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 included elsewhere in this Annual Report. The following discussion contains forward-looking statements. General Steel Holdings, Inc. is referred to herein as "we", "our,""us" and "the Company." 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 PRC, 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" as well as other factors described in "Item 1A: Risk Factors" in this Annual Report. You should carefully review all of these factors, as well as the comprehensive discussion of forward-looking statements on page 4 of this Annual Report. 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.

OVERVIEW

We were founded on the strategy to merge, partner with, and acquire State-owned enterprises and selected steel companies with great growth potential within China's highly fragmented steel industry. As of December 31, 2011, we were comprised of four steel producing and processing subsidiaries/VIE of which Longmen Joint Venture is the largest, and one raw material trading company subsidiary. Located in Shaanxi province, Longmen Joint Venture contributed approximately 97.9% and 98.1% of our total revenue for the 2011 and 2010 fiscal years, respectively.

Fiscal year 2011 was highlighted by increased sales revenue, driven from both increased sales volume and average selling prices, and capacity expansion from a Unified Management Agreement with Shaanxi Iron and Steel Group Co., Ltd. ("Shaanxi Steel") and Shaanxi Coal and Chemical Industry Group Co., Ltd. ("Shaanxi Coal"), which was entered in April 2011. Highlights include:

· Sales revenue increased by $1.7 billion, or 89.4% year-over-year to $3.6 billion, up from $1.9 billion in 2010 mainly due to increased sales volumes as well as average selling price of our rebar products. For the year of 2011, sales volume totaled 6.2 million metric tons, an increase of 2.3 million metric tons, or 58.1%, compared to 3.9 million metric tons in the year of 2010, with an average selling price of rebar of $635 per ton, compared to $526 per ton in the year of 2010.

· The construction of the newly constructed iron and steel making facilities, which include two 1,280 cubic meter blast furnaces, two 120 metric ton converters and one 400 square meter sintering machine paid by Shaanxi Steel at the business property of Longmen Joint Venture were finalized in the beginning of 2011. Through our collaboration with Shaanxi Steel and Shaanxi Coal under the terms of the Unified Management Agreement, we added a production capacity of 3 million metric tons of crude steel annually under our management. Out total crude steel production capacity under management is 7 million metric tons per annum and can produce approximately the same volume of rebar.

· On June 1, 2011, we announced an increase of additional 1,000,000 shares of our common stock which will be purchased under our share repurchase program launched in December 2010 (the "Share Repurchase Program"), bringing the total authorized shares of our common stock available for purchase to 2,000,000. As of December 31, 2011, we had repurchased 1,090,978 shares of common stock in open market transactions at an average price of $2.56 per share pursuant to the above mentioned expansion of the Share Repurchase Program.

· In July 2011, we completed the installation and started testing the 1,000,000 metric ton capacity high speed wire production line, which was re-located from Maoming facility to Longmen Joint Venture in December 2010, in order to consume less energy when running at maximum efficiencies than our previous production line.

Our continued growth demonstrates the following strengths:

· Our two-pronged growth strategy of upgrading our existing operations and growing through merger and acquisition activities has continued to be successful.

· We are a direct beneficiary of the PRC economic stimulus infrastructure spending program, low-income housing project and "Go-West" Initiative.

· Because of our geographic location we benefit from being the largest supplier of rebar within 250 kilometers of Shaanxi Province, which is the gateway to Western China.

Industry Environment

Despite demand growth witnessed during 2010 and 2011, the overall nationwide steelmaking capacity still exceeds steel demand. There is significant over-capacity in China steel sector which is putting pressure on operators' profitability which became the most significant challenge in the steel manufacturing business. Chinese crude steel capacity is expected to be around 840 million tons in 2012, which would be 22.1% in excess of the expected 688 million tons of consumption, according to HIS Global Insight daily analysis, January 2012.

For steelmakers, operating performance depends on the volatility of the cost of raw materials. The shortage of these raw materials in the market has allowed suppliers of iron ore and metallurgical coal to rebuild the pricing mechanisms through the shift from annual to shorter-term price contracts. This has created numerous challenges for steelmakers as they must now deal with volatility in raw material prices, as well as maintain margins with fluctuating demand. Over the past two years, we have witnessed perseverancein steel prices that has given iron ore producers an opportunity to increase the prices in the next contract; however the reverse may not be true as steel companies cannot always pass on the rise in iron ore prices to end consumers due to the market overcapacity and fragmentation.

The central government has had a long-stated goal to consolidate 50% of domestic steel production among the top ten producers by 2010 and 70% by 2020. Currently, there are approximately over 500 crude steel producers throughout China, and the top ten producers account for approximately 48% of total national output. In September 2009, the central government published an industry target to eliminate 80 million metric tons of inefficient capacity from the steel industry by the end of 2011. In July 2011, the central government announced its goal of reducing obsolete iron production capacities by 31.22 million ton in 2011. However, we continue to see a strong demand for our products and believe significant growth opportunities in the industry and market we service.

On July 12, 2010, the Ministry of Industry & Information Technology Commission enacted the Steel Industry Admittance and Operation Qualifications standards. The new standards specify requirements for all aspects of steel production in China, which include: size of blast furnaces, size of converters, emission of waste water, dust per ton from steel production, quantity of coal used for each process in steel production and output capacity. According to the new standards, blast furnaces under 450 cubic meters are targeted to be eliminated. These standards once again confirmed the central government's determination to push forward the consolidation of this fragmented industry. While the operational conditions become more stringent, more small and medium sized companies will likely aggressively look for valued partners which could lead to opportunities for high quality acquisitions. We believe the above-mentioned policy will strengthen our position as an industry consolidator by creating numerous qualified potential acquisition targets.

RESULTS OF OPERATIONS

Statements of Operations for the years ended December 31, 2011 and 2010:



                                                                                            Percentage
(In thousands except share data)             2011             2010           Change           Change
Sales                                     $ 3,563,896      $ 1,882,140     $ 1,681,756             89.4 %
Cost of Goods Sold                          3,652,110        1,850,725       1,801,385             97.3 %
Gross Profit (loss)                           (88,214 )         31,415        (119,629 )         (380.8 )%
Gross Profit Margin %                            (2.5 )%           1.7 %
Selling, General and Administrative
Expenses                                       91,827           52,577          39,250             74.7 %
Loss from Operations                         (180,041 )        (21,162 )      (158,879 )          750.8 %

Other Expense, net                            (87,664 )        (33,891 )       (53,773 )          158.7 %

Loss Before Provision for Income Taxes
and Noncontrolling Interest                  (267,705 )        (55,053 )      (212,652 )          386.3 %

Provision (Benefit) for Income Taxes           15,594           (8,782 )        24,376           (277.6 )%
Net Loss                                     (283,299 )        (46,271 )      (237,028 )          512.3 %
Less: Net Loss Attributable to
Noncontrolling Interest                      (106,112 )        (16,265 )       (89,847 )          552.4 %
Net Loss Attributable to General Steel
Holdings, Inc.                            $  (177,187 )    $   (30,006 )   $  (147,181 )          490.5 %
Loss Per Share
Basic                                     $     (3.24 )    $     (0.56 )   $     (2.68 )          478.6 %
Diluted                                   $     (3.24 )    $     (0.56 )   $     (2.68 )          478.6 %

Revenue

Fiscal year ended December 31, 2011 compared to fiscal year ended December 31, 2010

Revenue by Subsidiary and Product



                                                                                   Percentage
(in thousands)                       2011            2010           Change           Change

     Subsidiary         Product
Longmen Joint Venture    Rebar    $ 3,487,636     $ 1,845,577     $ 1,642,059             89.0 %
Others                                 76,260          36,563          39,697            108.6 %
Total Revenue                     $ 3,563,896     $ 1,882,140     $ 1,681,756             89.4 %




                                                                           Percentage
(In thousands metric tons)              2011        2010       Change        Change

        Subsidiary           Product
Longmen Joint Venture         Rebar      5,496       3,511       1,985            56.5 %
Others                                     711         415         296            71.3 %
Total Production                         6,207       3,926       2,281            58.1 %

Total Sales Revenue for the fiscal year 2011 increased $1.7 billion or 89.4% to $3.6 billion from $1.9 billion in 2010. The increase in sales revenue compared to 2010 was predominantly due to the combined effect of increased production volume and average selling price of our rebar products. Sales volume increased 2.3 million metric tons, or 58.1% to 6.2million metric tons, compared to 3.9 million metric tons in 2010. The average selling price of rebar increased 20.7% to approximately $635 per ton in 2011 from approximately $526 per ton in 2010.

Longmen Joint Venture comprised 97.9% of total sales for 2011. Production volume of rebar at Longmen Joint Venture reached 5.5 million metric tons in 2011, which increased 56.5% compared with 3.5 million metric tons for of the same period in 2010. The increase of Longmen Joint Venture's production was mainly due to the additional capacity contributed from the new blast furnaces brought online in January 2011 through our cooperation with Shaanxi Steel and Shaanxi Coal under the Unified Management Agreement. Our current total monthly production volume is approximately 555,000 tons of crude steel.

Our product demands and prices have been on a rise in the first three quarters of 2011 until the end of the third quarter. In the fourth quarter of 2011, as a result of the China and global steel industry over-capacity, Chinese economic control polices and the financial crisis, global demand stalled and commodity prices abruptly plummeted. With weakened demand, market forces kicked-in and the price of steel dropped substantially. As such, both our selling volume and prices have dropped in the fourth quarter of 2011 in comparison to the previous quarters after the launch of our new blast furnaces.

Longmen Joint Venture comprised 98.1% of total sales for 2010. We operated at about 89% of our total capacity in 2010 due to a stable market demand for our construction steel products.

Our five major customers are all distributors and collectively represented approximately 27.1% of our total sales for the year ended December 31, 2011 in comparison to 28.6% of our total sales for year ended December 31, 2010. These five customers include related parties and major distributors owned by central government. As we are the largest supplier in Shaanxi province, we normally maintain a good relationship with them to stabilize our sales channel.

Cost of Goods Sold

Fiscal year ended December 31, 2011 compared with fiscal year ended December 31, 2010

Cost of Goods Sold



                                                                            Percentage
(in thousands)                2011            2010           Change           Change
       Subsidiary
Longmen Joint Venture      $ 3,502,109     $ 1,813,170     $ 1,688,939             93.1 %
Others                         150,001          37,555         112,446            299.4 %
Total Cost of Goods Sold   $ 3,652,110     $ 1,850,725     $ 1,801,385             97.3 %

Our primary cost of goods sold is the cost of raw materials such as iron ore, coke, alloy and scrap steel. The costs of iron ore and coke account for approximately 90.1% of our total cost of sales. As a result, the cost of goods sold increased by $1.8 billion or 97.3% to $3.7 billion, in 2011 from $1.9 billion in 2010. The increase was mainly driven by the increasing sales volume of 56.5% in rebar and unit costs of raw materials as a result of the rise in iron ore and coke purchase prices until the end of third quarter of 2011 before the market started getting weaker in the fourth quarter of 2011. The rise in iron ore and coke purchases of approximately 10.7% and 15.6%, respectively, for the year ended December 31, 2011 as compared to the same period in 2010 increased our period over period costs. As our operating strategy is to maintain competitiveness and to produce quality products, we have previously entered into some import raw material purchase contracts prior to September 2011, which generally have a higher quality and price compared to domestic raw materials. As such, this also contributed to our unit costs of raw materials being higher in the fourth quarter of 2011. In addition, we incurred depreciation of $18.1 million during the year ended December 31, 2011 related to the new blast furnaces brought online in April 2011 through our cooperation with Shaanxi Steel and Shaanxi Coal under the Unified Management Agreement, while we did not have such cost during the same period of 2010. Furthermore, we also wrote off approximately $37.5 million of inventory for impairment at the end of 2011 for both of our raw materials and finished goods due to the drop in market price of iron ore, coke and our rebar products during the fourth quarter of 2011.

Gross Profit (Loss)



Fiscal year ended December 31, 2011 compared to fiscal year ended December 31,
2010

                                                                          Percentage
(in thousands)                 2011           2010         Change           Change
Gross Profit (Loss)          $ (88,214 )    $ 31,415     $ (119,629 )          (380.8 )%
Gross Profit (Loss) Margin        (2.5 )%        1.7 %         (4.2 )%

Gross profit for 2011 decreased by $119.6 million or 380.8% which resulted in a gross loss of $(88.2) million from $31.4 million in 2010. The gross margin for 2011 decreased by 4.2% to a gross loss margin of (2.5)% compared to 1.7% of gross profit margin for 2010. The decrease was primarily attributable to a drop in gross profit at Longmen Joint Venture. As discussed above, in the fourth quarter of 2011, as a result of the China and global steel industry over-capacity and Chinese economic control polices and the financial crisis, global demand stalled and commodity prices abruptly plummeted. With weakened demand, market forces kicked-in and the price of steel dropped substantially. We, like many other steel producers in China, experienced significant losses in the fourth quarter as we were forced to manufacture with high priced raw material inventories that we had previously purchased while the market selling prices for finished goods had dropped below the cost of goods. This resulted in negative margins.

Selling, General and Administrative Expenses



Fiscal year ended December 31, 2011 compared with fiscal year ended December 31,
2010



Selling, General and Administrative ("SG&A") Expenses                                 Percentage
(in thousands)                             2011              2010       Change          Change

Selling, General and Administrative
expenses                                $   91,827     $   52,577     $   39,250             74.7 %

SG&A expenses as percentage of total
revenue                                        2.6 %          2.8 %         (0.2 )%

Selling, general and administrative ("SG&A") expenses increased $39.3 million, or 74.7% to $91.8 million for the year ended December 31, 2011, compared to $52.6 million for of the same period in 2010.

The increase was mainly due to the rise of transportation and sales agent charges at Longmen Joint Venture related to the increase in shipment volume and long distance sales deliveries to markets in the rural area in Xian city, Henan, Hubei, Sichuan and Gansu as sales expansion to other region other than Shaanxi province as a result of the increase in production volume. In addition, we had an impairment charge in the amount of $5.4 million in General Steel (China) in the second quarter of 2011. Refer to "Note 6 - plant and equipment, net" in the Notes to Consolidated Financial Statements for details.

SG&A expenses as a percentage of revenue decreased to 2.6% in 2011 from 2.8% in 2010. The decrease in percentage of revenue was due to the increase of sales revenue as a result of expanded production capacity when comparing to some of the fixed SG&A expenses.

Loss from Operations

Fiscal year ended December 31, 2011 compared to fiscal year ended December 31, 2010

Percentage ( in thousands) 2011 2010 Change Change Loss from Operations $ (180,041 ) $ (21,162 ) $ (158,879 ) 750.8 %

Loss from operations was $180.0 million for the year ended December 31, 2011, as compared to loss of $21.2 million for the same period in 2010. The increase in loss of $158.9 million is predominantly due to negative profit margins and increased in SG&A expenses as discussed above.

Total Other Income (Expense), Net

Fiscal year ended December 31, 2011 compared with fiscal year ended December 31, 2010

Other Income (Expense)



(in thousands)                         2011           2010          Change        Percentage Change
Interest Income                     $    7,892     $    6,154     $    1,738                    28.2 %
Finance/Interest Expense               (87,245 )      (51,283 )      (35,962 )                  70.1 %
Financing Cost on Capital Lease        (27,704 )            -        (27,704 )                     -
Change in Fair Value of
Derivative Liabilities                   5,563         15,055         (9,492 )                 (63.0 )%
Gain on Debt Settlement                  3,430              -          3,430                       -
Gain (Loss) on Disposal of Fixed
Assets                                     693         (9,447 )       10,140                  (107.3 )%
Realized Income from Future
Contract                                   415          1,424         (1,009 )                 (70.9 )%
Income from Equity Investments           5,302          6,383         (1,081 )                 (16.9 )%
Foreign Currency Transaction Gain        3,424              -          3,424                       -
Lease Income                             2,008            943          1,065                   112.9 %
Other Non-operating Expense, net        (1,442 )       (3,120 )        1,678                   (53.8 )%
Total Other Expense, Net            $  (87,664 )   $  (33,891 )   $  (53,773 )                 158.7 %

Total other expenses, net for the year ended December 31, 2011 were $87.7 million compared to $33.9 million in 2010. The increase of $53.8 million or 158.7% in total other expenses, was mainly a result of the combined effect of an increase of $63.7 million in financial expenses, of which, $27.7 million was interest expense on capital lease, and $36.0 million was interest expense increase was primarily due to increased in banks borrowings, a $9.5 million reductions in income from the change in fair value of derivative liabilities, and offset by an increase of $3.4 million gain from debt extinguishment and $3.4 million foreign currency transaction gain.

The foreign currency transaction gain was due to the loans proceeds we received in the second quarter of 2011 which was denominated in U.S. Dollars. Prior to the second quarter of 2011, there were no other transactions denominated in U.S. Dollars and therefore we did not incur any foreign currency gains or losses.

According to U.S. GAAP, our December 2007 convertible notes, December 2007 warrants and the December 2009 warrants were considered derivatives and therefore are carried at their fair market value at each financial reporting date with any changes in the fair value reported as gains or losses in our income statements. One of the major drivers used to calculate the value of the derivatives is our stock price.

The change in fair value of derivative liabilities for the year ended December 31, 2011 was a gain of $5.6 million compared to a gain of $15.1 million for the same period last year. This gain was mainly due to a change of stock price of our common stock as of December 31, 2011 compared to the one as of December 31, 2010.

Income Taxes

For the years ended December 31, 2011 and 2010, we had a total tax provision of $15.6 million and a tax benefit of $8.8 million, respectively.

For the years ended December 31, 2011 and 2010, we had effective tax rates of -5.8% and 16.0%, respectively. The negative effective tax rate for the year ended December 31, 2011 was mainly due to a consolidated loss before income tax while we provided 100% valuation allowance for the deferred tax assets at Longmen Joint Venture and we incurred income tax expenses in our profitable subsidiaries. The positive effective tax rate for the year ended December 31, 2010 was mainly due to a consolidated loss before income tax while we recognized the deferred tax assets that were incurred from the net operating losses to be carrying forwards.

Deferred taxes assets - China

According to Chinese tax regulations, net operating losses can be carried forward to offset operating income for the next five years. Our losses carried forward of $309.0 million will begin to expire in 2014. Originally, management believed the deferred tax asset was fully realizable. After the filing of the Annual Report on Form 10-K/A for the year ended December 31, 2010, management reevaluated our future operating forecast based on the current steel market condition. In 2011, the Chinese government announced several policies to curb the real estate prices across the country which led to a slowdown in demand for construction steel products and a decrease in their average selling price starting in the fourth quarter of 2011. Additionally due to the continued global economic slowdown and the overcapacity issue in China's steel market, management expected there would be sustained increase in margin pressure in the next five years until all the existing but outdated steel capacity across the whole industry are eliminated. Management took considerations of this potential negative impact on average selling price and gross margin of its products, re-performed an operating forecast for the next five years and concluded that the beginning-of-the-year balance of deferred tax asset mainly relating to the net operating loss carry forward may not be fully realizable due to the reduction in the projection of income to be available in the next 5 years. Management therefore decided to provide 100% valuation allowance for the deferred tax assets at Longmen Joint Venture, which represent approximately 99% of the total deferred tax assets of our Company as of December 31, 2011.

Deferred taxes assets - U.S.

We were incorporated in the United States and have incurred net operating losses for income tax purposes for the year ended December 31, 2011. The net operating loss carry forwards for United States income taxes amounted to $1.8 million, which may be available to reduce future years' taxable income. These carry forwards will expire, if not utilized, through 2031. Management believes that the realization of the benefits from these losses appears uncertain due to our Company's limited operating history and continuing losses for United States income tax purposes. Accordingly, our Company has provided a 100% valuation allowance on the deferred tax asset benefit to reduce the asset to zero. The valuation allowance at December 31, 2011 was $0.6 million. The net change in the valuation allowance for the year ended December 31, 2011 was $0.2 million. Management will review this valuation allowance periodically and make adjustments as warranted.

We had cumulative undistributed retained earnings from profitable subsidiaries of approximately $0.7million as of December 31, 2011. 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.

Net Loss

Fiscal year ended December 31, 2011 compared with fiscal year ended December 31, 2010

Net Loss

Percentage ( in thousands) 2011 2010 2011 vs 2010 Change Net loss $ (283,299 ) $ (46,271 ) $ (237,028 ) 512.3 %

Net Loss attributable to General Steel Holdings, Inc.

Fiscal year ended December 31, 2011 compared to fiscal year ended December 31, 2010

Net Loss


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