 33.0%, which includes a 30.0% state income tax and a 3.0% local income tax. FIEs established in Coastal Open Economic Zones, Special Economic Zones or Economic and Technical Development Zones, such as our PRC subsidiaries Changshu Huaye and Jiangsu Cold-Rolled, are subject to an EIT rate of 24.0% of the assessable profits. As approved by the local tax authority in the PRC, Changshu Huaye was entitled to a two-year exemption from EIT followed by 50% tax exemption for the next three calendar years, commencing from the first cumulative profit-making year in the calendar of 2004. Our other subsidiary, Jiangsu Cold-Rolled had the same two-year full tax exemption for the calendar years 2006 and 2007, followed by 50% tax exemption for the next three years.

In addition, Changshu Huaye, being a FIE, was entitled to a special tax concession that allows an amount up to 40% of the qualifying domestic capital expenditures (as defined and approved under the relevant PRC income tax rule) to be used as an offset against the excess of the current year's EIT over the prior year's EIT.

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

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

In addition to the changes to the current tax structure, under the EIT Law, an enterprise established outside of China with "de facto management bodies" within China is considered a resident enterprise and will normally be subject to an EIT of 25.0% on its global income. The Implementing Rules define the term "de facto management bodies" as "an establishment that exercises, in substance, overall management and control over the production, business, personnel, accounting, etc., of a Chinese enterprise." If the PRC tax authorities subsequently determine that the Company should be classified as a resident enterprise, then the organization's global income will be subject to PRC income tax of 25.0%.

Our subsidiary Changshu Huaye is subject to an EIT rate of 12.5% for 2008 and will be subject to an EIT rate of 25% after 2008. Our subsidiary Jiangsu Cold-Rolled is exempt from EIT for 2008 and is expected to be subject to an EIT rate of 12.5% for the next three year.

Reportable Operating Segments

We have two reportable operating segments which are organized by our manufacturing facilities - Changshu Huaye and Jiangsu Cold-Rolled. Changshu Huaye manufactures and sells HDG Steel and PPGI products. Jiangsu Cold-Rolled started operation in the second quarter of fiscal year 2007 and currently manufactures and sells AP Steel and cold-rolled Steel. Jiangsu Cold-Rolled's new HDG Steel production line became operative on October 1, 2008. Changshu Huaye and Jiangsu Cold-Rolled are adjacent to each other and use largely the same management resources. See Note 9, "Segment Information" to the consolidated financial statements included elsewhere in this report.

Results of Operations

Comparison of Three Months Ended September 30, 2008 and September 30, 2007

The following table sets forth key components of our results of operations for
the periods indicated, both in dollars and as a percentage of our revenue.

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

                                                        Three Months Ended
                                                           September 30,
                                                2008                           2007
                                                        As a                          As a
                                                     Percentage                    Percentage
                                        Amount       of Revenue       Amount       of Revenue
Revenue:
Revenue from unrelated parties       $  74,370.25          73.07 %  $ 57,780.49          58.08 %
Revenue from related parties            27,407.44          26.93 %    41,709.60          41.92 %
Total                                  101,777.69         100.00 %    99,490.09            100 %

Cost of Revenue
Cost of revenue                         32,906.09          32.33 %    57,609.99          57.91 %
Purchases from related parties          55,424.55          54.46 %    30,495.51          30.65 %
 Total                                  88,330.64          86.79 %    88,105.50          88.56 %

Gross Profit                            13,447.05          13.21 %    11,384.59          11.44 %

Operating Expenses
Selling                                    690.31           0.68 %       573.75           0.58 %
General and administrative                 443.96           0.43 %     2,489.94           2.50 %
Total Operating Expenses                 1,134.27           1.11 %     3,063.69           3.08 %

Income from Operations                  12,312.78          12.10 %     8,320.90           8.36 %

Other Income (Expense)
Interest income                            475.44           0.47 %       131.59           0.13 %
Other income                                    -           0.00 %        31.48           0.03 %
Interest expense                        (1,480.74 )        (1.45 %)     (915.34 )        (0.92 )%
Other expense                                   0           0.00 %      (121.09 )        (0.12 )%
Total Other Expense                     (1,005.28 )        (0.99 %)     (873.36 )        (0.88 )%

Income Before Taxes and Minority
Interest                                11,307.50          11.11 %     7,447.54           7.49 %
Provision for income taxes              (1,186.30 )        (1.17 )%     (830.84 )        (0.84 )%
Minority interest in loss of
consolidated subsidiary                         -              -           3.29           0.00 %
Net Income                              10,121.20           9.94 %     6,619.99           6.65 %

The following table sets forth revenue by geography and the percentage of our total revenue and total revenue by business segments for the three months ended September 30, 2008 and 2007.

                                  Three Months Ended September 30,
                                 2008                          2007
                                      % of Total                   % of Total
                        Revenue        Revenue        Revenue       Revenue
Geographic Data:
China                 $  89,796.32          88.23 % $ 95,431.69          95.92 %
Hong Kong                 1,956.06           1.92 %           -
Other Countries          10,025.31           9.85 %    4,058.40           4.08 %

Total revenue           101,777.69         100.00 %   99,490.09            100 %

Segment Data:
Changshu Huaye           76,637.45          75.29 %   64,146.64          64.48 %
Jiangsu Cold-Rolled      25,140.24          24.71 %   35,343.45          35.52 %

Revenue. Our revenue increased $2.29 million, or 2.30%, to $101.78 million for the three months ended September 30, 2008 from $99.49 million for the same period last year. This increase was mainly attributable to the increased sale of our PPGI products.

On a geographic basis, our sales to markets outside of mainland China was $11.98 million, accounting for 11.77% of our revenue in the three months ended September 30, 2008 as compared to $4.06 million which was 4.08% of our revenue for the same period last year. This percentage increase was mainly a result of the Company's decision, with the cooperation and support of overseas customers, to delayed parts of their last quarter 2008 orders to this current quarter so that the Company could ship production to the earthquake relief effort for the Sichuang area of China.

On a segment basis, revenue contributed by Changshu Huaye increased to $76.63 million for the three months ended September 30, 2008, an increase of $12.48 million, or 19.45%, from $64.15 million for the same period last year. As part of our vertical integration strategy, we continued to use more of our own HDG Steel products for the production of PPGI products in the three months ended September 30, 2008 to reduce the production costs. As a result, we sold less HDG Steel products to third parties in the three months ended September 30, 2008 as compared to the same period last year. However, the increased revenue generated from our sales of PPGI products, which generally have higher per unit sales price than our HDG products, more than offset the decrease of sales of our HDG Steel products. Our newly developed PPGI products, such as the anti-static products and anti-bacterial PPGI products, were well received by the market.

As part of our vertical integration, a bigger portion of the AP Steel and cold-rolled steel products were used in the production of our HDG Steel and PPGI products in this fiscal quarter, as compared to that in the same period last year. After eliminating the inter-company sales, revenues contributed by Jiangsu Cold-Rolled were $25.14 million for the three months ended September 30, 2008, a decrease of $10.20 million from $35.34 for the same period last year.

In terms of sales to related parties as compared with sales to unrelated parties, our direct sales to unrelated parties in the three months ended September 30, 2008 increased $16.59 million, or 28.71%, to $74.37 million from $57.78 million for the same period last year. Such increase was mainly due to our increased direct sales to end customers. While we maintain a cooperation relationship with our sales agent, Shanghai Huaye, we have been seeking to increase our direct sale to end customers to increase margin.

Cost of Revenue. Our cost of revenue increased $0.22 million, or 0.25% to $88.33 million for the three months ended September 30, 2008 from $88.11 million for the same period last year. This dollar increase was mainly due to change of our product portfolio. We sold more PPGI products in the first fiscal quarter of 2009. As a percentage of revenue, the cost of revenue decreased to 86.79% for the three months ended September 30, 2008 from 88.56% for the same period last year. Such percentage decrease was mainly attributable to increased sale of PPGI products, which are higher end products and generally have a higher profit margin than other products, our vertical integration strategy and our increased direct sales to unrelated parties in the three months ended September 30, 2008.

Gross Profit. Our gross profit increased $2.06 million to $13.45 million for the three months ended September 30, 2008 from $11.38 million for the same period last year. Gross profit as a percentage of revenue (gross margin) was 13.21% for the three months ended September 30, 2008, as compared to 11.44% for the same period last year. Such gross margin increase was mainly due to the increased sale of PPGI products, which are higher end products and generally have a higher profit margin than other products, our vertical integration strategy and our increased direct sales to unrelated parties in the three months ended September 30, 2008.

Gross margin for Changshu Huaye increased to 15.58% for the three months ended September 30, 2008 from 14.75% for the same period last year, which was primarily attributable to the increased direct sales to unrelated parties, our vertical integration strategy that caused a large portion of Jiangsu Cold-Rolled's products to be used as raw materials for Changshu Huaye, and an increase in sales of our higher margin PPGI products.

Gross margins for Jiangsu Cold-Rolled decreased to 5.48% for the three months ended September 30, 2008 from 6.89% for the same period last year. In the three months ended September 30, 2008, the utilization rate of our AP Steel production line increased, as a result, we manufactured more AP Steel products and sales of AP Steel products constituted a bigger portion of the total revenue generated by . . .