China Industrial Steel Inc. - FORM S-1

Attached files

file	filename
EX-21 - China Industrial Steel Inc.	ex21.htm
EX-3.1 - China Industrial Steel Inc.	ex3-1.htm
EX-5.1 - China Industrial Steel Inc.	ex5-1.htm
EX-3.2 - China Industrial Steel Inc.	ex3-2.htm
EX-23.1 - China Industrial Steel Inc.	ex23-1.htm
EX-10.3 - China Industrial Steel Inc.	ex10-3.htm
EX-10.6 - China Industrial Steel Inc.	ex10-6.htm
EX-10.5 - China Industrial Steel Inc.	ex10-5.htm
EX-10.1 - China Industrial Steel Inc.	ex10-1.htm
EX-10.2 - China Industrial Steel Inc.	ex10-2.htm

As filed with the Securities and Exchange Commission on February 9, 2011

Registration No. 333-[______]

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

CHINA INDUSTRIAL STEEL INC.

(Exact name of registrant as specified in its charter)

Maryland	3310	27-1847645
(State or other jurisdiction of incorporation or organization)	(Primary Standard Industrial Classification Code Number)	(I.R.S. Employer Identification Number)

110 Wall Street, 11th Floor

New York, NY 10005

(646) 328 1502

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

HQ Maryland Corp.

715 St. Paul Street

Baltimore, MD 21202

(410) 752-8030

(Name, address, including zip code, and telephone number, including area code, of agent for service)

Copies to:

Gregory Sichenzia, Esq.

Benjamin Tan, Esq.

Sichenzia Ross Friedman Ference LLP

61 Broadway, 32nd Floor

New York, New York 10006

Telephone: (212) 930-9700

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Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. o

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act of 1933 registration statement number of the earlier effective registration statement for the same offering. o

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

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

Large Accelerated Filer o	Accelerated Filer o

Non-accelerated Filer o	Smaller Reporting Company x

(Do not check if a smaller reporting company)

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CALCULATION OF REGISTRATION FEE

Title of each class of securities to be registered	Amount to be Registered(1)		Proposed maximum offering price per share			Proposed maximum aggregate offering price		Amount of registration fee

Common stock, par value $0.0001 per share (3)		2,580,022	$	4.50	(2)	$	11,610,099	$	1,347.93

____________

	(1)	Pursuant to Rule 416 under the Securities Act, the shares of common stock offered hereby also include an indeterminate number of additional shares of common stock as may from time to time become issuable by reason of anti-dilution provisions, stock splits, stock dividends, recapitalizations or other similar transactions.

	(2)	Estimated solely for purposes of calculating the registration fee. Our common stock is not traded on any national exchange and in accordance with Rule 457; the offering price was determined by the price the shares were sold to our shareholders in a private placement transaction which closed in February 2011. The price of $4.50 is a fixed price at which the selling security holders may sell their shares until our common stock is quoted on the OTC Bulletin Board at which time the shares may be sold at prevailing market prices or privately negotiated prices. There can be no assurance that a market maker will agree to file the necessary documents with the National Association of Securities Dealers, which operates the OTC Electronic Bulletin Board, nor can there be any assurance that such an application for quotation will be approved.

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.

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The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer and sale is not permitted.

PRELIMINARY PROSPECTUS

SUBJECT TO COMPLETION, DATED FEBRUARY 9, 2011

CHINA INDUSTRIAL STEEL INC.

2,580,022 Shares of Common Stock

Offered by Selling Stockholders

This prospectus relates to the sale by the selling stockholders identified in this prospectus of up to 2,580,022 shares of our common stock, par value $.0001 per share. The common stock has already been issued to the selling stockholders in private placement transactions which closed in January 2011 and February 2011, that were exempt from the registration and prospectus delivery requirements of the Securities Act of 1933, as amended.

The selling stockholders may be deemed underwriters of the shares of common stock, which they are offering.

We have set an offering price for these securities at $4.50 per share of common stock offered through this prospectus. The $4.50 per share offering price of our common stock was determined based on the price per share of our common stock in our most recent private placement transaction, which was consummated in February 2011. Under the February 2011 private placement, the $4.50 per share price was based on negotiations between the Company and the investors. We are registering the shares on behalf of the selling stockholders. The selling stockholders will sell their shares of our common stock at a price of $4.50 per share until shares of our common stock are quoted on the Over-The-Counter (OTC) Bulletin Board, or listed for trading or quoted on any other public market, and thereafter, from time to time, at prevailing market prices or privately negotiated prices. We will not receive any of the proceeds from the sale of the shares by the selling stockholders. We will pay all of the registration expenses incurred in connection with this offering (estimated to be approximately $35,348), but the selling stockholders will pay all of their selling commissions, brokerage fees and related expenses.

Our common stock is not currently quoted on any exchange or inter-dealer market. We cannot give you any assurance that an active trading market in our common stock will develop, or if an active market does develop, that it will continue.

The shares are being offered by the selling stockholders in anticipation of the development of a secondary trading market in our common stock.

Investing in our common stock involves a high degree of risk. You may lose your entire investment. See “Risk Factors” beginning on page 7 for a discussion of certain risk factors that you should consider. You should read the entire prospectus before making an investment decision.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.

The date of this prospectus is _________, 2011

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TABLE OF CONTENTS

PART I		Page

About This Prospectus		1
Cautionary Note Regarding Forward-Looking Statements and Other Information Contained in this Prospectus		2
Prospectus Summary		2
Risk Factors		7
Use of Proceeds		22
Dilution		23
Selected Financial Data		23
Management's Discussion and Analysis of Financial Condition And Selected Financial Data		24
Selling Security Holders		35
Plan of Distribution		38
Market for Common Equity and Related Stockholder Matters		39
Description of Business		42
Description of Property		57
Legal Proceedings		57
Security Ownership of Certain Beneficial Owners and Management		58
Directors, Executive Officers, Promoters and Control Persons		59
Executive Compensation		63
Certain Relationships and Related Transactions		64
Description of Our Securities		68
Legal Matters		69
Experts		69
Interest of Named Experts and Counsel		69
Disclosure of Commission Position on Indemnification for Securities Act Liabilities		69
Changes in and Disagreements with Accountants		70
Where You Can Find More Information		70
Financial Statements		70

PART II


Other Expenses of Issuance and Distribution		71
Indemnification of Directors and Officers		71
Recent sales of Unregistered Securities		72
Exhibits		73
Undertakings		74
Signatures		76

Until _____________, 2011 all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers' obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

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ABOUT THIS PROSPECTUS

You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with information other than that contained in this prospectus. The selling stockholders are offering to sell and seeking offers to buy shares of our common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of our common stock. The prospectus will be updated and updated prospectuses will be made available for delivery to the extent required by the federal securities laws.

No person is authorized in connection with this prospectus to give any information or to make any representations about us, the selling stockholders, the securities or any matter discussed in this prospectus, other than the information and representations contained in this prospectus. If any other information or representation is given or made, such information or representation may not be relied upon as having been authorized by us or any selling stockholder. This prospectus does not constitute an offer to sell, or a solicitation of an offer to buy the securities in any circumstances under which the offer or solicitation is unlawful. Neither the delivery of this prospectus nor any distribution of securities in accordance with this prospectus shall, under any circumstances, imply that there has been no change in our affairs since the date of this prospectus. The prospectus will be updated and updated prospectuses will be made available for delivery to the extent required by the federal securities laws.

When used in this prospectus, the terms:

	●	“China Industrial Steel,” the "Company," "we," "our" and "us" refers to China Industrial Steel Inc., a Maryland company.

	●	“Northern Steel” refers to our wholly-owned subsidiary, Northern Steel Inc., a Colorado corporation.

●

"Nuosen" refers to Northern Steel’s wholly owned subsidiary, Nuosen (Handan) Trading Co. Ltd., a wholly foreign-owned enterprise (“WFOE”) organized under the laws of the People’s Republic of China.

●

"Hongri Metallurgy" refers to our variable interest entity, Handan Hongri Metallurgy Co., Ltd., a Chinese company that together with the shareholders of Hongri Metallurgy, has entered into a series of agreements with Nuosen that:

●

give Nuosen control over the board of directors, officers, operations and finances of Hongri Metallurgy (see “Description of Business - Corporate History” beginning on page 41 of this prospectus).

●

allow us to consolidate Hongri Metallurgy’s financial statements under GAAP (see “Description of Business - Corporate History” beginning on page 41 of this prospectus).

●

“Hongri Metallurgy Shareholders” refers to the shareholders of Hongri Metallurgy.

●

"Yuan" or "RMB" refer to the Chinese Yuan (also known as the Renminbi). According to the currency website xe.com, as of February 6, 2011, $1 = 6.557 Yuan.

●

"PRC" or "China" refers to the People's Republic of China.

●

"OTC Bulletin Board" or the "OTCBB" refers to the Over-the-Counter Bulletin Board, an electronic quotation system for equity securities overseen by the Financial Industry Regulatory Authority (formerly the National Association of Securities Dealers), which is accessible through its website at www.otcbb.com.

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS AND OTHER

INFORMATION CONTAINED IN THIS PROSPECTUS

This prospectus contains some forward-looking statements. Forward-looking statements give our current expectations or forecasts of future events. You can identify these statements by the fact that they do not relate strictly to historical or current facts. Forward-looking statements involve risks and uncertainties. Forward-looking statements include statements regarding, among other things, (a) projected sales, profitability, and cash flows, (b) growth strategies, (c) anticipated trends, (d) future financing plans and (e) anticipated needs for working capital. They are generally identifiable by use of the words "may," "will," "should," "anticipate," "estimate," "plans," "potential," "projects," "continuing," "ongoing," "expects," "management believes," "we believe," "we intend" or the negative of these words or other variations on these words or comparable terminology. These statements may be found under "Management's Discussion and Analysis of Financial Condition and Plan of Operation" and "Business," as well as in this prospectus generally. In particular, these include statements relating to future actions, prospective products or product approvals, future performance or results of current and anticipated products, sales efforts, expenses, the outcome of contingencies such as legal proceedings, and financial results.

Any or all of the forward-looking statements in this report may turn out to be inaccurate. They can be affected by inaccurate assumptions we might make or by known or unknown risks or uncertainties. Consequently, no forward-looking statement can be guaranteed. Actual future results may vary materially as a result of various factors, including, without limitation, the risks outlined under "Risk Factors" and matters described in this prospectus generally. In light of these risks and uncertainties, there can be no assurance that the forward-looking statements contained in this filing will in fact occur. You should not place undue reliance on these forward-looking statements.

PROSPECTUS SUMMARY

This summary highlights information contained elsewhere in this prospectus. This summary does not contain all of the information you should consider before investing in our common stock. You should read the entire prospectus, including “Risk Factors” and the consolidated financial statements and the related notes before making an investment decision. Contents from our website, www.chinaindustrialsteel.com,are not part of this prospectus.

THE COMPANY

Business Overview

We are a holding company that, through our wholly-owned subsidiary Nuosen and our variable interest entity (“VIE”) Hongri Metallurgy, produces and sells steel plate, bar and billet in China. The Company currently operates four production lines with an aggregate production capacity of 2.3 million metric tons of steel per year from its headquarters on approximately 1,000 acres in Handan City in Hebei Province, PRC.

We have a strategic relationship with Wu’an Yuanbaoshan Industrial Group Co., Ltd., a multi-industrial conglomerate, which, among other things, is engaged in the production of pig iron, cement, and the operation of a gas power plant.

We serve various industries and produce a variety of steel products, including billet, steel plate and steel bar. While the vast majority of our sales are made to distributors and traders, our products are typically used in ship building, construction, industrial manufacturing and infrastructure projects. Steel billet is also occasionally sold to end users to develop into plates and bars.

Our principal executive offices are located at 110 Wall Street – 11th Floor, New York, NY, 10005 and our U.S. telephone number is (646) 328-1502 and the telephone number at our production facility in the PRC is (86)-310-5919498.

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Corporate History

We were incorporated in the State of Maryland on January 27, 2010.

On February 5, 2010, we formed Northern Steel Inc., a Colorado corporation as our wholly-owned subsidiary. On July 15, 2010, Northern Steel formed Nuosen (Handan) Trading Co. Ltd. (“Nuosen”), a limited liability company organized under the laws of the PRC, as its wholly-owned subsidiary (commonly termed as “WOFE” under PRC law).

Under the laws of the PRC, certain restrictions are placed on round trip investments through an acquisition of a PRC entity by an offshore special purpose vehicle owned by one or more PRC residents as well as on foreign investment in iron and steel industry. To comply with these restrictions, on August 1, 2010, Northern Steel, through Nuosen, entered into a Entrusted Management Agreement, Exclusive Option Agreement, and a Covenant Letter (collectively, the “Entrusted Agreements”) with Hongri Metallurgy and the shareholders of Hongri Metallurgy, Fakei Investment (Hongkong) Limited (“Fakei”) and Hebei Wu’an Yuanbaoshan Industry Group Co., Ltd. (“YBS Group”), (Fakei and YBS Group are collectively referred to as the “Hongri Metallurgy Shareholders”). We issued 44,083,529 restricted shares of our common stock to Karen Prudente, a U.S. resident who entered into call option agreements (collectively, the “Call Option Agreements”) respectively with the shareholders of YBS Group, for YBS Group entering into the Entrusted Agreements. In addition, we issued 17,493,463 restricted shares of our common stock to Fakei, for Fakei entering into the Entrusted Agreements. According to the Call Option Agreements, Karen Prudente would transfer all restricted shares of our common stock that she received to the shareholders of YBS Group subject to the terms and conditions thereunder and entrust the shareholders of YBS Group with her voting rights in the Company. These restricted shares issued to Karen Prudente and Fakei were issued in reliance upon the exemptions set forth in Section 4(2) of the Securities Act of 1933, as amended, on the basis that they were issued under circumstances not involving a public offering. As a result of the aforementioned transaction, the shareholders of YBS Group and Fakei obtained control of the Company.

Generally, we provide Hongri Metallurgy with management services pursuant to the ENTRUSTED Agreements, the material terms which are as follows:

Entrusted Management Agreement – pursuant to this agreement entered into by and among the Hongri Metallurgy Shareholders, Hongri Metallurgy, and Nuosen, the Hongri Metallurgy Shareholders and Hongri Metallurgy entrust the management of Hongri Metallurgy to Nuosen until (a) the winding up of Hongri Metallurgy, or (b) the date on which Nuosen acquires Hongri Metallurgy. During the term, Nuosen is fully and exclusively responsible for the management of Hongri Metallurgy. In consideration of such services, the Hongri Metallurgy Shareholders and Hongri Metallurgy will pay a fee to Nuosen as set forth in the agreement.

Exclusive Option Agreement – pursuant to this agreement entered into by and among Nuosen, the Hongri Metallurgy Shareholders, and Hongri Metallurgy, the Hongri Metallurgy Shareholders grant Nuosen an irrevocable exclusive purchase option to purchase all or part of the shares of Hongri Metallurgy, currently owned by any of the Hongri Metallurgy Shareholders. Further, Hongri Metallurgy grants Nuosen an irrevocable exclusive purchase option to purchase all or part of the assets and business of Hongri Metallurgy. Nuosen and the Hongri Metallurgy Shareholders will enter into relevant agreements regarding the price of acquisition based on the circumstances of the exercise of the option, and the consideration shall be refunded to Nuosen or Hongri Metallurgy at no consideration in an appropriate manner decided by Nuosen. Upon the exercise of the option, Nuosen will be subject to non-competition restrictions as set forth in the agreement.

Covenant Letter – pursuant to this letter, the Hongri Metallurgy Shareholders irrevocably covenant that without the prior written consent of Nuosen, the Hongri Metallurgy Shareholders would not transfer, pledge, or create any encumbrance in other way on all or part of the contribution and share equity of Hongri Metallurgy, or increase or decrease the registered capital of Hongri Metallurgy, or divide or merge the Company or conduct any other activity which would change the registered capital or shareholding structure of Hongri Metallurgy.

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Through the Entrusted Agreements, we have the ability to substantially influence Hongri Metallurgy’s daily operations and financial affairs, appoint its senior executives and approve all matters requiring shareholder approval. As a result of the Entrusted Agreements, which enable us to control Hongri Metallurgy and operate our business in the PRC through Hongri Metallurgy, we are considered the primary beneficiary of Hongri Metallurgy.

Although we have no equity ownership interest in Hongri Metallurgy, we are entitled to receive all the profits of Hongri Metallurgy, and we are obligated to pay its debts to the extent that Hongri Metallurgy does not have enough funds to repay such debts.

As a result of the foregoing, we are required to consolidate the financial statements of Hongri Metallurgy under GAAP.

Call Option Agreement

Liu Shenghong, our Chairman of Board of Directors and one of the shareholders of YBS Group and other several the shareholders of YBS Group (each of them, a “Purchaser”) have entered into call option agreements, dated as of August 10, 2010 (collectively, the “Call Option Agreements”), with our major shareholder, Karen Prudente, pursuant to which they are entitled to purchase up to 100% of the issued and outstanding shares of Karen Prudente at a price of $0.0001 per 100 shares for a period of five years as outlined in the Call Option Agreements: the Option may be exercised, in whole or in part, in accordance with the following schedule: 34% of the Option Shares subject to the Option shall vest and become exercisable on January 1, 2012; 33% of the Option Shares subject to the Option shall vest and become exercisable on January 1, 2013 and 33% of the Option Shares subject to the Option shall vest and become exercisable on January 1, 2014.

Corporate Structure

The following diagram sets forth the current corporate structure of the Company:

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Summary Financial Information

Sales for the year ended December 31, 2009 totaled $556,754,960, an increase of $197,697,103, or 55% compared to sales of $359,057,857 for the year ended December 31, 2008. The increase in sales was attributable to the increase in production volume which was supported by our increased production capacity. Net income totaled $58,160,977 in 2009, an increase of $30,312,897, or 109%, as compared to the net income of $27,848,080 in 2008. The increase of net income was attributable primarily to the increase in production volume offset by a lower average selling price, reduced average cost of revenue and reduced operating expenses.

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THE OFFERING

Offering By Selling Stockholders

This prospectus relates to the sale by the selling stockholders identified in this prospectus of up to 2,580,022 shares of our common stock.

The common stock has already been issued to the selling stockholders through a series of private placement transactions which closed in February 2011 that were exempt from the registration and prospectus delivery requirements of the Securities Act of 1933, as amended. No shares are being offered for sale by the Company.

The Company		China Industrial Steel Inc.

Selling stockholders		The selling stockholders named in this prospectus are existing stockholders of our Company who purchased shares of our Common Stock from us in the private placement transactions which closed in January 2011 and February 2011. The issuance of the shares by us to the selling stockholders was exempt from the registration requirements of the Securities Act of 1933, as amended, or the Securities Act. See “Selling Stockholders.”
Capitalization		Common Stock, par value $0.0001 per share 980,000,000 authorized 73,542,058 issued and outstanding as of February 7, 2011 10,000,000 shares of Series A Preferred Stock, $0.0001 par value, authorized, none of which are issued and outstanding as of February 7, 2011 10,000,000 shares of Blank Check Preferred Stock, $0.0001 par value, authorized, none of which are issued and outstanding as of February 7, 2011
Common stock outstanding prior to offering		73,542,058
Common stock offered by the Company		0
Common Stock to be outstanding after the offering		73,542,058
Total shares of common stock offered by selling stockholders		2,580,022
Common stock to be outstanding after the offering		73,542,058
Use of Proceeds		We will not receive any of the proceeds from the sales of the shares by the selling stockholders.
Risk Factors		See "Risk Factors" and other information included in this prospectus for a discussion of factors you should consider before deciding to invest in shares of our common stock.

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RISK FACTORS

This investment has a high degree of risk. Before you invest you should carefully consider the risks and uncertainties described below and the other information in this prospectus. If any of the following risks actually occur, our business, operating results and financial condition could be harmed and the value of our stock could go down. This means you could lose all or a part of your investment.

RISKS RELATED TO OUR BUSINESS

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

Steel consumption is highly cyclical and generally follows general economic and industrial conditions both worldwide and in various smaller geographic areas. The steel industry has historically been characterized by excess world supply. This has led to substantial price decreases during periods of economic weakness, which have not been offset by commensurate price increases during periods of economic strength. Substitute materials are increasingly available for many steel products, which may further reduce demand for steel. Additional overcapacity or the use of alternative products could have a material adverse effect upon our results of operations.

Rapidly growing demand and supply in China and other developing economies may result in additional excess worldwide capacity and falling steel prices, which could adversely impact our results.

Over the last several years steel consumption in China and other developing economies such as India has increased at a rapid pace. Steel companies have responded by developing plans to rapidly increase steel production capability in these countries and entered into long-term contracts with iron ore suppliers in Australia and Brazil. Steel production, especially in China, has been expanding rapidly and could be in excess of Chinese demand depending on continuing growth rates. Because China is now the largest worldwide steel producer, any significant excess in Chinese capacity could have a major impact on domestic and international steel trade and prices.

Our subsidiary Hongri Metallurgy's business will suffer if it cannot obtain, maintain or renew necessary filings, approvals, permits or licenses.

All PRC enterprises in the iron and steel industry are required to obtain from various PRC governmental authorities certain permits and licenses, including, without limitation, a business license, a pollution emission license and a National Industrial Product Manufacture License and filing and approval for the production capacity of fixed

asset investments.

These filings, approvals, permits and licenses are subject to periodic renewal and/or reassessment by the relevant PRC government authorities, and the standards of compliance required in relation thereto may from time to time be subject to change. Hongri Metallurgy intends to obtain and apply for renewal and/or reassessment of such filings, approvals, permits and licenses when required by applicable laws. However, we cannot assure you that Hongri Metallurgy can obtain, maintain or renew the filings, approvals, permits and licenses or accomplish the reassessment of such permits and licenses in a timely manner. Any changes in compliance standards, or any new laws or regulations that may prohibit or render it more restrictive for us to conduct Hongri Metallurgy's business or increase its compliance costs may adversely affect our operations or profitability. Any failure by Hongri Metallurgy to obtain, maintain or renew the filings, licenses, permits and approvals may have an adverse effect on the operation of Hongri Metallurgy's business.

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Hongri Metallurgy is also required to conduct an environmental impact assessment and file such assessment with the local government, as well as to obtain the approval of construction project environment protection completion acceptance from Environmental Protection Bureau of Hebei Province for the production lines. Hongri Metallurgy intends to obtain and apply for the environmental impact assessment and application for construction project environment protection completion acceptance for its production lines. We cannot assure you that Hongri Metallurgy can obtain the requisite approval for the environmental impact assessment and construction project environment protection completion acceptance in a timely manner. Any failure by Hongri Metallurgy to make the filing and obtain the approval for environmental impact assessment may subject Hongri Metallurgy to a fine of approximately RMB 50,000 to RMB 200,000 and any failure by Hongri Metallurgy to obtain the approval of construction project environment protection completion acceptance may subject Hongri Metallurgy to halt the operation or production and a fine up to RMB 100,000, and as a result may have a material adverse effect on Hongri Metallurgy's production and business.

Environmental compliance and remediation could result in substantially increased capital requirements and operating costs.

Our operating subsidiary, Hongri Metallurgy, is subject to numerous Chinese provincial and local laws and regulations relating to the protection of the environment. These laws continue to evolve and are becoming increasingly stringent. The ultimate impact of complying with such laws and regulations is not always clearly known or determinable because regulations under some of these laws have not yet been promulgated or are undergoing revision. Our consolidated business and operating results could be materially and adversely affected if our operating subsidiaries were required to increase expenditures to comply with any new environmental regulations affecting its operations.

We may require additional capital in the future and we cannot assure that capital will be available on reasonable terms, if at all, or on terms that would not cause substantial dilution to stockholdings.

The development of high quality precision steel requires substantial funds. Sourcing external capital funds for product development and requisite capital expenditures are key factors that have and may in the future constrain our growth, production capability and profitability. To achieve the next phase of our corporate growth, increased production capacity, successful product development and additional external capital will be necessary. There can be no assurance that such capital will be available in sufficient amounts or on terms acceptable to us, if at all. Any sale of a substantial number of additional shares of common stock or securities convertible into common stock will cause dilution to the holders of our common stock and could also cause the market price of our common stock to decline.

We face significant competition from competitors who have greater resources than we do, and we may not have the resources necessary to successfully compete with them.

There are many manufacturers of steel products in China. Our business is in an industry that is becoming increasingly competitive and capital intensive, and competition comes from manufacturers located in China as well as from international competition. Our competitors may have financial resources, staff and facilities substantially greater than ours and we may be at a competitive disadvantage compared with larger companies.

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We are dependent on our Chinese manufacturing operations to generate our income and profits, and the deterioration of any current favorable local conditions may make it difficult or prohibitive to continue to operate or expand in China.

Our manufacturing operations are located in China and could be affected by, among other things:

	·	economic and political instability in China, including problems related to labor unrest;
	·	lack of developed infrastructure;
	·	variances in payment cycles;
	·	currency fluctuations;
	·	employment and severance taxes;
	·	compliance with local laws and regulatory requirements;

Moreover, inadequate development or maintenance of infrastructure in China, including adequate power and water supplies, transportation, raw materials availability or the deterioration in the general political, economic or social environment could make it difficult, more expensive and possibly prohibitive to continue to operate or expand our facilities in China.

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

We require substantial amounts of raw materials in our business, principally iron ore. Any substantial increases in the cost of iron ore could adversely affect our financial condition and results of operations. The availability and price of iron ore depends on a number of factors outside our control, including general economic conditions, domestic and international supply and tariffs. Increased domestic and worldwide demand for iron ore has had and will continue to have the effect of increasing the prices that we pay for these raw materials, thereby increasing our cost of goods sold. Generally, there is a potential time lag between changes in prices under our purchase contracts and the point when we can implement a corresponding change under our sales contracts with our customers. As a result, we can be exposed to fluctuations in the price of raw materials, since, during the time lag period, we may have to temporarily bear the additional cost of the change under our purchase contracts, which could have a material adverse effect on our profitability. If raw material prices were to increase significantly without a commensurate increase in the market value of our products, our financial condition and results of operations would be adversely affected.

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Although we are dependent on a steady flow of raw materials for our operations, we do not have in place long-term supply agreements for all of our material requirements.

As a substantial portion of our raw material requirements is met by Wu'an Yuanbaoshan Industrial Group Co., Ltd. through a strategic relationship. However, we do not currently have long-term supply contracts with any particular supplier, including Wu'an Yuanbaoshan Industrial Group Co., Ltd., to assure a continued supply of the raw materials we need in our operations. While we maintain good relationships with our suppliers, the supply of raw materials may nevertheless be interrupted on account of events outside our control, which will negatively impact our operations.

The loss of any key executive or our failure to attract and retain key personnel could adversely affect our future performance, strategic plans and other objectives.

The loss or failure to attract and retain key personnel could significantly impede our future performance, including product development, strategic plans, marketing and other objectives. Our success depends to a substantial extent not only on the ability and experience of our senior management, but particularly upon our Chairman, Mr. Liu Shenghong, our Chief Engineer and Plant Manager, Mr. Pan Rutai, and our Chief Financial Officer, Mr. Xiaolong Zhou. We do not currently have in place key man life insurance for these executive officers. To the extent that the services of these officers would be unavailable to us, we would be required to recruit other persons to perform the duties performed by them. We may be unable to employ other qualified persons with the appropriate background and expertise to replace these officers and directors on terms suitable to us.

We may not be able to retain, recruit and train adequate management and production personnel. We rely heavily on those personnel to help develop and execute our business plans and strategies, and if we lose such personnel, it would reduce our ability to operate effectively.

Our continued operations are dependent upon our ability to identify and recruit adequate management and production personnel in China. We require trained graduates of varying levels and experience and a flexible work force of semi-skilled operators. Many of our current employees come from the more remote regions of China as they are attracted by the wage differential and prospects afforded by our operations. With the economic growth currently being experienced in China, competition for qualified personnel is substantial, and there can be no guarantee that a favorable employment climate will continue and that wage rates we must offer to attract qualified personnel will enable us to remain competitive internationally. The inability to attract such personnel or the increased cost of doing so could reduce our competitive advantage relative to other precision steel producers, reducing or eliminating our growth in revenues and profits.

We are subject to risks associated with changing technology and manufacturing techniques, which could place us at a competitive disadvantage.

The successful implementation of our business strategy requires our products and services meet customers’ needs. Our designs and products are characterized by stringent performance and specification requirements that mandate a high degree of manufacturing and engineering expertise. We believe that our customers rigorously evaluate our services and products on the basis of a number of factors, including, but not limited to:

	·	quality;
	·	price competitiveness;
	·	technical expertise and development capability;
	·	innovation;
	·	reliability and timeliness of delivery;
	·	product design capability;
	·	operational flexibility;
	·	customer service; and
	·	overall management.

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Our success depends on our ability to continue to meet our customers’ changing requirements and specifications with respect to these and other criteria. There can be no assurance that we will be able to address technological advances or introduce new designs or products that may be necessary to remain competitive within the precision steel industry.

We depend upon independent distributors for a significant portion of our sales revenue, and we cannot be certain that sales to these distributors will continue. If sales to these distributors does not continue, then our sales may decline and our business may be negatively impacted.

We currently supply our steel products in the Chinese domestic market. For the years ended December 31, 2009, sales revenues generated from the top ten major customers amounted to 60% of total sales revenues; sales to the largest single customer for the same year amounted to 12% of total sales revenues. We do not enter into long-term contracts with our customers and therefore cannot be certain that sales to these customers will continue. The loss of any of our largest customers would likely have a material negative impact on our sales revenues and business.

Defects in our products could impair our ability to sell products or could result in litigation and other significant costs.

Detection of any significant defects in our precision steel products may result in, among other things, delay in time-to-market, loss of market acceptance and sales of its products, diversion of development resources, injury to our reputation, litigation or fines, or increased costs to correct such defects. Defects could harm our reputation, which could result in significant costs and could impair our ability to sell our products. The costs we may incur in correcting any product defects may be substantial and could decrease our profit margins.

Failure to optimize our manufacturing potential and cost structure could materially increase our overhead, causing a decline in our margins and profitability.

We strive to utilize the manufacturing capacity of our facilities fully but may not do so on a consistent basis. Our factory utilization is dependent on our success in, among other things:

	·	accurately forecasting demand;
	·	predicting volatility;
	·	timing volume sales to our customers;
	·	balancing our productive resources with product mix; and
	·	planning manufacturing services for new or other products that we intend to produce.

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Demand for contract manufacturing of these products may not be as high as we expect, and we may fail to realize the expected benefit from our investment in our manufacturing facilities. Our profitability and operating results are also dependent upon a variety of other factors, including, but not limited to:

	·	utilization rates of manufacturing lines;
	·	downtime due to product changeover;
	·	impurities in raw materials causing shutdowns; and
	·	maintenance of contaminant-free operations.

Failure to optimize our manufacturing potential and cost structure could materially and adversely affect our business and operating results.

Moreover, our cost structure is subject to fluctuations from inflationary pressures in China and specific geographic regions where we conduct business. China is currently experiencing dramatic growth in its economy. This growth may lead to continued pressure on wages and salaries that may exceed our budget and adversely affect our operating results.

Our production facilities are subject to risks of power shortages which may adversely affect our ability to meet our customers’ needs and reduce our revenues.

Many cities and provinces in China have suffered serious power shortages since 2004. Many of the regional grids do not have sufficient power generating capacity to fully satisfy the increased demand for electricity driven by continual economic growth and persistent hot weather. Local governments have occasionally required local factories to temporarily shut down their operations or reduce their daily operational hours in order to reduce local power consumption levels.

In September 2010, the Company was forced to stop production with all other local steel manufacturers in order to fulfill the quota of “energy-saving and emission-production” by the local government. There is a risk that our operations may be affected by those administrative measures at another time in the future, thereby causing material production disruption and delay in delivery schedule. In such event, our business, results of operation and financial conditions could be materially adversely affected.

We do have a back-up power generation system in the event natural power outages should occur.

Unexpected equipment failures may lead to production curtailments or shutdowns.

Interruptions in our production capabilities will adversely affect our production costs, products available for sales and earnings for the affected period. In addition to equipment failures, our facilities are also subject to the risk of catastrophic loss due to unanticipated events such as fires, explosions or violent weather conditions. Our manufacturing processes are dependent upon critical pieces of equipment, such as our various cold-rolling mills, as well as electrical equipment, such as transformers, and this equipment may, on occasion, be out of service as a result of unanticipated failures. We have experienced and may in the future experience material plant shutdowns or periods of reduced production as a result of such equipment failures.

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We do not currently maintain property damage or business interruption insurance. If our production facilities were destroyed or significantly damaged as a result of fire or some other natural disaster, it could have a material impact on our operations.

All of our products are currently manufactured at our existing facilities located in Handan City in Hebei Province. Firefighting and disaster relief or assistance in China may not be as developed as in Western countries. We do not maintain property damage insurance covering our inventories and equipment. We do not maintain business interruption insurance. Material damage to, or the loss of, our production facilities due to fire, severe weather, flood or other act of God or cause, even if insured, could have a material adverse effect on our financial condition, results of operations, business and prospects.

Our holding company structure may limit the payment of dividends.

We have no direct business operations, other than our ownership of our subsidiary. While we have no current intention of paying dividends, should we decide in the future to do so, as a holding company, our ability to pay dividends and meet other obligations depends upon the receipt of dividends or other payments from our operating subsidiary and/or other holdings and investments. In addition, our operating subsidiaries, from time to time, may be subject to restrictions on their ability to make distributions to us, including as a result of restrictive covenants in loan agreements, restrictions on the conversion of local currency into U.S. dollars or other hard currency and other regulatory restrictions as discussed below. If future dividends are paid in RMB, fluctuations in the exchange rate for the conversion of RMB into U.S. dollars may reduce the amount received by U.S. stockholders upon conversion of the dividend payment into U.S. dollars.

Chinese regulations currently permit the payment of dividends only out of accumulated profits as determined in accordance with Chinese accounting standards and regulations. Our subsidiaries in China are also required to set aside a portion of their after tax profits according to Chinese accounting standards and regulations to fund certain reserve funds. Currently, our subsidiaries in China are the only sources of revenues or investment holdings for the payment of dividends. If they do not accumulate sufficient profits under Chinese accounting standards and regulations to first fund certain reserve funds as required by Chinese accounting standards, we will be unable to pay any dividends.

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

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

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RISKS RELATED TO DOING BUSINESS IN CHINA

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

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

	·	a higher level of government involvement;
	·	an early stage of development of the market-oriented sector of the economy;
	·	a rapid growth rate;
	·	a higher level of control over foreign exchange; and
	·	the allocation of resources.

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

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

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

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

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

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

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

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

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

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

Accordingly, government actions in the future, including any decision not to continue to support recent economic reforms and to return to a more centrally planned economy or regional or local variations in the implementation of economic policies, could have a significant effect on economic conditions in China or particular regions thereof and could require us to divest ourselves of any interest we then hold in Chinese properties or joint ventures.

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

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

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

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

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

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

Currently, some of our raw materials and equipment are imported. In the event that the U.S. dollars appreciate against RMB, our costs will increase. If we cannot pass the resulting increased cost to our customers, our profitability and operating results will suffer.

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

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

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You may have difficulty enforcing judgments against us.

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

PRC State Administration of Foreign Exchange ("SAFE") regulations regarding offshore financing activities by PRC residents which may increase the administrative burden we face. The failure by our shareholders who are PRC 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 PRC resident shareholders to liability under PRC law.

SAFE, issued a public notice ("SAFE #75") effective from November 1, 2005, which requires registration with SAFE by the PRC resident shareholders of any offshore special purpose company. Without registration, the PRC subsidiary entity cannot remit any of its profits out of the PRC as dividends or otherwise.

In October 2005, SAFE issued a public notice, the Notice on Relevant Issues in the Foreign Exchange Control over Financing and Return Investment Through Special Purpose Companies by Residents Inside China, or the SAFE notice, which requires PRC residents, including both legal persons and natural persons, to register with the competent local SAFE branch before establishing or controlling any company outside of China, referred to as an "offshore special purpose company," for the purpose of overseas equity financing involving onshore assets or equity interests held by them. In addition, any PRC resident that is the shareholder of an offshore special purpose company is required to amend its SAFE registration with the local SAFE branch with respect to that offshore special purpose company in connection with any increase or decrease of capital, transfer of shares, merger, division, equity investment or creation of any security interest over any assets located in China. Moreover, if the offshore special purpose company was established and owned the onshore assets or equity interests before the implementation date of the SAFE notice, a retroactive SAFE registration is required to have been completed before March 31, 2006. If any PRC shareholder of any offshore special purpose company fails to make the required SAFE registration and amendment, the PRC subsidiaries of that offshore special purpose company may be prohibited from distributing their profits and the proceeds from any reduction in capital, share transfer or liquidation to the offshore special purpose company. Moreover, failure to comply with the SAFE registration and amendment requirements described above could result in liability under PRC laws for evasion of applicable foreign exchange restrictions.

Our current beneficial owners and/or prospective shareholders may fall within the ambit of the SAFE notice and be required to register with the local SAFE branch as required under the SAFE notice. If so required, and if such beneficial owners fail to timely register their SAFE registrations pursuant to the SAFE notice, or if future shareholders and/or beneficial owners of our company who are PRC residents fail to comply with the registration procedures set forth in the SAFE notice, this may subject such shareholders, beneficial owners and/or our PRC subsidiaries to fines and legal sanctions and even criminal liabilities under the PRC Foreign Exchange Administrative Regulations promulgated January 29, 1996, as amended, and may also limit our ability to contribute additional capitals, limit our PRC subsidiaries’ ability to distribute dividends to our company, or otherwise adversely affect our business.

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

On March 16, 2007, the National People’s Congress of China passed the EIT Law and on November 28, 2007, the State Council of China passed its implementing rules, both of which took effect on January 1, 2008. Under the EIT Law, an enterprise established outside of China with “de facto management bodies” within China is considered a “resident enterprise,” meaning that it can be treated in a manner similar to a Chinese enterprise for enterprise income tax purposes. The implementing rules of the EIT Law define de facto management as “substantial and overall management and control over the production and operations, personnel, accounting, and properties” of the enterprise.

On April 22, 2009, the State Administration of Taxation issued the Notice Concerning Relevant Issues Regarding Cognizance of Chinese Investment Controlled Enterprises Incorporated Offshore as Resident Enterprises pursuant to Criteria of de facto Management Bodies, or the Notice, further interpreting the application of the EIT Law and its implementation against non-Chinese enterprise or group controlled offshore entities. Pursuant to the Notice, an enterprise incorporated in an offshore jurisdiction and controlled by a Chinese enterprise or group will be classified as a “domestically incorporated resident enterprise” if (i) its senior management in charge of daily operations reside or perform their duties mainly in China; (ii) its financial or personnel decisions are made or approved by bodies or persons in China; (iii) its substantial assets and properties, accounting books, corporate chops, board and shareholder minutes are kept in China; and (iv) at least half of its directors with voting rights or senior management often resident in China. A resident enterprise would be subject to an enterprise income tax rate of 25% on its worldwide income and its non-PRC stockholders would be subject to a withholding tax at a rate of 10% when dividends are paid to such non-PRC stockholders. However, it remains unclear as to whether the Notice is applicable to an offshore enterprise incorporated by a Chinese natural person. Nor are detailed measures on enforcement of PRC tax against non-domestically incorporated resident enterprises are available. Therefore, it is unclear how tax authorities will determine tax residency based on the facts of each case.

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

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

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

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

RISKS RELATED TO THE MARKET FOR OUR STOCK

The market price for shares of our common stock could be volatile and could decline.

The market price for the shares of our common stock may fluctuate in response to a number of factors, many of which are beyond our control. In some cases, these fluctuations may be unrelated to our operating performance. Many companies with Chinese operations have experienced dramatic volatility in the market prices of their common stock. We believe that a number of factors, both within and outside of our control, could cause the price of our common stock to fluctuate, perhaps substantially. Factors such as the following could have a significant adverse impact on the market price of our common stock:

	·	our ability to obtain additional financing and, if available, the terms and conditions of the financing;
	·	our financial position and results of operations;
	·	period-to-period fluctuations in our operating results;
	·	changes in estimates of our performance by any securities analysts;
	·	substantial sales of our common stock pursuant to Rule 144 or otherwise;
	·	new regulatory requirements and changes in the existing regulatory environment;
	·	the issuance of new equity securities in a future offering;
	·	changes in interest rates; and
	·	general economic, monetary and other national conditions, particularly in the U.S. and China.

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

We may be required to raise additional financing by issuing new securities with terms or rights superior to those of our shares of common stock, which could adversely affect the market price of our shares of common stock.

We may require additional financing to fund future operations, develop and exploit existing and new products and to expand into new markets. We may not be able to obtain financing on favorable terms, if at all. If we raise additional funds by issuing equity securities, the percentage ownership of our current shareholders will be reduced, and the holders of the new equity securities may have rights superior to those of the holders of shares of common stock, which could adversely affect the market price and the voting power of shares of our common stock. If we raise additional funds by issuing debt securities, the holders of these debt securities would similarly have some rights senior to those of the holders of shares of common stock, and the terms of these debt securities could impose restrictions on operations and create a significant interest expense for us.

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

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

Risks Related to Ownership of our Common Stock

We are not likely to pay cash dividends in the foreseeable future.

We intend to retain any future earnings for use in the operation and expansion of Hongri Metallurgy's business. We do not expect to pay any cash dividends in the foreseeable future but will review this policy as circumstances dictate. Should we decide in the future to do so, as a holding company, our ability to pay dividends and meet other obligations depends upon the receipt of dividends or other payments from our operating subsidiaries. In addition, our operating subsidiaries, from time to time, may be subject to restrictions on their ability to make distributions to us, including restrictions on the conversion of local currency into U.S. dollars or other hard currency and other regulatory restrictions.

There is currently no trading market for our common stock.

Our common stock is not quoted on any exchange or inter-dealer quotation system. There is no trading market for our common stock and our common stock may never be included for trading on any stock exchange or through any quotation system (including, without limitation, the NASDAQ Stock Market and the FINRA over-the-counter Bulletin Board). You may not be able to sell your shares due to the absence of a trading market.

Our common stock may be also subject to the "penny stock" rules to the extent that its price is below $5.00, which rules require delivery of a schedule explaining the penny stock market and the associated risks before any sale. These requirements may further limit your ability to sell your shares.

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

If a market for our common stock does develop, its market price 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 companies in the same industry, trading volume in our common stock, changes in general conditions in the economy and the financial markets or other developments affecting us or our competitors. In addition, the stock market itself 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.

We are authorized to issue "blank check" preferred stock, which, if issued without stockholders approval, may adversely affect the rights of holders of our common stock.

We are authorized to issue 20,000,000 shares of preferred stock, of which 10,000,000 shares have been designated as Series A Preferred Stock. As of February 7, 2011 there are no shares of Series A Preferred Stock issued and outstanding. The Board of Directors is authorized under our Articles of Amendment to provide for the issuance of additional shares of preferred stock by resolution, and to fix the designation, powers, preferences and rights of the shares of each such series and the qualifications, limitations or restrictions thereof without any further vote or action by the stockholders. Any shares of preferred stock so issued are likely to have priority over the common stock with respect to dividend or liquidation rights. In the event of issuance, the preferred stock could be utilized, under certain circumstances, as a method of discouraging, delaying or preventing a change in control, which could have the effect of discouraging bids for our company and thereby prevent stockholders from receiving the maximum value for their shares. We have no present intention to issue any shares of its preferred stock in order to discourage or delay a change of control. However, there can be no assurance that preferred stock will not be issued at some time in the future.

Our shares may become subject to the U.S. “Penny Stock” Rules and investors who purchase our shares may have difficulty re-selling their shares as the liquidity of the market for our shares may be adversely affected by the impact of the “Penny Stock” Rules.

Our stock may become subject to U.S. "Penny Stock" rules, which may make the stock more difficult to trade on the open market. Our common shares are expected to trade on the OTCBB. A "penny stock" is generally defined by regulations of the U.S. Securities and Exchange Commission ("SEC") as an equity security with a market price of less than US$5.00 per share. However, an equity security with a market price under US$5.00 will not be considered a penny stock if it fits within any of the following exceptions:

	(i)	the equity security is listed on a national securities exchange;
	(ii)	the issuer of the equity security has been in continuous operation for less than three years, and either has (a) net tangible assets of at least US$5,000,000, or (b) average annual revenue of at least US$6,000,000; or
	(iii)	the issuer of the equity security has been in continuous operation for more than three years, and has net tangible assets of at least US$2,000,000.

If an investor buys or sells a penny stock, SEC regulations require that the investor receive, prior to the transaction, a disclosure explaining the penny stock market and associated risks. Furthermore, trading in our common stock is currently subject to Rule 15g-9 of the Exchange Act, which relates to non-NASDAQ and non-exchange listed securities. Under this rule, broker/dealers who recommend our securities to persons other than established customers and accredited investors must make a special written suitability determination for the purchaser and receive the purchaser's written agreement to a transaction prior to sale. Securities are exempt from this rule if their market price is at least $5.00 per share.

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The anticipated low price of our common stock has a negative effect on the amount and percentage of transaction costs paid by individual shareholders. The low price of our common stock also limits our ability to raise additional capital by issuing additional shares. There are several reasons for these effects. First, the internal policies of certain institutional investors prohibit the purchase of low-priced stocks. Second, many brokerage houses do not permit low-priced stocks to be used as collateral for margin accounts or to be purchased on margin. Third, some brokerage house policies and practices tend to discourage individual brokers from dealing in low-priced stocks. Finally, broker's commissions on low-priced stocks usually represent a higher percentage of the stock price than commissions on higher priced stocks. As a result, our shareholders may pay transaction costs that are a higher percentage of their total share value than if our share price were substantially higher.

The issuance of shares through our stock compensation plans may dilute the value of existing stockholders and may affect the market price of our stock.

Although we do not have an option or other equity-based incentive plan at present, in the future we may use stock options, stock grants and other equity-based incentives, to provide motivation and compensation to our officers, employees and key independent consultants. The award of any such incentives will result in an immediate and potentially substantial dilution to our existing stockholders and could result in a decline in the value of our stock price. The exercise of these options and the sale of the underlying shares of common stock and the sale of stock issued pursuant to stock grants may have an adverse effect upon the price of our stock.

Standards for compliance with Section 404 of the Sarbanes-Oxley Act of 2002, as amended, are uncertain, and if we fail to comply in a timely manner, our business could be harmed and our stock price could decline.

Recently, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, which became effective on July 21, 2010, has amended Section 404 of the Sarbanes-Oxley Act of 2002 (the “Act”). The rules adopted by the SEC pursuant to the Act require an annual assessment of our internal control over financial reporting. The SEC extended the compliance dates for non-accelerated filers, as defined by the SEC. Accordingly, we believe that the annual assessment of our internal controls requirement will first apply to our annual report for the 2010 fiscal year. The standards that must be met for management to assess the internal control over financial reporting as effective are new and complex, and require significant documentation, testing and possible remediation to meet the detailed standards. We may encounter problems or delays in completing activities necessary to make an assessment of our internal control over financial reporting. Pursuant to the amended Act, as neither a “large accelerated filer” nor an “accelerated filer”, we are exempt from the requirements of Section 404(b) of the Act to obtain an auditor’s report on management’s assessment of the effectiveness of the Company’s internal control over financial reporting.

A large number of shares will be eligible for future sale and may depress our stock price.

We may be required, under terms of future financing arrangements, to offer a large number of common shares to the public, or to register for sale by future private investors a large number of shares sold in private sales to them.

Sales of substantial amounts of common stock, or a perception that such sales could occur, could adversely affect the market price of our common stock and could impair our ability to raise capital through the sale of our equity securities, either of which would decrease the value of any earlier investment in our common stock.

USE OF PROCEEDS

We will not receive any of the proceeds from any sales of the shares offered for sale and sold under this prospectus by the selling stockholders.

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DETERMINATION OF OFFERING PRICE

The $4.50 per share offering price of our common stock was determined based on the $4.50 per share sales price of our common stock in private placement transaction which closed in February 2011. There is no relationship whatsoever between this price and our assets, earnings, book value or any other objective criteria of value.

We intend to apply to request a broker-dealer apply to have our common stock quoted on the OTC Bulletin Board upon our becoming a reporting entity under the Exchange Act. We intend to file a registration statement under the Exchange Act concurrently with the effectiveness of the registration statement of which this prospectus is a part. If our Common Stock becomes is quoted on the OTC Bulletin Board and a market for the stock develops, the actual price of stock will be determined by prevailing market prices at the time of sale or by private transactions negotiated by the Selling Stockholders named in this prospectus. The offering price would thus be determined by market factors and the independent decisions of the Selling Stockholders named in this prospectus.

DILUTION

The common stock to be sold by the selling shareholders is common stock that is currently issued. Accordingly, there will be no dilution to our existing shareholders.

SELECTED FINANCIAL DATA

The following selected financial data contains statement of operations data and balance sheet data of the Company for the nine months ended September 30, 2010 and 2009, the years ended December 31, 2009 and 2008, the and ten months ended December 31, 2007. The statements of operations and balance sheet data of 2009, 2008 and 2007 were derived from the audited consolidated financial statements for the years ended December 31, 2009, and 2008, and the ten months ended December 31, 2007. Such financial data should be read in conjunction with the consolidated financial statements and the notes to the financial statements filed with the Form S-1 and with the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” below.

Selected Consolidated Income Statements Data	Nine Months Ended September 30,				Year Ended December 31,				For the Period March 7, 2007 (Inception) to December 31,
	2010		2009		2009		2008		2007

Net revenues	$	369,747,456	$	417,246,853	$	556,754,960	$	359,057,857	$	13,466,606
Gross profit (loss)	$	25,067,788	$	51,734,641	$	62,136,779	$	33,217,202	$	(555,925	)
Income (loss) from operations	$	23,181,592	$	51,037,887	$	61,260,199	$	32,134,803	$	(585,500	)
Net income (loss)	$	15,805,442	$	47,969,710	$	58,160,977	$	27,848,080	$	(860,587	)
Net income (loss) per share - basic and diluted	$	0.24	$	0.78	$	0.94	$	0.45	$	(0.01	)
Weighted average shares outstanding - basic and diluted		64,739,718		61,576,992		61,576,992		61,576,992		61,576,992

Selected Consolidated Balance Sheet Data	As of September 30,				As of December 31,
		2010		2009		2009		2008		2007
Current assets	$	127,302,466	$	169,993,336	$	107,054,551	$	131,164,157	$	18,203,958
Total assets	$	312,212,979	$	289,734,563	$	300,101,254	$	242,571,451	$	109,521,875
Current liabilities	$	116,254,961	$	135,739,958	$	125,083,110	$	136,574,269	$	27,514,331
Long term liabilities	$	76,343,820	$	64,926,428	$	75,087,441	$	64,902,579	$	70,097,021

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with our financial statements and notes thereto included in this report.

On August 1, 2010, CIS, through Northern and its wholly owned foreign enterprise, Nuosen, entered into Entrusted Management Agreement, Exclusive Option Agreement, and Covenants Agreement (collectively, the “Entrusted Agreements”) with Hongri and shareholders of Hongri, YBS Group and Fakei. The effect of the Entrusted Agreements is to cede control of management and economic benefits of Hongri to Nuosen. As a consideration, CIS issued 44,083,529 restricted shares of its common stock, par value $0.0001, to Karen Prudente, a nominee and trustee for YBS Group for entering into the Entrusted Agreements with Nuosen. CIS also issued 17,493,463 restricted shares of its common stock to Fakei in consideration for Fakei entering into the Entrusted Management Agreement with Nuosen.

Entrusted Agreements has empowered CIS, through Northern and Nuosen, the ability to substantially influence Hongri’s daily operations and financial affairs, appoint its senior executives and approve all matters requiring shareholders’ approval. As a result of these entrusted agreements, which obligates CIS to absorb a majority of the risk of loss from Hongri’s activities and enable CIS to receive a majority of its expected residual returns, CIS, through its wholly-owned subsidiaries, accounts for Hongri as its Variable Interest Entity (“VIE”) under ASC 810-10-15-14. Accordingly, CIS consolidates Hongri’s operating results, assets and liabilities.

For accounting purposes, the above transactions were accounted for in a manner similar to a reverse merger or recapitalization, since the former equity shareholders of Hongri now effectively owns a majority of CIS’ common stock immediately following the transactions. Consequently, the assets and liabilities and historical operations reflected in the consolidated financial statements prior to the transactions are those of Hongri and are recorded at the historical cost of Hongri, and the consolidated financial statements after completion of the transactions include the assets and liabilities of CIS, Northern, Nuosen, and Hongri (collectively, CIS or the “Company”), historical operations of Hongri, and operations of CIS, Northern, Nuosen and Hongri from the date of the transaction. The 44,083,529 restricted shares of common stock issued to Karen Prudente and 17,493,463 restricted shares of common stock issued to Fakei were presented as of the beginning of the first period presented in the accompanying consolidated financial statements.

CIS through Hongri, its operating company in China, produces and sells steel plates, steel bars and steel billets. The Company currently operates from its headquarters on approximately 1,000 acres in Handan City, Hebei Province, China. Most of the Company’s products are sold domestically in China.

The Company had completed construction of steel production phase II in 2009. Steel production capacity was increased to 2.3 million tons in 2009 from 1.3 million tons in 2008. The second plate production line has been added in 2009. Steel plate production capacity was increased to 1,400,000 tons per year in 2009 from 600,000 tons per year in 2008. In addition, the construction of a new 600,000 ton steel bar production line was completed in 2009. The Company currently operates four production lines with an aggregate production capacity of 2.3 million metric tons of steel per year from its headquarters.

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Due to the nature of our business, the Company has significant exposure to the fluctuation of raw material and energy product prices as part of its normal operations. There are many factors of our business which are impacted by prevailing market conditions, specifically, a change in the raw material and energy product pricing environment will influence our inventory levels, purchasing decisions and will, ultimately, all have an impact on our realized gross margin. Our management operational decisions are a direct response to the market and, as such, will change as market conditions change. The Company did not buy any commodity products to hedge the fluctuation of market price. Therefore, the fluctuation of commodity price will have an indirect impact on our operation through the price change in local steel market.

The steel industry has been facing a challenging situation nationally since 2008. In 2008, iron ore prices increased dramatically and cost of revenue increased accordingly. In 2009, the amount of steel products produced was more than demand for steel products and in general, inventories increased consequently. In 2010, the Chinese government announced new targets for consolidation in the steel industry to close out small size steel manufacturers nationally in order to clean up excessive production capacities and to increase the efficiency of energy usage and reduce the pollution. We believe that the Company will survive from this national steel industrial consolidation due to our current capacities are greater and more efficient compared to other small sized local manufacturers. However, due to fluctuations of iron ore prices, national excessive inventories and lack of demand, we expect that the market demand will not begin to improve until 2012.

The Company commenced its test production from November 2007, and, as such, the analysis on operations in 2007 and comparison of 2008 with 2007 was omitted by the Management.

Results of Operations for the Year Ended December 31, 2009 and 2008

Comparison of Revenue for the Years Ended December 31, 2009 and 2008

	2009				2008
Products	Revenue		Quantity (Ton)		Revenue		Quantity (Ton)
Steel plates	$	385,531,390		913,300	$	308,238,686		460,300
Steel billets		161,712,725		396,438		49,790,008		87,969
By-products		9,510,845		-		1,029,163		-
Products Total	$	556,754,960		1,309,738	$	359,057,857		548,269

Total sales for the year ended December 31, 2009 was $556,754,960, an increase of $197,697,103, or 55%, compared to $359,057,857 in 2008. The revenue from steel plates was $385,531,390 in 2009, an increase of $77,292,704, or 25%, compared to revenue of $308,238,686 in 2008. The increase in sales resulted primarily from an increase in volume which was supported by our increased production capacity.

The Company sold 913,300 tons steel plates in 2009, an increase of 453,000 or 98%, compared to 460,300 in 2008. Average sales price of steel plates was approximately $422 per ton during 2009, a decrease of $248 per ton, or 37% from $670 in 2008. Reduced average sales price was mainly attributable to the deterioration of the steel industry. The revenue from steel billets was $161,712,725 in 2009, an increase of $111,922,717, or 225%, compared to revenue of $49,790,008 in 2008. The Company sold 396,438 tons of steel billets in 2009, an increase of 308,469 tons, or 251%, compared to 87,969 tons in 2008. Average sales price of steel billets was approximately $408 per ton during 2009, a decrease of $158 per ton, or 28% from $566 in 2008. Reduced average sales price was mainly attributable to the deterioration in the steel industry.

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By-products consist of reselling of coke, offcuts of steel plates and oxygen gas. Byproducts sales were $9,510,845 in 2009, an increase of $8,481,682, compared to $1,029,163 in 2008. Increase in byproducts sales in 2009 were attributable to a $4,738,452 increase in coke reselling, $3,518,867 new sales of offcuts of steel plates, and $224,363 new sales of oxygen gas in 2009.

The production of steel plate total capacity utilization rate was approximately 65% and 77% in 2009 and 2008, respectively.

Comparison of Cost of Revenue for the Years Ended December 31, 2009 and 2008

Costs of Revenue	2009			2008
Steel plates	$	347,922,843		$	278,706,582
Steel billets		140,927,723			46,104,910
By-products		5,767,615			1,029,163
Total Cost of Revenue	$	494,618,181		$	325,840,655

Gross Profit Margin		2009			2008
Steel plates		9.75	%		9.58	%
Steel billets		12.85	%		7.40	%
By-products		39.36	%		-
Total Gross Profit Margin		11.16	%		9.25	%

Cost of revenue totaled $494,618,181 in 2009, an increase of $168,777,526, or 52% compared to $325,840,655 in 2008. The principal raw material used in our manufacturing is molten iron. The average cost of revenue of steel plates was approximately $381 per ton during 2009, a decrease of $224 per ton, or (37)% from $605 in 2008. The average cost of revenue of steel billets was $355 per ton in 2009, a decrease of $169 per ton, or (32)% from $524 in 2008. The reduced average cost of revenue was mainly attributable to a reduction in raw material prices due to the deterioration of the steel industry. The Company purchases its raw materials from the local market.

Comparison of Operating Expenses for the Years Ended December 31, 2009 and 2008

Selling, General and Administrative expenses consist of allowance for bad debts, selling expenses, professional fees and other general and administrative expenses. Total operating expenses were $876,580 in 2009, a decrease of $205,819, or (19)%, compared to $1,082,399 in 2008. The decrease in operating expenses in 2009 was mainly attributable to the decrease in service fees charged by YBS Group.

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Comparison of Other Expenses for the Years Ended December 31, 2009 and 2008

Other expenses consist of interest income, interest expense and other expense. Total other expenses were $3,099,222 in 2009, a decrease of $1,187,501, or (28)%, compared to $4,286,723 in 2008. Among other expenses, interest was $3,113,222 for the year ended December 31, 2009, a decrease of $1,224,292, or (28)%, compared to $4,337,514 for 2008. The decrease of interest expense mainly resulted from the repayment of equipment loan in 2009. During 2009, the total repayment of the equipment loan was $46,057,290. Among the total repayment, the $24,318,525 was paid for equipment loans acquired in 2009, and the $21,738,765 was paid for existing equipment loans.

Comparison of Net Income for the Years Ended December 31, 2009 and 2008

Net income totaled $58,160,977 in 2009, an increase of $30,312,897, or 109%, compared to the net income of $27,848,080 in 2008. The increase of net income was attributable primarily to increased sales resulted from volume increases offset by a lower average selling price, reduced average cost of revenue and reduced operating expenses aforementioned.

Results of Operations for the Nine Months Ended September 30, 2010 and 2009

Comparison of Revenue for the Nine Months Ended September 30, 2010 and 2009

	2010				2009
Products	Revenue		Quantity (Ton)		Revenue		Quantity (Ton)
Steel plates	$	323,061,600		621,646	$	286,396,767		672,392
Steel bars		25,163,146		47,362		-		-
Steel billets		19,652,433		40,620		123,542,415		300,926
By-products		1,869,277		-		7,307,671		-
Products Total	$	369,746,456		709,628	$	417,246,853		973,318

Total sales for the nine months ended September 30, 2010 were $369,746,456, a decrease of $47,500,397, or (11)%, compared to $417,246,853 in 2009. The decrease in sales primarily resulted from “energy-saving and emission-reduction” control initiatives in China. The Company was forced to stop production during the month of September 2010 with all other local steel manufacturers in order to fulfill the quota of “energy-saving and emission-production” by the local government, which management estimated to have impacted volume by approximately 76,000 tons.

Revenue from steel plates was $323,062,600 in 2010, an increase of $36,664,833, or 13% compared to $286,396,767 in 2009. The increase in steel plates was primarily attributable to the recovery of sales price. The Company sold 621,646 tons of steel plates in 2010, a decrease of 50,746 or 8%, compared to 672,392 tons in 2009. The average sales price of steel plates was approximately $520 per ton during 2010, an increase of $94 per ton, or 22%, from $426 in 2009.

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Steel bars are new products in 2010. The Company sold 47,362 tons of steel bars in 2010. The average selling price was $531 per ton. Steel billets are semi-finished products. It can be used to produce steel plates or steel bars by further processing. It can also be sold in the market. Due to the uncertainty of the market condition, the Company did not produce excess steel billets during the nine months ended September 30, 2010.

Byproducts consist of the reselling of coke, offcuts of steel plates and oxygen gas. Byproducts sales were $1,869,277 for nine months ended September 30, 2010, a decrease of $5,438,394, compared to $7,307,671 in 2009. For the nine months ended September 30, 2010, the only byproduct sold was offcuts and no sales for coke or oxygen gas.

The production of steel plate / total capacity utilization rate was approximately 59% and 64% for the nine months ended September 30, 2010 and 2009, respectively.

Comparison of Cost of Revenue for the Nine Months Ended September 30, 2010 and 2009

Costs of Revenue	2010			2009
Steel plates	$	300,823,941		$	254,937,860
Steel bars		25,921,922			-
Steel billets		17,933,925			105,921,018
By-products		-			4,653,334
Total Cost of Revenue	$	344,679,788		$	365,512,212

Gross Profit Margin		2010			2009
Steel plates		6.88	%		10.98	%
Steel bars		-3.02	%		-
Steel billets		8.74	%		14.26	%
By-products		100.00	%		36.32	%
Total Gross Profit Margin		6.78	%		12.40	%

Cost of revenue totaled $344,679,788 for the nine months ended September 30, 2010, a decrease of $20,832,424, or (6)% compared to $365,512,212 in comparable period of 2009. The average cost of revenue of steel plates was approximately $484 per ton in 2010, an increase of $105 per ton, or 28%, from $379 in 2009. The average cost of revenue of steel bars was approximately $547 per ton in 2010. Average cost of revenue of steel billets was $442 per ton in 2010, an increase of $90 per ton, or 26%, from $352 in 2009. Increased average cost of revenue was mainly attributable to the increase in raw material prices. The percentage of increase in cost of revenue was higher than the increase in sales price for the nine months ended September 30, 2010, which affected our gross profit rate directly.

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Comparison of Operating Expenses for the Nine Months Ended September 30, 2010 and 2009

Selling, General and Administrative expenses consist of allowance for bad debts, selling expenses, professional fees and other general and administrative expenses. Total operating expenses were $1,886,076 in 2010, an increase of $1,189,322, or 171%, compared to $696,754 in 2009. The increase in operating expenses in 2010 was mainly attributable to the $1,100,255 increase in allowance for bad debts.

Comparison of Other Expenses for the Nine Months Ended September 30, 2010 and 2009

Other expenses consist of interest income, interest expense and other expense. Total other expenses were $3,693,934 in 2010, an increase of $625,757, or 20%, compared to $3,068,177 in 2009. Among other expenses, interest was $3,712,745 for the nine months ended September 30, 2010, an increase of $637,622, or 21%, compared to $3,075,123 for 2009. Interest expense included interest on equipment loans, interest on capitalized lease payables, interest on employee loans payable and interest on bank loans payable. The increase of interest expense mainly resulted from the increase in interest on obligations under the capital lease and a new short-term bank loan acquired in 2010 and new equipment loan acquired in November 2009.

Comparison of Income Tax for the Nine Months Ended September 30, 2010 and 2009

The provision for income tax of $3,682,216 and $0 for the nine months ended September 30, 2010 and 2009, respectively, arose from foreign income tax incurred and or paid to the Chinese tax agent. Hongri is subject to a PRC 25% standard enterprise income tax. Hongri applied for foreign investment enterprise exemption, and the application had been approved by the local tax authority in 2007. Hongri was entitled to a tax holiday of full (100%) income tax exemption starting from the first profitable year of 2008 through 2009 and then a 50% reduction in income tax for additional three (3) years commencing 2010. The reduced income tax rate will be 12.5%, 12.5% and 12.5% for the year 2010, 2011 and 2012.

Comparison of Net Income for the Nine Months Ended September 30, 2010 and 2009

Net income totaled $15,805,442 for nine months ended September 30, 2010, a decrease of $32,164,268, or (67)%, compared to the net income of $47,969,710 in 2009. The decrease of net income was attributable primarily to the restriction of production due to “energy-saving and emission-reduction” control initiatives aforementioned and its related impact on sales volume. Increased prices of raw materials also had a negative impact on the Company’s gross profit rate and net income.

Liquidity and Capital Resources

Years Ended December 31, 2009 and 2008

The Company had cash and cash equivalents of $2,524,530 and $211,272 as of December 31, 2009 and 2008, respectively. Most of the Company’s funds are kept in financial institutions in China, which do not provide insurance for deposits. Moreover, the Company is subject to the regulations of the PRC, which restrict the transfer of cash from China, except under certain circumstances. Accordingly, such funds may not be readily available to satisfy obligations which have been incurred outside the PRC.

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Net cash provided by operating activities was $84,544,877 and $26,296,522 for the years ended December 31, 2009 and 2008, respectively. The increase in net cash provided by operating activities in 2009 was due to the $30,312,897 increase in net income and the $52,212,222 decrease in inventories, $20,952,103 decrease in advance to suppliers, and $13,443,084 increase in accounts payable. The increase was offset by the $38,760,885 increase in advance to related parties and $24,278,021 increase in accounts payable-related parties.

Net cash used in investing activities was $35,121,084 and $23,869,851 for the year ended December 31, 2009 and 2008. Those expenditures were related to the new production lines and equipment.

Net cash used in financing activities was $48,009,993 in 2009, compared to $6,586,485 in 2008. The Company repaid equipment loans of $46,059,634 to related parties and deposited $1,758,000 into the bank in 2009. During 2008, the Company received $684,537 employee loans. Payments to obligations under capital lease were $192,359 and $177,418, respectively, for the year, ended December 31, 2009 and 2008.

YBS Group is a parent company (70% shareholder) of Hongri. Hongrong is a major supplier of molten iron, the raw material of steel making, and an affiliated company. Equipment loan payables – related parties consisted of:

Equipment Loans Payable	2009			2008			2007

Equipment loan - YBS Group payable	$	54,885,968		$	25,389,669		$	26,208,524
Equipment loan - Hongrong payable		24,201,859			43,337,074			44,698,499
Total equipment loans payable		79,087,827			68,726,743			70,907,023
Less: current portion		(10,660,435	)		(10,529,941	)		(6,633,923	)
Long-term payable	$	68,427,392		$	58,196,802		$	64,273,100

As of December 31, 2009 and 2008, bank notes payable were $2,930,000 and $0, respectively. The bank notes payable does not carry a stated interest rate, but does carry a specific due date usually for a short-term period of six months. These notes are negotiable documents issued by financial institutions on Hongri’s behalf to vendors. These notes can either be endorsed by the vendor to other third parties as payment, or prior to coming due, they can factor these notes to other financial institutions. These notes are short-term in nature, as such, Hongri does not calculate imputed interest with respect to them. These notes are collateralized by Hongri’s restricted bank deposits.

Nine Months Ended September 30, 2010

The Company had cash and cash equivalents of $871,794 and $2,524,530 as of September 30, 2010 and December 31, 2009, respectively. Most of the Company’s funds are kept in financial institutions in China, which do not provide insurance for deposits. Moreover, the Company is subject to the regulations of the PRC, which restrict the transfer of cash from China, except under certain circumstances. Accordingly, such funds may not be readily available to satisfy obligations which have been incurred outside the PRC.

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The Company’s accounts receivable has been an increasingly significant portion of the Company’s current assets, representing $20,314,743 and $7,474,509, or 16% and 7%, of current assets, as of September 30, 2010 and December 31, 2009, respectively. If customers responsible for a significant amount of accounts receivable were to become insolvent or otherwise unable to pay for our products, or to make payments in a timely manner, the Company’s liquidity and results of operations could be materially adversely affected. An economic or industry downturn could materially adversely affect the servicing of these accounts receivable, which could result in longer payment cycles, increased collections costs and defaults in excess of management’s expectations. A significant deterioration in the Company’s ability to collect on accounts receivable could affect our cash flow and working capital position and could also impact the cost or availability of financing available to the Company.

Percentage of aged accounts receivable

	Total			Current			31-60		61-90		91-180		181-270		271-365		Over 365
September 30, 2010		100.00	%		19.59	%	9.38	%	2.72	%	1.06	%	3.13	%	5.72	%		0.00	%
December 31, 2009		100.00	%		86.19	%	1.95	%	0.00	%	11.54	%	0.02	%	0.00	%		0.30	%

As of September, 2010, six customers’ receivables totaled $1,257,503 over 270 days, compared to two customers’ receivable that totaled $24,695 over 270 days as of December 31, 2009. The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. Allowance for doubtful accounts is based on the management’s assessment of the collectability of specific customer accounts, the aging of accounts receivable, the history of bad debts, and the general condition of the industry. If a major customer’s credit worthiness deteriorates, or customers’ actual defaults exceed historical experience, the management’s estimates could change and impact the results of operations. The Company has not experienced any significant amount of bad debt since the inception of our operation. Allowance for doubtful accounts was $1,635,601 and $240,964 as of September 30, 2010 and December 31, 2009, respectively.

Net cash used in operating activities was $2,149,057 for the nine months ended September 30, 2010, compared to net cash of $20,704,048 provided by operating activities for the nine months ended September 30, 2009. The decrease was mainly attributable to the $34,794,780 decrease in accounts payable.

Net cash used in investing activities was $4,761,359 and $16,424,485 for the nine months ended September 30, 2010 and 2009. Those expenditures were related to the new production lines and equipment.

Net cash provided by financing activities was $4,188,512 for the nine months ended September 30, 2010. During 2010, the Company received $2,839,930 short-term loan from a bank. The loan bears interest at 10.62% per annum and was due by November 2010. The Company received proceeds of $1,909 from issuing of its common stocks. The Company is in the process of private placement and selling the Company’s securities to the accredited investor. Each selling unit comprises one share of the Company’s common stock and one three-year warrant to purchase one share of the Company’s common stock at $4.50 per share. As of September 30, 2010, the Company received total proceeds of $1,558,128. Net cash used was $3,368,815 for the nine months ended September 30, 2009. It was mainly attributable to the $3,223,000 restricted bank deposit used as collateral to bank notes payable.

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	As of September 30,			As of December 31,
Equipment Loans Payable	2010			2009
Equipment loan - YBS Group payable	$	55,998,674		$	54,885,968
Equipment loan - Hongrong payable		24,692,503			24,201,859
Total equipment loans payable		80,691,177			79,087,827
Less: current portion		(10,876,555	)		(10,660,435	)
Long-term payable	$	69,814,622		$	68,427,392

Employee loans were $697,939 and $684,070 as of September 30, 2010 and December 31, 2009, respectively. Employee loans payable consists of loans from employees of Hongri, which bears an interest rate at 25% per year and a maturity date of December 31, 2010. Accrued interests were $479,830 and $299,276 for the nine months ended September 30, 2010 and 2009, respectively.

As of September 30, 2010 and December 31, 2009, bank notes payable was$2,989,400 and $2,930,000, respectively. The bank notes payable does not carry a stated interest rate, but does carry a specific due date usually for a short-term period of six months. These notes are negotiable documents issued by financial institutions on Hongri’s behalf to vendors. These notes can either be endorsed by the vendor to other third parties as payment, or prior to coming due, they can factor these notes to other financial institutions. These notes are short-term in nature, as such, Hongri does not calculate imputed interest with respect to them. These notes are collateralized by Hongri’s restricted bank deposits.

As of September 30, 2010 and December 31, 2009, the Company had no operating leases, pending litigation, or potential overdue charges for bank loans, as the Company normally repaid interest and loan principal based on the contractual terms.

Critical Accounting Policies and Estimates

In Note 2 to our audited consolidated financial statements for the years ended December 31, 2009, 2008 and 2007 included in this Form S-1, the Company discusses those accounting policies that are considered to be significant in determining the results of operations and its financial position. The Company believes that the accounting principles utilized by it conform to accounting principles generally accepted in the United States of America (U.S. GAAP). The Company applies the following critical accounting policies related to revenue recognition in the preparation of its financial statements.

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General

The Company’s consolidated financial statements are prepared in accordance with U.S. GAAP, which require management to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, net revenue and expenses, and the disclosure of contingent assets and liabilities. Management bases its estimates on historical experience and on various other assumptions it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of the assets and liabilities that are not readily apparent from other sources. Senior management has discussed the development, selection and disclosure of these estimates with the Board of Directors. Management believes the accounting estimates employed and the resulting balances are reasonable; however, actual results may differ from these estimates under different assumptions or conditions.

Revenue Recognition

The recognize revenue from the sales of products. The Company recognizes revenues under FAS Codification Topic 605 (“ASC 605”). Revenue is recognized when all of the following have occurred: (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred or services have been rendered, (iii) the price is fixed or determinable, and (iv) the ability to collect is reasonably assured. These criteria are generally satisfied at the time of delivery for sales when risk of loss and title passes to the customer. Revenue is reported net of all value added taxes. Other income is recognized when it is earned. The Company does not routinely permit customers to return products and historically, customer returns have been immaterial. The Company will replace the original product with a similar product if the customer is not satisfied with the quality of product.

Fair Value of Financial Instruments

The Company’s financial instruments consist of cash and cash equivalents, restricted cash bank notes receivable, accounts receivable, net, advance to suppliers, value added tax (“VAT”) recoverable, advances to related parties, current portion of equipment loan payables and accrued interest – related parties, employee loan and accrued interest payable, bank notes payable, accounts payable, accrued liabilities, VAT and other tax payables, advances from customers, and accounts payable - related parties. The fair value of these financial instruments approximate their carrying amounts reported in the balance sheets due to their short-term maturity or by comparison to other instruments with similar terms.

The Company evaluated the fair value of the equipment loans payable – related parties, net of current portion at the nine months ended September 30, 2010 and the year end of 2009, 2008 and 2007, and determined that the book value of equipment loans payable approximated the fair market value based on information available as of September 30, 2010 and December 31, 2009, 2008 and 2007.

Foreign Currency Translation

The Company’s financial information is presented in U.S. dollars. The functional currency of the Company is RMB, the currency of the PRC. The Company’s transactions, which are denominated in currencies other than RMB, are translated into RMB at the exchange rate quoted by the People’s Bank of China prevailing at the dates of the transactions. Exchange gains and losses resulting from transactions denominated in a currency other than the RMB are included in statements of operations as foreign currency transaction gain or loss. The financial statements of the Company have been translated into U.S. dollars in accordance with ASC 830, “Foreign Currency Matters”. The financial information is first prepared in RMB and then is translated into U.S. dollars at period-end exchange rates for assets and liabilities and average exchange rates for revenue and expenses. Capital accounts are translated at their historical exchange rates when the capital transactions occurred. The effects of foreign currency translation adjustments are included as a component of accumulated other comprehensive income (loss) in shareholders’ equity.

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Segment Information

ASC 280-10 (formerly, SFAS No. 131), “Disclosure About Segments of and Enterprise and Related Information”, requires entity-wide disclosures about the products and services an entity provides, the material countries in which it holds assets and reports revenues and its major customers. The Company operates in a single segment and will evaluate additional segment disclosure requirements as it expands its operations.

Recently Adopted Accounting Standards

In February 2010, the Company adopted an amendment to previously adopted accounting guidance on subsequent event disclosure, which established standards of accounting for and disclosure of events or transactions that occur after the balance sheet date but before financial statements are issued or available to be issued. Under the amended guidance, the Company is no longer required to disclose the date through which subsequent events have been evaluated. The adoption of this requirement did not have a material impact on the Company’s financial condition or results of operations.

The Company adopted the accounting principles established by ASU 2009-17, Consolidations: Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities, effective January 1, 2010. This ASU requires an ongoing reassessment and replaces the quantitative-based risks and rewards calculation for determining which reporting entity, if any, has a controlling financial interest in a variable interest entity (“VIE”) with a primarily qualitative analysis. The qualitative analysis is based on identifying the party that has the power to direct the activities that most significantly impact the VIE’s economic performance (the “power criterion”) and the obligation to absorb losses from or the right to receive benefits of the VIE that could potentially be significant to the VIE (the “losses/benefit criterion”). The party that meets both these criteria is deemed to have a controlling financial interest. The party with the controlling financial interest is considered to be the primary beneficiary and, as a result, is required to consolidate the VIE. The adoption of this new guidance did not have a material effect on the Company’s financial statements.

Recently Issued Accounting Standards

In January 2010, the Financial Accounting Standards Board (“FASB”) issued guidance which expands the required disclosures about fair value measurements. This guidance requires disclosures about transfers of investments between levels in the fair value hierarchy and disclosures relating to the reconciliation of fair value measurements using significant unobservable inputs (level 3 investments). This guidance is effective for the Company as of January 1, 2011. The adoption of this guidance will not have a material impact on its financial condition or results of operations.

In April 2010, the FASB issued ASU 2010-13, “Compensation-Stock Compensation (Topic 718) - Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the Market in Which the Underlying Equity Security Trades - a consensus of the FASB Emerging Issues Task Force”. ASU 2010-13 provides amendments to Topic 718 to clarify that an employee share-based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the entity’s equity securities trades should not be considered a condition that is not a market, performance, or service condition. Therefore, an entity would not classify such an award as a liability if it otherwise qualifies as equity. The amendments in this update do not expand the recurring disclosures required by Topic 718. Disclosures currently required under Topic 718 are applicable to a share-based payment award, including the nature and the term of share-based payment arrangements. The amendments in this update are effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2010. The Company is currently evaluating the impact of the adoption of ASU 2010-13 on its financial statements.

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Certain other accounting pronouncements were issued by the FASB and other standard setting organizations, which are not yet effective and have not yet been adopted by the Company. The impact on the Company’s financial position and results of operations from adoption of these standards is not expected to be material.

Off-Balance Sheet Arrangements

The Company has never entered into any off-balance sheet financing arrangements and has never established any special purpose entities. The Company has not guaranteed any debt or commitments of other entities or entered into any options on non-financial assets.

SELLING SECURITY HOLDERS

The securities being offered hereunder are being offered by the selling shareholders listed below or their respective transferees, pledgees, donees or successors. Each selling shareholder may from time to time offer and sell any or all of such selling shareholder’s shares that are registered under this prospectus. Because no selling shareholder is obligated to sell shares, and because the selling shareholders may also acquire publicly traded shares of our common stock, we cannot accurately estimate how many shares each selling shareholder will own after the offering.

All expenses incurred with respect to the registration of the common stock covered by this prospectus will be borne by us, but we will not be obligated to pay any underwriting fees, discounts, commissions or other expenses incurred by any selling shareholder in connection with the sale of shares.

None of the selling stockholders is a broker dealer or an affiliate of a broker dealer.

Except as set forth below or in the section “Recent Sales of Unregistered Securities” below, none of the selling stockholders has been an officer or director of the Company or any of its predecessors or affiliates within the last three years, nor has any selling stockholder had a material relationship with the Company.

Each selling stockholder may offer for sale all or part of the shares from time to time. The table below assumes that the selling stockholders will sell all of the shares offered for sale. A selling stockholder is under no obligation, however, to sell any shares pursuant to this prospectus.

After due inquiry and investigation and based on information provided by the selling stockholders, none of the selling stockholders has an existing short position in our stock.

The selling stockholders acquired their shares pursuant to one of the following transactions:

On January 28, 2011, we sold an aggregate of 2,579,022 units in a private placement transaction. Each unit consisted of one share of our common stock and a three-year warrant to purchase one share of our common stock at an exercise price of $4.50 per share. We are registering the shares contained in the units.

On February 7, 2011, we sold 1,000 units in a private placement transaction. Each unit consisted of one share of our common stock, one three-year warrant to purchase one share of our common stock at an exercise price of $2.00 per share and one three-year warrant to purchase one share of our common stock at an exercise price of $4.50 per share. We are registering the shares contained in the units.

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No underwriter was involved in any of the above issuances of securities. All of the above securities were issued in reliance upon the exemptions set forth in Section 4(2) of the Securities Act of 1933, as amended, on the basis that they were issued under circumstances not involving a public offering. Further, there are no rights associated with any of the shares described above.

Other than as described in this prospectus, we have not in the past three years engaged in any securities transaction with any of the selling stockholders, any affiliates of the selling stockholders, or, after due inquiry and investigation, to the knowledge of the management of the Company, any person with whom any selling stockholder has a contractual relationship regarding the transaction (or any predecessors of those persons).

The following table sets forth, with respect to the selling shareholders (i) the number of shares of common stock beneficially owned as of February 7, 2011, (ii) the maximum number of shares of common stock which may be sold by the selling shareholders under this prospectus, and (iii) the number of shares of common stock which will be owned after the offering by the selling shareholders. All shareholders listed below are eligible to sell their shares. The percentage ownerships set forth below are based on 73,542,058 shares outstanding as of the date of this prospectus.

Name of Selling Stockholder	Total Number of Shares Beneficially Owned Prior to Offering (2)		Total Percentage of Shares Beneficially Owned Prior to Offering (2)		Maximum Number of Shares to be Sold		Number of Shares Owned After Offering
Yuan Yuan		133,320		133,320		133,320		0
Chen Zhao		99,986		99,986		99,986		0
Haochuan Ma		266,652		266,652		266,652		0
Shuo Tian		39,986		39,986		39,986		0
Xiangdong Zhang		133,320		133,320		133,320		0
Xiurong Xu		125,486		125,486		125,486		0
Tao Chen		100,000		100,000		100,000		0
Kaihua Wang		66,686		66,686		66,686		0
Shenglin Yang		33,353		33,353		33,353		0
Ke Xu		33,353		33,353		33,353		0
Shouping Sun		33,353		33,353		33,353		0
Jian Ding		33,323		33,323		33,323		0
Ruxi Yang		33,323		33,323		33,323		0
Xinlu Jin		100,000		100,000		100,000		0
Yuzhou Wang		100,000		100,000		100,000		0
Yu Yan		81,592		81,592		81,592		0
Jing Dai		99,998		99,998		99,998		0
Jianfei Zhang		100,000		100,000		100,000		0

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Honggang Cao	33,333	33,333	33,333
Xianzhou Chen	133,314	133,314	133,314
Deran Li	199,998	199,998	199,998
Mingshan Gan	139,981	139,981	139,981
Bingwen Xu	33,333	33,333	33,333
Tracy K. Gibbs	10,000	10,000	10,000
Sterling Trust Custodian FBO Frank G. Li (3)	10,000	10,000	10,000
Bibicoff Family Trust (4)	15,000	15,000	15,000
James F. Truitt, Jr.	25,000	25,000	25,000
John C. Kleinert	25,000	25,000	25,000
Haruyo D'Elia	133,333	133,333	133,333
Jean Paul D'Elia	6,666	6,666	6,666
Joseph J. Amiel Money Purchase Plan (5)	16,667	16,667	16,667
Patrick J. Greene	10,000	10,000	10,000
Brian P. Greene	8,000	8,000	8,000
Daniel L. Kinzie / Julie L. Kinzie	16,000	16,000	16,000
William J. Reininger	20,000	20,000	20,000
Daniel H. Wu	4,000	4,000	4,000
The Sussman Trust 09/28/04, S/J Sussman Trustees (6)	3,000	3,000	3,000
Christopher P. Wood	6,666	6,666	6,666
Robert H. Litzenberger/Amy Litzenberger	30,000	30,000	30,000
Qiu Wei	66,667	66,667	66,667
Stewart H. Katz	6,666	6,666	6,666
Francis Knuettel, II	2,000	2,000	2,000
Brian R. Wood	6,666	6,666	6,666
Jeremy Akers	3,334	3,334	3,334
JL Penn Investments LLC (7)	1,000	1,000	1,000

(1)

Under applicable SEC rules, a person is deemed to beneficially own securities which the person as the right to acquire within 60 days through the exercise of any option or warrant or through the conversion of a convertible security. Also under applicable SEC rules, a person is deemed to be the “beneficial owner” of a security with regard to which the person directly or indirectly, has or shares (a) voting power, which includes the power to vote or direct the voting of the security, or (b) investment power, which includes the power to dispose, or direct the disposition, of the security, in each case, irrespective of the person’s economic interest in the security. Each listed selling stockholder has the sole investment and voting power with respect to all shares of common stock shown as beneficially owned by such selling stockholder, except as otherwise indicated in the footnotes to the table.

(2)	As of February 7, 2011 there were 73,542,058 shares of our common stock issued and outstanding. In determining the percent of Common Stock beneficially owned by a selling stockholder on February 7, 2011, (a) the numerator is the number of shares of common stock beneficially owned by such selling stockholder (including shares that he has the right to acquire within 60 days of February 7, 2011), and (b) the denominator is the sum of (i) the 73,542,058 shares of common stock outstanding on February 7, 2011 and (ii) the number of shares of common stock such selling stockholders has the right to acquire within 60 days of February 7, 2011.

(3)	Frank G. Li has voting and dispositive control over such shares.

(4)	Harvey Bibicoff, Trustee, has voting and dispositive control over such shares.

(5)	Joseph J. Amiel, Managing Member, has voting and dispositive control over such shares.

(6)	Scott Sussman, Trustee, has voting and dispositive control over such shares.

(7)	Jason Friedland, Manager, has voting and dispositive control over such shares.

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PLAN OF DISTRIBUTION

This offering is not being underwritten. The selling stockholders will sell their shares of our common stock at a price of $4.50 per share until shares of our common stock are quoted on the OTC Bulletin Board, or listed for trading or quoted on any other public market, and thereafter at prevailing market prices or privately negotiated prices. The $4.50 per share offering price of our common stock was determined based on the $4.50 per share sales price of our common stock in our last private placement transactionwhich closed in February 2011. The selling stockholders themselves directly, or through their agents, or through their brokers or dealers, may sell their shares from time to time, in (i) privately negotiated transactions or (ii) at such time our common stock is quoted on the OTC Bulletin Board or on any stock exchange on which the shares may be listed in the future, in one or more transactions, including block transactions in accordance with the applicable rules of such exchange. Once our common stock is listed, the selling price of the shares may be at market prices prevailing at the time of sale, at prices related to the prevailing market prices, or at negotiated prices. To the extent required, the specific shares to be sold, the names of the selling stockholders, the respective purchase prices and public offering prices, the names of any agent, broker or dealer and any applicable commission or discounts with respect to a particular offer will be described in an accompanying prospectus. In addition, any securities covered by this prospectus which qualify for sale pursuant to Rule 144 may be sold under Rule 144 rather than pursuant to this prospectus. As of the date of this prospectus, there is no public market for our common stock. The selling stockholders are offering the common stock under this prospectus in the hope that such a market will develop. The selling stockholders may use any one or more of the following methods when disposing of shares:

·	ordinary brokerage transactions and transactions in which the broker-dealer solicits purchasers;

·	block trades in which the broker-dealer will attempt to sell the shares as agent but may position and resell a portion of the block as principal to facilitate the transaction;

·	purchases by a broker-dealer as principal and resales by the broker-dealer for its account;

·	an exchange distribution in accordance with the rules of the applicable exchange;

·	privately negotiated transactions, including gifts;

·	to cover short sales made after the date that the registration statement of which this prospectus is a part is declared effective by the Commission;

·	broker-dealers may agree with the selling stockholders to sell a specified number of such shares at a stipulated price per share;

·	a combination of any of these methods of sale; and

·	any other method permitted pursuant to applicable law.

The shares may also be sold under Rule 144 under the Securities Act, if available, rather than under this prospectus. The selling stockholders have the sole and absolute discretion not to accept any purchase offer or make any sale of shares if they deem the purchase price to be unsatisfactory at any particular time.

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The selling stockholders may pledge their shares to their brokers under the margin provisions of customer agreements. If a selling stockholder defaults on a margin loan, the broker may, from time to time, offer and sell the pledged shares.

Broker-dealers engaged by a selling stockholder may arrange for other broker-dealers to participate in sales. Broker-dealers may receive commissions or discounts from a selling stockholder (or, if any broker-dealer acts as agent for the purchaser of shares, from the purchaser) in amounts to be negotiated, which commissions as to a particular broker or dealer may be in excess of customary commissions to the extent permitted by applicable law.

If sales of shares offered under this prospectus are made to broker-dealers as principals, we would be required to file a post-effective amendment to the registration statement of which this prospectus is a part. In the post-effective amendment, we would be required to disclose the names of any participating broker-dealers and the compensation arrangements relating to such sales.

The selling stockholder and any broker-dealers or agents that are involved in selling the shares offered under this prospectus may be deemed to be "underwriters" within the meaning of the Securities Act in connection with these sales. In such event, commissions received by these broker-dealers or agents and any profit on the resale of the shares purchased by them may be deemed to be underwriting commissions or discounts under the Securities Act. Any broker-dealers or agents that are deemed to be underwriters may not sell shares offered under this prospectus unless and until we set forth the names of the underwriters and the material details of their underwriting arrangements in a supplement to this prospectus or, if required, in a replacement prospectus included in a post-effective amendment to the registration statement of which this prospectus is a part.

The selling stockholder and any other persons participating in the sale or distribution of the shares offered under this prospectus will be subject to applicable provisions of the Exchange Act, and the rules and regulations under that act, including Regulation M. These provisions may restrict activities of, and limit the timing of purchases and sales of any of the shares by, the selling stockholder or any other person. Furthermore, under Regulation M, persons engaged in a distribution of securities are prohibited from simultaneously engaging in market making and other activities with respect to those securities for a specified period of time prior to the commencement of such distributions, subject to specified exceptions or exemptions. All of these limitations may affect the marketability of the shares.

If any of the shares of common stock offered for sale pursuant to this prospectus are transferred other than pursuant to a sale under this prospectus, then subsequent holders could not use this prospectus until a post-effective amendment or prospectus supplement is filed, naming such holders. We offer no assurance as to whether any of the selling stockholder will sell all or any portion of the shares offered under this prospectus.

We have agreed to pay all fees and expenses we incur incident to the registration of the shares being offered under this prospectus. However, each selling stockholder and purchaser is responsible for paying any discounts, commissions and similar selling expenses they incur.

We and the selling stockholders have agreed to indemnify one another against certain losses, damages and liabilities arising in connection with this prospectus, including liabilities under the Securities Act.

MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

No Public Market for Common Stock

There is presently no public market for our Common Stock. We will seek to have our common stock quoted on the OTC Bulletin Board as soon as practicable after the effective date of this registration statement. As of the date of this prospectus, there are 73,542,058 issued and outstanding shares of our common stock.

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We intend to request a registered broker-dealer to apply to have our common stock quoted on the OTC Bulletin Board upon the effectiveness of the registration statement of which this prospectus forms a part. However, we can provide no assurance that our shares will be traded on the OTC Bulletin Board or, if traded, that a public market will materialize.

The Securities and Exchange Commission has adopted rules that regulate broker-dealer practices in connection with transactions in penny stocks. Penny stocks are generally equity securities with a price of less than $5.00, other than securities registered on certain national securities exchanges or quoted on the NASDAQ system, provided that current price and volume information with respect to transactions in such securities is provided by the exchange or quotation system. For further information regarding rules governing penny stocks, see Penny Stock Regulations below.

Holders

As of the date of this prospectus, there were 73,542,058 shares of our common stock issued and outstanding, and there were approximately 86 holders of record of our common stock.

Dividends

We have not declared or paid any cash dividends on our common stock during either of our last two fiscal years or during our last two fiscal quarters. The payment of dividends, if any, is at the discretion of the Board of Directors and is contingent on the Company's revenues and earnings, capital requirements, financial conditions. We currently intend to retain all earnings, if any, for use in business operations. Accordingly, we do not anticipate declaring any dividends in the near future.

The PRC's national currency, the Yuan, is not a freely convertible currency. For an explanation of how this may restrict our ability to declare dividends on our common stock, please refer to the risk factors in the section entitled “Risk Factors – Risks Related to Doing Business in China.”

Securities Authorized for Issuance under Equity Compensation Plans

As of the date of this prospectus, we do not have any securities authorized for issuance under any equity compensation plans and we do not have any equity compensation plans.

Shares Eligible for Future Sale

There is no established trading market for our common stock. Future sales of substantial amounts of our common stock in the trading market could adversely affect market prices.

This is an offering of 2,580,022 shares of our common stock by the selling stockholders, all of which have issued to the selling stockholders. As of February 7, 2011, we have presently 73,542,058 shares of Common Stock issued and outstanding. None of these shares are currently eligible for resale under Rule 144.

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Rule 144 Shares

After February 15, 2008, a person who has beneficially owned shares of a company’s common stock for at least six months is entitled to sell within any three month period a number of shares that does not exceed 1% of the number of shares of our common stock then outstanding.

Consequently, as of February 7, 2011 there are approximately 73,542,058 shares of our common stock held by 60 shareholders of record, none of which are currently available for resale to the public and in accordance with the volume and trading limitations of Rule 144 of the Act.

Sales under Rule 144 are also subject to manner of sale provisions and notice requirements and to the availability of current public information about the company. Under Rule 144(b), a person who is not one of the company’s affiliates at any time during the three months preceding a sale, and who has beneficially owned the shares proposed to be sold for at least one year, is entitled to sell shares without complying with the manner of sale, public information, volume limitation or notice provisions of Rule 144.

Penny Stock Regulations

Our common stock may be subject to regulations prescribed by the SEC relating to "penny stocks." The SEC has adopted regulations that generally define a penny stock to be any equity security that has a market price (as defined in such regulations) of less than $5 per share, subject to certain exceptions. These regulations impose additional sales practice requirements on broker-dealers who sell penny stocks to persons other than established customers and accredited investors (generally institutions with assets in excess of $5,000,000 and individuals with a net worth in excess of $1,000,000 or annual income exceeding $200,000 (individually) or $300,000 (jointly with their spouse). For transactions covered by these rules, other than exempt transactions, involving a penny stock, the rules require the delivery, prior to the transaction, of a risk disclosure document mandated by the SEC relating to the penny stock market, that: (a) contains a description of the nature and level of risk in the market for penny stocks in both public offerings and secondary trading; (b) contains a description of the broker's or dealer's duties to the customer and of the rights and remedies available to the customer with respect to a violation to such duties or other requirements of Securities' laws; (c) contains a brief, clear, narrative description of a dealer market, including bid and ask prices for penny stocks and the significance of the spread between the bid and ask price; (d) contains a toll-free telephone number for inquiries on disciplinary actions; (e) defines significant terms in the disclosure document or in the conduct of trading in penny stocks; and (f) contains such other information and is in such form, including language, type, size and format, as the Securities and Exchange Commission shall require by rule or regulation. The broker-dealer also must provide, prior to effecting any transaction in a penny stock, the customer with: (a) bid and offer quotations for the penny stock; (b) the compensation of the broker-dealer and its salesperson in the transaction; (c) the number of shares to which such bid and ask prices apply, or other comparable information relating to the depth and liquidity of the market for such stock; and (d) monthly account statements showing the market value of each penny stock held in the customer's account. In addition, the penny stock rules require that prior to a transaction in a penny stock not otherwise exempt from those rules; the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser's written acknowledgment of the receipt of a risk disclosure statement, a written agreement to transactions involving penny stocks, and a signed and dated copy of a suitably written statement.

The broker-dealer also must disclose the commissions payable to both the broker-dealer and the registered representative, current quotations for the securities and, if the broker-dealer is the sole market-maker, the broker-dealer must disclose this fact and the broker-dealer's presumed control over the market. Finally, monthly statements must be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks.

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Legal remedies, which may be available to the investor, are as follows:

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If penny stocks are sold in violation of the investor's rights listed above, or other federal or state securities laws, the investor may be able to cancel his purchase and get his money back.

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If the stocks are sold in a fraudulent manner, the investor may be able to sue the persons and firms that caused the fraud for damages.

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If the investor has signed an arbitration agreement, however, s/he may have to pursue a claim through arbitration.

If the person purchasing the securities is someone other than an accredited investor or an established customer of the broker-dealer, the broker-dealer must also approve the potential customer's account by obtaining information concerning the customer's financial situation, investment experience and investment objectives. The broker-dealer must also make a determination whether the transaction is suitable for the customer and whether the customer has sufficient knowledge and experience in financial matters to be reasonably expected to be capable of evaluating the risk of transactions in such securities. Accordingly, the SEC's rules may limit the number of potential purchasers of the shares of our common stock and stockholders may have difficulty selling their securities.

REGISTRATION UNDER THE SECURITIES ACT

Except for the 2,580,080 shares of common stock being registered in the registration statement and described in this prospectus, the Company has not agreed to register any other shares of stock under the Securities Act.

DESCRIPTION OF BUSINESS

Corporate History

China Industrial Steel Inc. was incorporated in the State of Maryland on January 27, 2010. Through the steps described immediately below, we became the indirect holding company for Hongri Metallurgy, a manufacturer of steel plate, bar and billet in the PRC, on December 29, 2009.

On February 5, 2010, we formed Northern Steel, a Colorado corporation, as our wholly-owned subsidiary. On July 15, 2010, Northern Steel formed Nuosen as its wholly-owned subsidiary and a "wholly foreign-owned enterprise" in the PRC.

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Under the laws of the PRC, certain restrictions are placed on round trip investments through an acquisition of a PRC entity by an offshore special purpose vehicle owned by one or more PRC residents as well as foreign investment in iron and steel industry. To comply with these restrictions, on August 1, 2010, we, through Nuosen, entered into a Entrusted Management Agreement, Exclusive Option Agreement, and Covenant Letter (collectively, the “Entrustment Agreements”) with Hongri Metallurgy and shareholders of Hongri Metallurgy Shareholders, Fakei and YBS Group. We issued 44,083,529 restricted shares of our common stock to Karen Prudente, a US resident who entered into call option agreements (collectively, the “Call Option Agreements”) respectively with the shareholders of YBS Group, for YBS Group entering into the Entrustment Agreements. In addition, we issued 17,493,463 restricted shares of our common stock to Fakei, for Fakei entering into the Entrustment Agreements. According to the Call Option Agreements, Karen Prudente would transfer all restricted shares of our common stock she received to the shareholders of YBS Group subject to the terms and conditions thereunder and entrust the shareholders of Hebei with her voting rights in the Company. Karen Prudente’s role with respect to the restricted shares held by the Hongxing Shareholders is to manage the trust of the Hongxing Shareholders. These restricted shares issued to Karen Prudente and Fakei were issued in reliance upon the exemptions set forth in Section 4(2) of the Securities Act of 1933, as amended, on the basis that they were issued under circumstances not involving a public offering. As a result of the aforementioned transaction, the shareholders of YBS Group and Fakei obtained control of the Company.

Generally, we provide Hongri Metallurgy with technology consulting and management services pursuant to the Entrustment Agreements, the material terms which are as follows:

Entrusted Management Agreement – pursuant to this agreement entered into by and among the Hongri Metallurgy Shareholders, Hongri Metallurgy, and Nuosen, the Hongri Metallurgy Shareholders and Hongri Metallurgy entrust the management of Hongri Metallurgy to Nuosen until (a) the winding up of Hongri Metallurgy, (b) the termination date of the agreement as determined by the parties, or (c) the date on which Nuosen acquires Hongri Metallurgy. During the term, Nuosen is fully and exclusively responsible for the management of Hongri Metallurgy. In consideration of such services, the Hongri Metallurgy Shareholders and Hongri Metallurgy will pay a fee to Nuosen as set forth in the agreement.

Covenant Letter – pursuant to this letter, the Hongri Metallurgy Shareholders irrevocably covenant that without the prior written consent by Nuosen, the Hongri Metallurgy Shareholders would not transfer, pledge or create any encumbrance in other way on all or part of the contribution and share equity of Hongri Metallurgy, or increase or decrease the registered capital of Hongri Metallurgy, or divide or merge the Company or conduct any other activity which would change the registered capital or shareholding structure of Hongri Metallurgy.

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Call Option Agreement

Liu Shenghong, our Chairman of Board of Directors and one of the shareholders of YBS Group and other several the shareholders of YBS Group (each of them, the “Purchaser”) have entered into call option agreements, dated as of August 10,], 2010 (collectively, the “Call Option Agreements”), with our major shareholder, Karen Prudente, pursuant to which they are entitled to purchase up to 100% of the issued and outstanding shares of Karen Prudente at a price of $0.0001 per 100 shares for a period of five years, as defined in the Call Option Agreements; the Option may be exercised, in whole or in part, in accordance with the following schedule: 34% of the Option Shares subject to the Option shall vest and become exercisable on January 1, 2012; 33% of the Option Shares subject to the Option shall vest and become exercisable on January 1, 2013 and 33% of the Option Shares subject to the Option shall vest and become exercisable on January 1, 2014.

Through the Entrustment Agreements , we have the ability to substantially influence Hongri Metallurgy’s daily operations and financial affairs, appoint its senior executives and approve all matters requiring shareholder approval. As a result of the Entrustment Agreements, which enable us to control Hongri Metallurgy and operate our business in the PRC through Hongri Metallurgy, we are considered the primary beneficiary of Hongri Metallurgy.

When we sell our equity or borrow funds we expect the proceeds will be forwarded to Hongri Metallurgy through Nuosen. We may also use the proceeds to repurchase our capital stock or for our corporate overhead expenses. If we borrow funds we expect to be the primary obligor on any debt. For example, in February 2011 we raised gross proceeds of $3,868,547 in a private placement from certain non-affiliated accredited investors in a private placement of our common stock. Net proceeds after our expenses were provided to Hongri Metallurgy through Nuosen.

Nuosen’s control over Hongri Metallurgy under the preceding agreements requires us to consolidate its financial statements pursuant to the FASB Interpretation 46, “Consolidation of Variable Interest Entities (VIEs)” (“FIN 46R”), an Interpretation of Accounting Research Bulletin No. 51 because Hongri Metallurgy is considered a variable interest entity of Nuosen.

FIN 46R requires a variable interest entity to be consolidated by any company that is subject to a majority of the risk of loss for the variable interest entity or is entitled to receive a majority of the variable interest entity’s residual returns. Since Nuosen is the primary and only beneficiary of Hongri Metallurgy (the variable interest entity), FIN 46R requires the consolidation of its financial statements with Nuosen and ultimately consolidated with Nuosen’s parent company, China Industrial Steel.

By causing our subsidiary Nuosen to enter into the Entrusted Agreements, we obtained substantially the same result as a direct share exchange, which is to permit us to consolidate the financial results of Hongri Metallurgy as our VIE.

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The following diagram sets forth the current corporate structure of the Company:

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Summary

Neither China Industrial Steel, Northern Steel nor Nuosen has any operations or plans to have any operations in the future other than acting as a holding company and management company for Hongri Metallurgy and raising capital for its operations. However, we reserve the right to change our operating plans regarding China Industrial Steel, Northern Steel and Nuosen.

History Of Hongri Metallurgy

Hongri Metallurgy, the primary entity through which we operate our business, was formed on March 7, 2007 as a limited liability company under the laws of the PRC, under the approval of Commerce Bureau of Handan Municipal. In August 2010, Hongri Metallurgy and Nuosen, a wholly-owned subsidiary of Northern Steel, entered into a number of contractual agreements by which Nuosen was entrusted to manage and operate Hongri Metallurgy. These contractual agreements, described in further detail above, also provide for the consolidation of the financial statements of China Industrial Steel, Northern Steel, Nuosen, and Hongri Metallurgy.

Business of Hongri Metallurgy

We are a holding company that, through our wholly-owned subsidiary Northern Steel and its wholly-owned subsidiary, Nuosen, and its variable interest entity ("VIE") Hongri Metallurgy, manufactures in the PRC steel plate, bar and billet.

Hongri Metallurgy currently operates four production lines with an aggregate production capacity of 2.3 million metric tons of steel per year from its headquarters on approximately 1,000 acres in Handan City in Hebei Province.

Hongri Metallurgy has a strategic relationship with Wu'an Yuanbaoshan Industrial Group Co., Ltd., a multi-industrial conglomerate with approximately 4.35 billion Yuan in assets, including fixed assets of 2.85 billion Yuan, with 4,500 employees, achieved sales revenue of 5.59 billion Yuan and profits of 650 million Yuan. The group is consist of Hongrong Iron and Steel Co., Ltd., which has annual output of 1.4 million tons of pig iron; one cement plant with 250,000 tons production capacity per year; one coking plant has 1 million tons output annually; gas power plants in generating 300 million kwh per year; one acid groups Ball Plant, and Wu'an Prosperous Materials Corporation.

Hebei is one of China’s leading steel producing provinces, and steel production is a significant component of the regional economy. Our business model relies on a lean infrastructure with a strong focus on production. Functions outside of manufacturing are outsourced to third parties, including related parties, enabling us to remain profitable in a highly competitive market.

We serve various industries and produce a variety of steel products including: billet, steel plate and steel bar. While the vast majority of our sales are made to distributors and traders, our products are typically used in ship building, construction, industrial manufacturing, and infrastructure projects. Steel billet is also occasional sold to end users to develop into plates and bars.

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Our first production line transforms iron ore to steel for further fabrication. At this stage impurities such as sulfur, phosphorus, and excess carbon are removed from the raw iron, and alloying elements such as manganese, nickel, chromium and vanadium are added to produce specific types of steel. Upon completion of the process the iron becomes steel billet, a cast semi-finished product which can then be formed into steel coil, medium plate or bar. The annual output of this production line is 2.3 million tons.

Our rolling production lines use hot rolling technology to produce plate and bar steel. The first of these facilities produces thin, flat sheets that are used in metalworking, and can be cut and bent into a variety of different shapes. Our medium plate line has an annual output of 600,000 tons of product, including carbon element structural armor plate, high quality carbon element structural armor plate, low alloy structural armor plate, shipbuilding armor plate, boiler armor plate, pressure vessel plate, automotive frame plate, automotive frame plate and pipeline steel, among others.

We recently completed construction of a second medium plate production line with an annual capacity of 800,000 tons. Our steel billet line has an annual capacity of 2.3 million tons. Our fourth line produces steel bar, commonly used in reinforced concrete and reinforced masonry structures. The bars are typically formed from carbon steel with ridges for better mechanical anchoring into concrete. The annual output of our bar rolling line is 600,000 tons.

During 2009 the Company reported revenue of approximately $557 million and net income of approximately $58 million. During the third quarter of 2010, ended September, 2010, the Company generated approximately $3370 million and approximately $16 million of sales and net income, respectively. The decrease in operating results in 2010 was attributed to several factors, predominantly changes in China’s overall economy, including; a slowed growth rate, increases in raw material expenses, a stall in real estate development, and to an extent, effects of the global financial crisis. Management believes it has accommodated for these factors and expects revenue and income growth will return to growth by year end.

As of February 7, 2011, we had an annual production capacity of approximately 2.3 million tons. We operated at approximately 65% capacity in 2009 and are expected to operate at approximately 60% of capacity in 2010. We are currently seeking capital to supplement the funding of further expansion of its capacity to take advantage of market demand. In particular, we are seeking to add a production line to produce a coated steel product, known as Galvalume™, which is primarily used in the automotive and home appliance industry. The planned facility will have an annual capacity of 400,000 tons per year and will enable us to take advantage of the forecasted growth in China’s domestic consumer goods sector.

Industry Overview

China is the world’s largest steel producing country, responsible for over one-third of the global suppy of steel. Steel production has been, and continues to be is an integral part of China’s economic growth. Historically much of China’s steel production was tagged for export to more industrial nations such as the United States. As with many other low value-added, labor-intensive sectors, China was successful in establishing a prominent position in the global steel market by pegging its currency, providing cheap labor through state-subsidized operations, and ignoring environmental impact. Privately run manufacturers were further subsidized through value added tax rebates on steel exports.

While these tactics served the nation’s economy well, during the past decade several trends were established which have caused the government to revise their policies. First, on the domestic front, as China continues to build infrastructure and move toward a consumer-driven economy, domestic demand for steel has grown substantially. Conversely, because China focused the vast majority of its resources on being the low-cost provider, its development of high precision/ high technology products and modern manufacturing facilities lagged other industry participants.

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In the global arena, as China increases its presence on the world stage, its policies with regard to worker’s rights and environmental impact are increasingly garnering comment from the rest of the world. Further, as the effects of the global financial crisis maintain a stranglehold on most of the world’s “modern” economies, China faces increasing pressure to eliminate some of the subsidies and artificial restraints implemented by the central government.

Recent Government Initiatives

In its efforts to maximize economic growth and minimize global criticism, the Chinese government has taken several measures to modify its fragmented steel industry.

With an estimated 1,000 mills throughout the country, China’s steel manufacturing sector was initially dominated by state-owned enterprises. However, the substantial demand and potential for profit resulted in numerous private steel makers, some of which grew to a sizable scale, but with many smaller independent facilities. In an effort to eliminate obsolete and inefficient producers, in May of 2010, the central government established a detailed set of guidelines with regard to the operation of existing plants including energy usage, plant emissions and production levels. The guidelines also prohibit local governments from approving projects that increase steel production capacity before the end of 2011.

While this is seen by some as an attempt to appease the international community and facilitate the modernization of China’s steel industry, the PRC has had only limited success with previous attempts to implement policy to curb expansion in this sector. This is largely a result of the nature of China’s steel industry. About half of China’s steel capacity is privately controlled, with 35% owned or controlled by provincial governments, according to Xu Zhongbo, an analyst at Beijing Metal Consulting, a private-sector consulting firm. Provincial governments have not been aggressive in enforcing the new guidelines as steel production provides substantial economic benefit to regional communities, in the way of tax revenue and job creation.

These policies have also been undermined by the success of the country’s overall stimulus efforts. The Government’s direct investment in infrastructure has resulted in the startup of numerous projects, many of which rely on a ready supply of steel suitable for all levels of construction.

However, more recently, the PRC implemented broad, temporary shutdowns in particular geographic markets, including Hebei. While unpopular with manufacturers in the short run, did have several positive effects. It reduced steel supply, thus strengthening pricing, while decreasing demand for raw materials, specifically weakening the pricing strength of leading iron ore suppliers. Smaller firms that were unable to sustain their operation through the shutdown were closed, eliminating inefficient manufactures.

Government Regulation

According to the Decision regarding Investment System Reform by the State Council, promulgated on July 16, 2004, the Foreign Invested Project Approval Administration Interim Regulations, promulgated by the State Development and Reform Commission on October 9, 2004, and Hebei Province Foreign Invested Project Approval Administration Interim Regulations, promulgated by the Development and Reform Commission of Hebei Province on November 19, 2004, foreign invested projects of encouraged and permitted items with total investment no more than USD 50 million shall be approved by Development and Reform department of municipal level, and total investment no more than USD 100 million by provincial level.

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On May 4, 2010, State Development and Reform Commission issued the Circular concerning Lowing the Approval Level of Foreign Investment Projects, foreign invested projects of encouraged and permitted items with total investment no more than USD 300 million can be approved by provincial authority.

According to the Foreign Investment Industry Guide Catalogue, promulgated by State Development and Reform Commission and Ministry of Commerce, revised in 2004 and 2007, steel-making and steel-rolling, the main business of the Company, are permitted items.

On March 5, 2007, 600,000 tons mid-thick steel plate project of the Company was approved Development and Reform Commission of Wu’an City. Development and Reform Commission of Wu’an City also approved the application of the Company’s adding steel-making into its business scope on April 17, 2009.

Effect of Existing or Probable Government Regulation on the Business

Before starting each of its operations or any other relevant construction project, the Company must secure approval from the Environment Protection Bureau of Hebei Province. Hongri Metallurgy must also secure a final approval once construction is completed before the operation commences.

To management’s knowledge, all current production and operating activities are in compliance with the environmental protection requirements.

Market Demand

After all is said and done, the Chinese steel industry continues to experience solid fundamental trends and favorable supply and demand dynamics. In addition to the overall improvements in China’s economy, the increased demand for steel results from several trends within the overall economy.

China’s real estate sector has been very instrumental in the growth of domestic steel demand. Housing sales growth in 2009 was solid with new starts particularly strong in the second half of the year. While housing sales have weakened a bit in the first half of 2010, China is still in early-phase of urbanization, thus the trend is expected to turn upward again.

China’s auto sales continue to increase, despite the financial crisis, due to improving consumer confidence as well as the purchase tax reduction and higher auto replacement subsidy introduced by the government.

According to the World Steel Association, China’s crude steel production in 2010 reached 626.7 mmt, an increase of 9.3% as compared to 2009.

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In its October 2010 Short Range Outlook report, the World Steel Association also reported, China’s steel use in 2010 is expected to increase by 6.7% to 579 million metric tons on top of the 24.8% increase in 2009. The pace of economic growth and steel production seen in the 1st quarter of 2010 suggests that China’s steel use could be even higher than this forecast. In 2011, the growth rate is expected to slow to 2.8%, which will bring China’s steel use to 595 million metric tons, with China accounting for 45.5% of world steel use, compared to 48.4% in 2009.

Competitive Environment

World-renown steel producers such as Shanghai Baosteel Group and Magang Group Holding Company Limited concentrate on the production of crude steel and hot-rolled steel from iron ore imported from Brazil and Australia. Hot-rolled steel coils produced by these steelmakers are then supplied as raw materials to high precision steel manufacturers, such as the Company, for further cold processing to meet specific market demand.

Regional manufacturers can be characterized into five groups, as follows.

Industry Leaders -- These firms incorporate advanced production technologies and sophisticated management teams. Regional manufacturers in this division include Handan Iron and Steel Group Co., Ltd, Xin Xing Ductile Iron Pipe Co., Ltd, and Tian Tie Group, each of which has substantial production capacity.

High End Producers -- Companies in this group integrate iron making, steel making and rolling, to produce high-end products including, billet, hot rolled plate, and hot rolled strips, and have strong production capacity. High end producers include China Industrial Steel, Wen Feng Iron and Steel Co., Ltd., and Zongheng Iron and Steel Co., Ltd.

Mid-Level “Country” Producers -- These firms produce low-end billet, steel and iron. They have ample capacity, however the quality of their products are relatively low. Companies in this group include Puyang Iron and Steel Co., Ltd. and Dongshan metallurgy Industry Co., Ltd.

Independent /Private Producers – These enterprises tend to be small and low tech, and include iron-smelting, rebar, round bar steel, ribbon steel and section steel, such as Wen An Iron and Steel Co., Ltd and Wu An Bao Feng Iron and Steel Co., Ltd

Proprietary/Specialized – There is only one specialized manufacturer in Handan – Xinxing ductile pipes co., ltd – which produces ductile iron pipe and ductile iron fittings.

Thus, while we clearly do face competition, management believes that it is well positioned within the sector to sustain considerable growth going forward. Following is a brief discussion of our strengths within the overall sector and its regional market.

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Hebei Province is the biggest iron and steel manufacturing province in China, accounting for an estimated 60% of the PRCs total production capacity, and within the province, Handan and Wuan (where our facilities are located) are the most important regions in Hebei. Management believes there are numerous advantages to be gained as a result of being headquartered in Hebei.

“Brand Name” Recognition – Hebei is associated with steel production, and as such attracts customers, management, labor and financing resources interested in the sector.

Competitive Cluster – Steel manufacturers and related companies located in Hebei are quick to hear about new strategies and innovations of their counterparts, in addition to getting feedback on their own products.

Strong Alliances Related Parties – A common shareholder has resulted in us developing an excellent working relationship with Wuan Yuan Bao Shan Industrial Group, one of biggest iron makers in local market.

Specifically within our market -- ultra-thin cold-rolled precision steel – the other regional manufacturer is Qinghuangdao Longteng Precision Strip Co., Limited, or Longteng. However, Longteng’s production capabilities are currently for cold-rolled steel with widths of approximately 400 mm, whereas our mills can provide widths of 1000 mm to 1400 mm (with a 1450 mm line in planning). Consequently, Longteng’s products are largely sold in different segments and are not considered by management to be direct competition.

In the high carbon cold-rolled steel segment, our main competition is from Shinwha Steel Co., Ltd. in Korea. There are also potential competitors currently constructing mills that are expected to produce precision and specialty steel products both for the domestic China market and for export.

Within the regional Handen market, there are currently more than 40 steel manufacturers. only Baosteel and Ansteel have annual output beyond 10 million tons. As for annual output of more than 5 million tons, 15 of China producers fall into the category, and they account for only 45%of the country’s steel output, 11 are producing between 1 and 5 million metric tons, with the remainder being small operations of less than 1 million metric tons annually. Based upon information obtained from the China Metallurgical Industry Planning and Research Institute, management estimates that approximately 65% of China’s steel production is low-end, or long products and approximately 35% are high-end, high value rolled steel strips.

Manufacturing Process

Steel is an alloy consisting mostly of iron, with carbon content between 0.2% and 2.1% by weight, depending on the grade. Carbon is the most cost-effective alloying material for iron, but various other alloying elements are also used such, as manganese, chromium, vanadium, and tungsten. These elements act as a hardening agent for the steel and by varying the amount and form (i.e., solute, precipitate) of these alloying elements in the steel, manufacturers can control certain qualities such as the hardness, ductility, and tensile strength of the resulting steel.

Making steel is essentially a three-phase process as illustrated in the following diagram. We possess one steel-making production line and three rolled production line.

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Products

Products are typically categorized as low-end (long products such as pipes, tubes, wires and rods) and high end (flat products such as hot-rolled steel or cold-rolled steel strips). We produce a limited number of high-end steel products which are used in a broad variety of manufacturing and industrial applications. Each application requires specific criteria in order to optimize the end product. We work carefully with our customers and distributors to determine the proper makeup and form of the steel that will satisfy their needs.

Following is an overview of the products that we are currently manufacturing.

Steel Billet

Steel billet is the basic material for many steel-based products. Made by molding molten liquid, and are later exposed to extremely low temperatures in order allow the metal to take shape and solidify in chemical structure. The temperature manipulates the metal’s physical properties, and tones its strength and durability. Steel billets have distinct characteristics as compared with already furnished steel bar and products. Billets have a specific grain structure, which enables the metal to be processed more intricately. We have one steel billet production line, which can produce 2.3 million tons per year.

Hot Rolled Steel Plate

Steel plate is made by hot-rolling steel from either semi-finished slabs or directly from steel billet into rectangular shapes or coils. Our facilities can produce steel bars and wire rods from a variety of steels in several different strength grades.

Reinforcing Steel

Reinforced concrete was created based on the principle that by adding a material to concrete it would be sounder structurally. Steel is the best material for reinforcing concrete because the properties of expansion for both steel and concrete are approximately the same; that is, under normal conditions, they will expand and contract at an almost equal rate. For this reason, reinforcing steel is widely used in the construction industry.

However, because the quality of reinforcing steel has direct effect on a construction project’s quality and safety, the China National Development and Reform Commission limits the number of production permits for reinforcing steel to qualified manufacturers. CIS is one of only two permitted steel makers in Handan City.

Pricing Model

We generally set prices for our customers on a month by month basis. Pricing is adjusted continually based on an evaluation of local steel market prices.

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Raw Materials

The primary raw materials necessary for production of steel are iron ore and coal. Several larger steel manufacturers have vertically integrated their business to include a mining component within their operation. We do not have any internal coal or iron mine resources, opting instead to purchase those raw materials from third parties with whom it has established relationships. Following is a list of our leading suppliers of raw materials.

	Supplier	Materials	2008 (Tons)		2009 (Tons)
1	Hebei Huafeng Coal and Power Co., Ltd.	Coke		200,000		250,000
2	Heibei Feng Coking Co., Ltd.	Coke		50,000		30,000
3	Handan Lushun Coking Co., Ltd.	Coke		50,000		50,000
4	Shanxi Xianghui Huayuan Coking., Ltd.	Coke		100,000		150,000
5	Lichengxian Changfu Gas Coking Co., Ltd.	Coke		100,000		20,000
6	Shahe Jinli Industry and Trade Co., Ltd.	Iron ore		200,000		1,500,000
7	Jizhong Energy Fengfeng Group Handan Dingfeng Logistics Co., Ltd.	Iron ore		500,000		300,000
8	Tianjin JinBarr Import& Export Co., Ltd.	Iron ore		800,000		1,300,000
9	Shandong Yuanzitong International Trading Co., Ltd.	Iron ore		400,000		900,000
10	Heibei Jiwu Metal Recycling Co., Ltd.	Iron ore		300,000		500,000
11	Wuanshi Linyongxin Trade Co., Ltd.	Iron ore		300,000		200,000
12	Wuan Weiqing Materials Trade Co., Ltd.	Iron ore		200,000		100,000

Once purchased, raw materials are delivered to a related party’s ironwork and coking plants where they are transformed into molten iron and coke, respectively, and then sent to our production facilities where they are used to manufacture our steel products. Although these plants are run by a related party, Hongri Metallurgy does pay market rate processing fees for the work. Both the raw materials purchasing price and third party processing fees are accounted for as direct costs of our steel products.

Sales and Marketing

In keeping with our strategy to maintain a lean operating infrastructure, we currently utilize distributors to sell our products as opposed to an in-house sales force. Approximately 90% of our sales are fulfilled through agents selling to established end users throughout China, including Jinan and Taian in Shandong Province, Shijiazhuang, Tangshan, Handan, and Zhengzhou.

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While the margins may be a bit lower than selling directly to the customer, the commodity nature of the our products lends itself to an agent sales marketing strategy as compared to a dedicated, and more costly “in-house” sales team. Furthermore, this strategy requires a comparatively lower investment in overhead expenses (i.e., training, marketing and salaries); market risk is undertaken by the agents, and we receive payment in advance which greatly facilitates its cash management.

The following table lists the Company’s top ten customers in 2009.

Customer name	Percentage to total sales
Wuan Jun Fa Materical and Trade Co., Ltd		11.83	%
Handan Jin Dou Materials Co., Ltd		7.19	%
Handan Dong Dou Matericals Co., Ltd		5.49	%
Wu'an Yuanbaoshan Industrial Group Co., Ltd.		5.52	%
Tangshan Xing Yu Metal Trade Co., Ltd		5.71	%
Handan Ju Mao Materials Co., Ltd		4.94	%
Handan Chang Xu Materials Co., Ltd		4.85	%
Handan You Shun Materials Co., Ltd		4.80	%
Handan Hong Shan Materials Co., Ltd.		4.33	%
Shanghai Hua Chang Yuan Industry Investment Co		5.30	%

The nature of China’s steel industry and the regional demand for high quality, cold-rolled steel, result in us having to do very little formal marketing. The majority of new orders come from current customers reducing imports and new customers who are referred by trading agents or existing customers. We do transact a small portion of our sales directly to customers via the internet; however these orders are not consistent. Looking forward, we are evaluating the feasibility of establishing an in-house distribution center to facilitate direct sales to certain end-users.

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Manufacturing Facilities

We currently operate four production lines, as outlined in the following table. Our first steel production line, with annual capacity of 1.3 million tons, was expanded 2009 to accommodate an additional 1 million tons of steel billet production annually.

		Annual
	Commission	Capacity		Output (Tons)
Project Name	Date	(Tons)		2007		2008		2009		2010
										(forecast)
Steel Production Phase I	Nov, 2007		1,300,000		32,000		584,601		1,200,000		1,200,000
Steel Production Phase II	Dec, 2009		1,000,000		123,345		700,000
Plate Production(First Stage)	Nov, 2007		600,000		30,153		496,979		580,000		350,000
Plate Production (Second Stage)	Jun, 2009		800,000		331,631		750,000
Bar Production(Third Stage)	Mar, 2009		600,000		450,000
Cumulative production	4,300,000

Environmental Regulation Compliance

We take our environmental responsibilities very seriously and works to minimize the impact of each of our facilities on the environment. Before starting each of its operations or any other relevant construction project, we must secure approval from the Environment Protection Bureau of Hebei Province. We must also secure a final approval once construction is completed before the operation commences.

Currently management is not aware of any investigations, prosecutions, disputes, claims or other proceedings in respect of environmental protection and our cold-rolled mills produce no impermissible emissions. The pickling process is outsourced to a local company which is wholly-responsible for any failure to comply with applicable law.

Quality Control

Our facilities conform to system standard GB/t 19001-2008/ISO 9001:2008. We process products in strict accordance with standard testing and substandard products are disposed of in strict accordance with the procedures to prevent the unintended use of unqualified products to ensure final product quality.

All key personnel regularly undergo further training to improve their skills to monitor the production process and maintain superior quality control.

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Employees

As of February 7, 2011, Hongri Metallurgy employed a staff of 816. The largest group is the production staff, as illustrated in the following table.

Employee Breakdown
Department	Number of Employees
Steel workshop		183
Continuous casting workshop		227
Electrical & Control and Automation workshop		227
Oxygen making workshop		80
Logistics Department		19
Laboratory Department		19
Quality inspection Department		7
Security Department		12
Dispatching Department		14
Finance Department		2
Warehouse		9
Equipment management department		1
The administrative department		3
Total Employees		816

Hongri Metallurgy maintains good relations with its employees.

Hongri Metallurgy is required to contribute a portion of its employees' total salaries to the Chinese government's social insurance funds, including medical insurance and unemployment insurance and to purchase job injuries insurance for employees, in accordance with relevant regulations. The government's social insurance funds account for 10% of employees' total salaries, while job injuries insurance premiums are about RMB 50 (approximately US$7) per person. Hongri Metallurgy expects the amount of its contribution to the government's social insurance funds and the cost related to job injuries insurance to increase in the future as it expands its workforce and operations.

Executive Offices

Our executive office in China for Hongri Metallurgy is located at Guzhen Village, Yetao Town, Wu’an City, Hebei Province, Tel: 86 310 5919498. Our company website address is: www.chinaindustrialsteel.com

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Risk of Loss And Product Liability Insurance

The Company doesn’t have any product liability insurance for its products.

DESCRIPTION OF PROPERTY

All land in the PRC is owned by the government and cannot be sold to any individual or entity. Instead, the government grants landholders a "land use right" after a purchase price for such "land use right" is paid to the government. The "land use right" allows the holder the right to use the land for a specified long-term period of time and enjoys all the incidents of ownership of the land. The following are the details regarding Hongri Metallurgy’s land use rights with regard to the land that it uses in its business.

The Company leases 956 mu (approximately 157.5 acres) of land as its manufacturing site from YBS Group, a related party. The rent for the first three years was waived per lease agreement. The annual lease payment is RMB 1,434,450 (approximately $210,147) commencing on 2011. The average lease payment is RMB 1,291,005 (approximately $189,132) per annum. The lease is set to expire on December 31, 2037. The present value of the total lease payments at inception was RMB 12,703,147 (approximately $1,861,011), which was calculated with a discount rate of 7.83%, a PRC long term borrowing rate in December 2007.

LEGAL PROCEEDINGS

Neither we nor any of our subsidiaries including Hongri Metallurgy is a party to any pending legal proceedings, nor are we aware of any such proceedings threatened against us, Hongri Metallurgy or any of our other subsidiaries.

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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth certain information with respect to the beneficial ownership of our common stock as of February 7, 2011 by (i) any person or group with more than 5% of our voting securities, (ii) each director, (iii) each executive officer and (iv) all executive officers and directors as a group.

Title of Class	Name and Address of Beneficial Owner	Common Stock Beneficially Owned (1)		Percent of Common Stock (2)
Common Stock	Liu Shenghong, Chairman of the Board of Directors (3) Address: No.1055, Guzheng Village, Yetao Town, Wu'an City, Hebei Province, PRC 056304		1,819,321	2	%

Common Stock	Liu Beifang, Director Address: No.603, Guzheng Village, Yetao Town, Wu'an City, Hebei Province, PRC 056304		37,086,143	48	%

Common Stock	Xiaolong Zhou, Chief Financial Officer Address: 110 Wall Street, 11th Floor, New York, New York, 1005		25,000		*

Common Stock	Pan Rutai, Chief Engineer and Manager, Plant Operations Address: No.347, Guzheng Village, Yetao Town, Wu'an City, Hebei Province, PRC 056304		0	0

Common Stock	Frank J. Pena, Director Address: 1590 HORSESHOE DRIVE MANASQUAN, NJ, 08736		25,000	*

Common Stock	Liu Fengye, Director Address: No.1054, Guzheng Village, Yetao Town, Wu'an City, Hebei Province, PRC 056304		1,259,530	2%

Common Stock	Liu Jihnghe, Director Address: No.580, Guzheng Village, Yetao Town, Wu'an City, Hebei Province, PRC 056304		559,751	1	%

Common Stock	All Directors and Officers of the Company as a group (7 persons)		40,774,745	52	%

*Less than 1% of the outstanding common stock.

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(1)

As of the date of this prospectus, none of the beneficial owners listed in the table holds any option, warrant or other right to acquire any shares of our common within 60 days.

	(2)	As of February 7, 2011, we had 73,552,166 outstanding shares of common stock outstanding. Because none of the beneficial owners listed in the table holds any option, warrant or other right to acquire any shares of our common within 60 days of the date of this prospectus, the calculation of percentage of class held by each owner does not include any such shares.

	(3)	Liu Shenghong, our Chairman of Board of Directors and one of the shareholders of YBS Group and other several the shareholders of YBS Group (each of them, the “Purchaser”) have entered into call option agreements, dated as of August 10, , 2010 (collectively, the “Call Option Agreements”), with our major shareholder, Karen Prudente, pursuant to which they are entitled to purchase up to 100% of the issued and outstanding shares of Karen Prudente at a price of $0.0001 per 100 shares for a period of five years as defined in the Call Option Agreements; the Option may be exercised, in whole or in part, in accordance with the following schedule: 34% of the Option Shares subject to the Option shall vest and become exercisable on January 1, 2012; 33% of the Option Shares subject to the Option shall vest and become exercisable on January 1, 2013 and 33% of the Option Shares subject to the Option shall vest and become exercisable on January 1, 2014.

DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS

The following are our officers and directors as of the date of this prospectus. Some of our officers and directors are residents of the PRC and, therefore, it may be difficult for investors to effect service of process within the U.S. upon them or to enforce judgments against them obtained from the U.S. courts.

Directors and Executive Officers of China Industrial Steel:

Name	Position	Age

Liu Shenghong	Chairman of Board, Chief Executive Officer and Chief Operating Officer	48

Xiaolong Zhou	Chief Financial Officer	59

Pan Rutai	Chief Engineer and Manager, Plant Operations	47

Frank J. Pena	Director	52

Liu Beifang	Director	72

Liu Fengye	Director	53

Liu Jihnghe	Director	55

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Liu Shenghong Mr. Liu brings 20 years of expertise in ferrous metallurgy to the Company. He has been with the Company (and/or its parent the Yuanbaoshan Group) since 1988, where he first served as the Deputy Plant Chief, then was promoted to Deputy General Manager of the Yuanbaoshan Group in 1993, where he helped increase the company’s assets from 10 million RMB to 150 million. From 1999 to 2007, he served as the Group General Manager, where he was instrumental in increasing sales to 4.8 billion RMB, with profits of 500 million RMB. In 2007 he became Chairman and General Manager of, Handan Hongri Metallurgy Co., Ltd. Mr. Liu , graduated from Hebei Tangshan Project Technology Institute in 1987.

Mr. Xiaolong Zhou was appointed as our Chief Financial Officer in February 2010. He had been a senior accountant in Liss Okou Goldstein Okun and Tancer CPA'S P.C. in Great Neck, New York for the prior nine years. He is a certified public accountant, registered in the state of New York, a member of American Institute of Certified Public Accountants, and a member of New York State Society of Certified Public Accountants. Mr. Zhou obtained an M.B.A. in accountancy degree from Baruch College of CUNY and an M.A. in economics degree from City College of CUNY. He obtained a B.A. in economics degree from Fudan University, Shanghai, China.

Pan Rutai Mr. Pan joined the Yuanbaoshan Industry Group as Production Chief of the cement division in 1983. In 1989 he joined the Company as Deputy Director of Production, a position he held for 10 years. From 2000 to 2006, he served as Factory Manager of the Company’s iron to steel production facility. In 2007 he was promoted to his current position as Chief Engineer and Manager of the Company, where he has been extremely instrumental in increasing the efficiency of the operation and reducing the energy consumption.

Frank J. Pena has spent over 27 years in the financial services arena primarily in banking, brokerage and consulting. Mr. Pena has worked on hundreds of transactions in the real estate and distressed asset arena totaling over $1.5 billion as well as raising significant equity and debt capital for both public and private companies. From January 2000 to the present day, Mr. Pena has been the Principal of Winthorp Capital Group, a boutique advisory firm that works with public and private companies in raising equity and debt capital. Prior to forming Winthorp Capital Group, Mr. Pena was the Director of Sales & Marketing for the Breen Capital Group from May 1996 to December 1999. From October 1988 until May 1996, Mr. Pena was a Vice President of First Fidelity Bank (subsequently acquired by First Union National Bank and today known as Wachovia Bank), where he was pivotal in creating First Fidelity's Municipal Tax Lien business. Mr. Pena has a BS degree from Kean University in Management Science. Mr. Pena is fluent in English and Spanish.

Liu Fengye,junior college level, party member, acted as the president of the Economics and Trade Company of Wu’an Yuanbaoshan Industrial Group from 1978 to 1995. She also served as the president of YIN SHENG Economics and Trade Company of WU’AN City from 1996 to 2006. Since 2007, Mrs. Liu has held a post of member of the board of Handan Hongri Metallurgy Co., Ltd. Enthusiastic and decisive, she is one of the best in our Group, who participated in many substantial jobs and won a reputation for us.

Liu Jinghe, junior college level, party member, is the vice president of Handan Hongri Metallurgy Co., Ltd. He served in military from 1974 to 1978. From 1983 to 1989, he acted as the manager of the Secondary Cement Factory of YUANBAOSHAN in WU’AN City and as the manager of the First Cement Factory of Wu’an Yuanbaoshan from 1990 to 1999. Since 2000, he has been the Vice President of Yuanbaoshan Industrial Group. The 20 years professional history ensured him having more practical experiences, which covers market positioning and market model of steel and iron industry. Possessing abundant experiences and updated concepts, he is precisely one of the talents our enterprise needs for healthy development.

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Lie Beifang, joined the Yuanbaoshan Industry Group as General Manger in 1989, In 1999 he Joined the company as President, a position he held for 11 years. From 2007 till now, he served as member of board of directors of Handan Hongri Metallurgy Co., Ltd., He has more than 25 years of management experience in iron industries.

The directors will serve until our next annual meeting, or until their successors are duly elected and qualified. The officers serve at the pleasure of the Board.

When evaluating candidates for election to the Board, the Company seeks candidates with certain qualities that it believes are important, including integrity, an objective perspective, good judgment, leadership skills. Our directors are highly educated and have diverse backgrounds and talents and extensive track records of success in what we believe are highly relevant positions.

The Board does not have a specific diversity policy, but considers diversity of race, ethnicity, gender, age, cultural background and professional experiences in evaluating candidates for Board membership. Diversity is important because a variety of points of view contribute to a more effective decision-making process.

None of our directors currently hold or held any directorships during the past five years in other reporting companies.

Presently, none of our directors is an “independent director” under the Corporate Governance Rules of the NASDAQ Stock Market, Inc., Rule 5605(a)(2).

There are no family relationships among our directors or officers other than; Liu Beifang is the father of Liu Shenghong, our Chairman, Chief Executive Officer and Chief Operating Officer.

To our knowledge, during the last ten years, none of our directors and executive officers (including those of our subsidiaries) has:

●	Had a bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time.

●	Been convicted in a criminal proceeding or been subject to a pending criminal proceeding, excluding traffic violations and other minor offenses.

●	Been subject to any order, judgment or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities.

●	Been found by a court of competent jurisdiction (in a civil action), the SEC, or the Commodities Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended or vacated.

●

Been the subject to, or a party to, any sanction or order, not subsequently reverse, suspended or vacated, of any self-regulatory organization, any registered entity, or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member.

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Audit Committee Financial Expert

Our board of directors currently acts as our audit committee and is still in the process of finding an “audit committee financial expert” as defined in Regulation S-K and directors that are “independent” as that term is used in Section 10A of the Exchange Act.

Audit Committee

We have not yet appointed an audit committee. At the present time, we believe that the members of Board of Directors are collectively capable of analyzing and evaluating our financial statements and understanding internal controls and procedures for financial reporting. We do, however, recognize the importance of good corporate governance and intend to appoint an audit committee comprised entirely of independent directors, including at least one financial expert, in the near future.

Compensation Committee

We do not presently have a compensation committee. Our board of directors currently acts as our compensation committee.

Nominating Committee

We do not presently have a nominating committee. Our board of directors currently acts as our nominating committee.

Board Leadership Structure

Liu Shenghong is our chairman. At the advice of other members of the management or the Board, Mr. Liu calls meetings of Board of Directors when necessary. The Board believes that the Company's Chief Executive Officer is best situated to serve as chairman of the Board because she is the director most familiar with our business and industry and the director most capable of identifying strategic priorities and executing our business strategy. In addition, having a single leader eliminates the potential for confusion and provides clear leadership for the Company. We believe that this leadership structure has served the Company well.

The Board’s Role in Risk Oversight

Risk is an integral part of the Board's deliberations throughout the year. The Board oversees and reviews an assessment prepared by management of the critical risks facing the Company, their relative magnitude and management’s actions to mitigate these risks.

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EXECUTIVE COMPENSATION

The following table reflects the compensation paid to our principal executive officer. None of our executive officers earned more than $100,000 in any of the previous two fiscal years.

Name and Principal Position	Fiscal Year	Salary ($)		Bonus ($)	Stock Awards ($)		Option Awards ($)		Non-Equity Incentive Plan Compensation ($)		Non- Qualified Deferred Compensation Earnings ($)		All Other Compensation ($)		Total ($)

Liu Shenghong,	2010									—		—		—
Chairman, Chief Executive	2009									—		—		—
Officer and Chief Operating Officer

Xialong Zhou,	2010	$	48,750			—		—		—		—		—	$	48,750
Chief Financial Officer	2009					—		—		—		—		—

Pan Rutai, Chief Engineer and	2010
Manager, Plant Operations	2009

Outstanding Equity Awards at 2010 Fiscal Year End

There were no option exercises or options outstanding in the year ended December 31, 2010.

Employment Agreements

There are currently no employment agreements with any officers or directors

Director Compensation

We have not had compensation arrangements in place for members of our board of directors and have not finalized any plan to compensate directors in the future for their services as directors. We may develop a compensation plan for our independent directors in order to attract qualified persons and to retain them. We expect that the compensation arrangements may be comprised of a combination of cash and/or equity awards.

Notwithstanding the foregoing, generally, we pay no compensation to the directors for serving as a director. There are no other elements of compensation paid to our directors but it is expected that in the future, we may create a remuneration and expense reimbursement plan.

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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Related parties can include any of our directors or executive officers, certain of our stockholders and their immediate family members. A conflict of interest occurs when an individual’s private interest interferes, or appears to interfere, in any way with the interests of the Company as a whole.

In evaluating related party transactions and potential conflicts of interest, our board of directors apply the same standards of good faith and fiduciary duty they apply to their general responsibilities. They will approve a related party transaction only when, in their good faith judgment, the transaction is in the best interest of the Company.

Hongri Metallurgy is 70% owned by YBS Group, who is a major shareholder of some other steel production related companies, mainly Hongrong Iron and Steel Co. Ltd. (“Hongrong”), Wu'an Baoye Coke Industrial Co. Ltd.(“Baoye”), Wu'an Yuanbaoshan Cement Plant, Wu'an Yuanbaoshan Ore Treatment Plant (“Ore Plant”), Wu'an Yuanbaoshan Industrial Group Go. Ltd - Gas Station and Wu’an Yeijin Iron Co. Ltd. (“Yeijin”). During the routine business process, Hongri Metallurgy purchases raw materials and supplies from these companies and advanced to or owed cash to these companies.

The relationships and the nature of related party transactions are summarized as follow:

Name of Related Party	Owned by YBS			Relationship to Company	Nature of Transactions
Wu'an Yuanbaoshan Industrial Group Co. Ltd	Self			70% parent	Services, information and public relationship, and coordination
Wu'an Yuanbaoshan Industrial Group Co. Ltd - Gas Station		100	%	Affiliated company	Supplier of gas
Wu'an Hongrong Iron & Steel Co. Ltd		67	%	Affiliated company	Supplier of molten iron
Wu'an Baoye Coke Industrial Co. Ltd.		49	%	Affiliated company	Supplier of coke
Wu'an Yuanbaoshan Cement Plant		36	%	Affiliated company	Supplier of cement
Wu'an Yuanbaoshan Ore Treatment Plant		33	%	Affiliated company	Supplier of granular
Wu’an Yeijin Iron Co. Ltd		31	%	Affiliated company	Supplier of iron

U.S. GAAP requires consolidation when an entity holds a controlling interest in another entity (often in the form of control through voting interests) or if the entity meets the requirements of a variable interest entity (“VIE”). The Company has no direct control of the affiliated companies, noted above, through voting interest. However, because the Company has a variable interest in some of these affiliated companies via the supply relationship noted above (i.e. an implied relationship), the Company is required to determine whether such affiliates are VIE’s and, if so, whether the Company is the primary beneficiary so that consolidation must occur. A VIE has the following characteristics in accordance with ASC 810-10-15-14: insufficient equity investment at risk; equity lacks decision-making rights; equity with nonsubstantive voting rights; lacking the obligation to absorb an entity’s expected losses and lacking the right to receive an entity’s expected residual returns. The Company’s analysis concluded that such affiliates were not VIE’s.

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The Company purchased raw materials from above-mentioned related parties, received services from parent company, and had advances and accounts payable to these related parties in the routine business operations. Advances to related parties and accounts payable - related parties consisted of:

Advances to Related Parties
	As of September 30,			As of December 31,
Name of related parties	2010			2009
Wu'an Yuanbaoshan Industrial Group Co. Ltd	$	53,094,193		$	20,611,677
Wu'an Hongrong Iron & Steel Co. Ltd		-			19,943,131
Wu'an Yuanbaoshan Ore Treatment Plant		216,241			-
Total Advance to Related Parties	$	53,310,434		$	40,554,808

(Accounts Payable) - Related Parties
Name of related parties		2010			2009
Wu'an Yuanbaoshan Industrial Group Co. Ltd	$	-		$	-
Wu'an Yuanbaoshan Industrial Group Co. Ltd - Gas Station		(629,750	)		(606,938	)
Wu'an Hongrong Iron & Steel Co. Ltd		(6,032,640	)		-
Wu'an Baoye Coke Industrial Co. Ltd.		(4,288,356	)		(5,528,680	)
Wu'an Yuanbaoshan Cement Plant		(97,503	)		(78,132	)
Wu'an Yuanbaoshan Ore Treatment Plant		-			(635,657	)
Wu'an Yeijin Iron Co. Ltd		(3,359,209	)		(3,292,461	)
Total (Accounts Payable) - Related Parties	$	(14,407,458	)	$	(10,141,868	)

Advances to Related Parties and Accounts Payable - Related Parties, Net	$	38,902,976		$	30,412,940

On November 30, 2007, the Company purchased Oxygen-Making I production line and related auxiliary equipment at a price of RMB 18,207,877 (approximately $2,496,300) from YBS Group. The Company repaid RMB 18,207,877 (approximately $2,496,300) to YBS Group in 2007.

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On November 30, 2007, the Company purchased Plate-Rolling I production line and related auxiliary equipment at a price of RMB 191,163,559 (approximately $26,208,524) from YBS Group. YBS Group provided a 10 year seller-financed loan to the Company to finance the purchase. The loan bears interest at 5% per annum, and has a fixed repayment schedule at RMB 17,973,455 (approximately $2,686,492) per annum. The remaining balance is to be paid equally in the years of 2016 and 2017. The Company repaid RMB 17,973,455 (approximately $2,633,111) and RMB 17,973,455 (approximately $2,634,909) in 2009 and 2008, respectively.

On November 30, 2007, the Company purchased Steel-Making I production line and related auxiliary equipment at a price of RMB 326,028,440 (approximately $44,698,499) from Hongrong. Hongrong provided a 10 year seller-financed loan to the Company to finance the purchase. The loan bears interest at 5% per annum, and has a fixed repayment schedule at RMB 30,414,021 (approximately $4,545,984) per annum. The remaining balance is to be paid equally in the years of 2016 and 2017. The Company repaid RMB 30,414,021 (approximately $4,455,654) and RMB 30,414,021 (approximately $4,458,695) in 2009 and 2008, respectively. Company made additional payments of RMB 100,000,000 (approximately $14,650,000) during 2009.

On November 30, 2009, the Company purchased Steel-Making II production line and related auxiliary equipment at a price of RMB 243,811,599 (approximately $35,718,399) from YBS Group. YBS Group provided a 10 year seller-financed loan to the Company to finance the purchase. The loan bears interest at 5% per annum, and has a fixed repayment schedule at RMB 24,380,000 (approximately $3,644,079) per annum. The remaining balance is to be paid equally in the years of 2017 and 2018. The Company repaid RMB 24,380,000 (approximately $3,571,670) in 2009.

On November 30, 2009, the Company purchased Bar-Rolling III production line and related auxiliary equipment at a price of RMB 141,606,756 (approximately $20,745,390) from Hongrong. Hongrong provided a 10 year seller-financed loan to the Company to finance the purchase. The loan bears interest at 5% per annum, and has a fixed repayment schedule at RMB 14,000,000 (approximately $2,092,580) per annum. The remaining balance is to be paid equally in the years of 2017 and 2018. The Company repaid RMB 141,606,756 (approximately $20,745,390) in full in 2009.

The Company also leases the land and the manufacturing buildings where the above-mentioned production lines are situated from YBS Group and Hongrong under various capital leases (see Note 8).

The Company paid accrued interest totaling RMB 17,334,635 (approximately $2,540,390) for the years 2008 and 2009 to YBS Group in 2009.

Company paid accrued interest totaling RMB 23,040,741 (approximately $3,376,947) for the years 2008 and 2009 to Hongrong in 2009.

Commencing February 2010, the Company purchased its raw material – molten iron from Hongrong directly instead of sub-contracting processing of molten iron from Hongrong. During the nine months ended September 30, 2010, the Company purchased 659,140 tons of molten iron from Hongrong. The average purchase price was $384 per ton. Total purchase and fees paid to Hongrong was $255,337,903 and $13,503,923 for the nine months ended September 30, 2010 and 2009, respectively.

The Company purchased $2,911,043 and $34,698,242 raw materials from Baoye during nine months ended September 30, 2010 and 2009, respectively.

During nine months ended September 30, 2010, the Company purchased $2,047,957 raw materials from third parties through YBS Group and $1,794,299 from Ore Plant.

The Company sold its products to third parties through YBS group amounted $22,951,936 and $19,688,091 for the nine months ended September 30, 2010 and 2009, respectively.

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Equipment Loans Payable – Related Parties

Equipment loan payables – related parties consisted of:

	As of September 30,			As of December 31,
Equipment Loans Payable	2010			2009
Equipment loan - YBS Group payable	$	55,998,674		$	54,885,968
Equipment loan - Hongrong payable		24,692,503			24,201,859
Total equipment loans payable		80,691,177			79,087,827
Less: current portion		(10,876,555	)		(10,660,435	)
Long-term payable	$	69,814,622		$	68,427,392

The detail of various equipment loans follows:

YBS Group Loan Payable	Total Loans and Accrued Interests Payable			Accrued Loan Interests			Steel-Making II production line and related auxiliary equipment loan interest at 5% per annum, due December 31, 2018			Plate-Rolling I production line and related auxiliary equipment loan interest at 5% per annum, due December 31, 2017

Balance at December 31, 2008	$	26,659,152		$	1,269,483		$	-		$	25,389,669
Acquired in 2009		35,718,399			-			35,718,399			-
Accrued interest		1,270,907			1,270,907			-			-
Repayment in 2009		(8,745,171	)		(2,540,390	)		(3,571,670	)		(2,633,111	)
Effect of exchange rate		(17,319	)		-			-			(17,319	)
Balance at December 31, 2009		54,885,968			-			32,146,729			22,739,239
Accrued interest		2,063,843			2,063,843			-			-
Effect of exchange rate		1,148,813			36,107			651,712			460,994
Balance at September 30, 2010	$	58,098,624		$	2,099,950		$	32,798,441		$	23,200,233

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Hongrong Loan Payable	Total Loans and Accrued Interest Payable			Accrued Loan Interests			Bar-Rolling III production line and related auxiliary equipment loan interest at 5% per annum, due December 31, 2018			Steel-Making I production line and related auxiliary equipment loan interest at 5% per annum, due December 31, 2017
Balance at December 31, 2008	$	45,503,928		$	2,166,854		$	-		$	43,337,074
Acquired in 2009		20,746,855			-			20,746,855			-
Accrued interest		1,210,093			1,210,093			-			-
Repayment in 2009		(43,229,456	)		(3,376,947	)		(20,746,855	)		(19,105,654	)
Effect of exchange rate		(29,561	)		-			-			(29,561	)
Balance at December 31, 2009		24,201,859			-			-			24,201,859
Accrued interest		910,048			910,048			-			-
Effect of exchange rate		506,565			15,921			-			490,644
Balance at September 30, 2010	$	25,618,472		$	925,969		$	-		$	24,692,503

DESCRIPTION OF OUR SECURITIES

The following is a summary description of our capital stock and certain provisions of our Articles of Incorporation, as amended and corrected, our By-laws, and certain applicable provisions of Maryland law.

General

We have common stock and preferred stock authorized, but only common stock issued and outstanding.

Common Stock

The holders of our common stock are entitled to one vote per share on all matters to be voted on by the stockholders and are not entitled to cumulative voting in the election of directors. Holders of common stock are entitled to any dividends that may be declared from time to time by the Board of Directors in its discretion out of funds legally available therefor, subject to the prior rights, if any, of holders of any outstanding shares of preferred stock and any contractual restrictions we have against the payment of dividends on common stock. In the event of our liquidation or dissolution, holders of common stock are entitled to share ratably in all assets remaining after payment of liabilities and the liquidation preferences of any outstanding shares of preferred stock. Holders of common stock have no preemptive or other subscription rights and no right to convert their common stock into any other securities.

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Preferred Stock

The articles of incorporation of the Company provide for 20,000,000 authorized preferred stock, par value $0.0001 of which 10,000,000 shares of Series A Convertible Preferred Stock, $0.0001 par value, are authorized, 0 issued and outstanding as of February 7, 2011 and 10,000,000 shares of Blank Check Preferred Stock, $0.0001 par value, are authorized, 0 issued and outstanding as of February 7, 2011.

Registration Rights

None.

LEGAL MATTERS

Our legal counsel, Sichenzia Ross Friedman Ference LLP, located at 61 Broadway, New York, New York 10006, is passing upon the validity of the issuance of the common stock that we are offering under this prospectus.

EXPERTS

Friedman LLP, has audited our consolidated financial statements included in this registration statement as of and for each of the years and the periods ended December 31, 2009, 2008 and 2007.

INTEREST OF NAMED EXPERTS AND COUNSEL

No "expert" or "counsel," as defined by Item 509 of Regulation S-K promulgated pursuant to the Securities Act, whose services were used in the preparation of this Form S-1, was hired on a contingent basis or will receive a direct or indirect interest in us, nor was any of them a promoter, underwriter, voting trustee, director, officer or employee of the Company.

DISCLOSURE OF COMMISSION POSITION OF INDEMNIFICATIONFOR SECURITIES ACT LIABILITIES

Our Articles of Incorporation provide that we will indemnify our directors and officers from all liabilities incurred by them in connection with any action, suit or proceeding in which they are involved by reason of their acting as our directors and officers to the fullest extent provided by Maryland law.

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Insofar as indemnification for liabilities arising under the Securities Act may be permitted to our directors, officers and controlling persons pursuant to the foregoing provisions, or otherwise, we have been informed that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by us of expenses incurred or paid by a director, officer or controlling person in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, we will, unless in the opinion of our counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by us is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS

None.

WHERE YOU CAN FIND MORE INFORMATION

The registration statement and other information may be read and copied at the SEC's Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains a web site (http://www.sec.gov) that contains the registration statements, reports, proxy and information statements and other information regarding registrants that file electronically with the SEC such as us.

You may also read and copy any reports, statements or other information that we have filed with the SEC at the addresses indicated above and you may also access them electronically at the web site set forth above. These SEC filings are also available to the public from commercial document retrieval services.

We are not currently required to file reports with the SEC; however, we intend to begin filing periodic reports with the SEC if and when the registration statement becomes effective. We are not currently required to deliver an annual report to stockholders, and we do not currently intend to deliver an annual report to stockholders until we are required to do so.

FINANCIAL STATEMENTS

Hongri Metallurgy’s consolidated financial statements for the years ended December 31, 2009 and 2008 and for the period from March 7, 2007 (Inception) through December 31, 2007, and for the quarters ended September 30, 2010 and September 30, 2009, and together with the report of the independent registered public accounting firm thereon and the notes thereto are presented beginning at page F-1.

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INDEX TO FINANCIAL STATEMENTS

	Page

Report of Independent Registered Public Accounting Firm	F-1

Consolidated Balance Sheets as of December 31, 2009 and 2008 and 2007	F-2

Consolidated Statements of Operations Years ended December 31, 2009 and 2008 and for the Period from March 7, 2007 (Inception) through December 31, 2007	F-3

Consolidated Statements of Stockholders’ Equity Years ended December 31, 2009 and 2008 and for the Period from March 7, 2007 (Inception) through December 31, 2007	F-4

Consolidated Statements of Cash Flows Years ended December 31, 2009 and 2008 and for the Period from March 7, 2007 (Inception) through December 31, 2007	F-5

Notes to Audited Consolidated Financial Statements	F-6

Index

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

China Industrial Steel Inc. and Subsidiaries

We have audited the accompanying consolidated balance sheets of China Industrial Steel Inc. and Subsidiaries (the “Company”) as of December 31, 2009, 2008, and 2007, and the related consolidated statements of operations and other comprehensive income, changes in stockholders’ equity, and cash flows for the period of inception (March 7, 2007) through December 31, 2007 and each of the years in the two-year period ended December 31, 2009. The Company’s management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2009, 2008 and 2007, and the consolidated results of its operations and its cash flows for the period of inception (March 7, 2007) through December 31, 2007 and each of the years in the two-year period ended December 31, 2009 in conformity with accounting principles generally accepted in the United States of America.

/s/Friedman LLP

Marlton, NJ

January 12, 2011

F-1

Index

CHINA INDUSTRIAL STEEL INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In US Dollars)

	As of December 31,
	2009		2008		2007

ASSETS
Current Assets:
Cash and cash equivalents	$	2,524,530	$	211,272	$	3,746,990
Restricted cash		1,758,000		-		-
Bank notes receivable		1,820,844		366,500		2,336,499
Accounts receivables, net		7,474,509		953,797		22,553
Inventories, net		25,229,112		77,758,212		3,168,386
Advances to suppliers		19,266,964		40,500,000		5,951,524
VAT tax recoverable		8,425,784		10,048,160		-
Advance to related parties		40,554,808		1,326,216		2,978,006
Total Current Assets		107,054,551		131,164,157		18,203,958

Machinery and Equipment, Net		186,622,582		105,384,574		85,188,665

Land use rights and buildings under capital leases		6,424,121		6,022,720		6,129,252

TOTAL ASSETS	$	300,101,254	$	242,571,451	$	109,521,875

LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current equipment loan payables - related parties	$	10,660,435	$	10,529,941	$	6,633,923
Current obligations under capital leases		450,602		352,052		305,331
Employee loan payable		684,070		-		-
Bank notes payable		2,930,000		-		-
Accounts payable		76,818,564		63,256,104		429,962
Accounts payable - related parties		10,141,868		34,737,101		1,435,628
Accrued liabilities		5,811,369		7,213,544		3,388,958
VAT and other tax payables		1,889,592		1,468,230		342,784
Advances from customers		15,696,610		19,017,297		14,977,745
Total Current Liabilities		125,083,110		136,574,269		27,514,331

Long Term Liabilities:
Equipment loans payable - related parties, net of current portion		68,427,392		58,196,802		64,273,100
Employee loan payable		-		684,537		-
Obligation under capital leases		6,660,049		6,021,240		5,823,921
Total Long Term Liabilities		75,087,441		64,902,579		70,097,021

TOTAL LIABILITIES		200,170,551		201,476,848		97,611,352

Commitments and Contingencies

Stockholders' Equity:
Series A Convertible Preferred Stock, $0.0001 par value, 10,000,000 shares authorized, none issued and outstanding		-		-		-
Blank Check Preferred Stock, $0.0001 par value, 10,000,000 shares authorized, none issued and outstanding		-		-		-
Common stock, $0.0001 par value, 980,000,000 authorized, 61,576,992 issued and outstanding at December 31, 2009, 2008 and 2007		6,158		6,158		6,158
Additional paid-in capital		12,357,466		12,357,466		12,357,466
Statutory reserves		6,530,869		3,342,882		-
Retained earnings		78,617,601		23,644,611		(860,587	)
Accumulated other comprehensive income		2,418,609		1,743,486		407,486
Total Stockholders' Equity		99,930,703		41,094,603		11,910,523
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	300,101,254	$	242,571,451	$	109,521,875

The accompanying notes are an integral part of these audited consolidated financial statements.

F-2

Index

CHINA INDUSTRIAL STEEL INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE INCOME

(In US Dollars)

	For the Year Ended						For the Period March 7, 2007 (Inception) to
	December 31,						December 31,
	2009			2008			2007

Net Revenues	$	556,754,960		$	359,057,857		$	13,466,606

Cost of Revenue		494,618,181			325,840,655			14,022,531

Gross Profit		62,136,779			33,217,202			(555,925	)

Selling and General and Administrative Expenses		876,580			1,082,399			29,575

Income (Loss) From Operations		61,260,199			32,134,803			(585,500	)

Other Income (Expenses)
Interest income		14,000			61,962			2,174
Interest expense		(3,113,222	)		(4,337,514	)		(10,470	)
Other expenses		-			(11,171	)		-
Total Other Income (Expenses)		(3,099,222	)		(4,286,723	)		(8,296	)

Income (loss) from operations before income tax		58,160,977			27,848,080			(593,796	)
Provision for income tax		-			-			266,791
Net Income (Loss)	$	58,160,977		$	27,848,080		$	(860,587	)

Other Comprehensive Income (Loss):
Foreign currency translation adjustment		675,123			1,336,000			407,486
Comprehensive Income (Loss)	$	58,836,100		$	29,184,080		$	(453,101	)

Net Income (Loss) Per Share -
Basic and Diluted	$	0.94		$	0.45		$	(0.01	)
Weighted Average Shares Outstanding - Basic and Diluted		61,576,992			61,576,992			61,576,992


The accompanying notes are an integral part of these audited consolidated financial statements.

F-3

Index

CHINA INDUSTRIAL STEEL INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008, AND PERIOD ENDED DECEMBER 31, 2007

(In US Dollars)

	Preferred Stock				Common Stock				Additional Paid-In			Statutory		Retained			Accumulated Other Comprehensive
	Shares		Amount		Shares		Amount		Capital			Reserves		Earnings			Income		Total
Balance as of March 7, 2007 - Inception		-	$	-		61,576,992	$	6,158	$	(6,158	)	$	-	$	-		$	-	$	-
Capital contribution		-		-		-		-		12,363,624			-		-			-		12,363,624
Net loss		-		-		-		-		-			-		(860,587	)		-		(860,587	)
Foreign currency translation adjustment		-		-		-		-		-			-		-			407,486		407,486
Balance as of December 31, 2007		-		-		61,576,992		6,158		12,357,466			-		(860,587	)		407,486		11,910,523
Allocation of statutory reserves		-		-		-		-		-			3,342,882		(3,342,882	)		-		-
Net income		-		-		-		-		-			-		27,848,080			-		27,848,080
Foreign currency translation adjustment		-		-		-		-		-			-		-			1,336,000		1,336,000
Balance as of December 31, 2008		-		-		61,576,992		6,158		12,357,466			3,342,882		23,644,611			1,743,486		41,094,603
Allocation of statutory reserves		-		-		-		-		-			3,187,987		(3,187,987	)		-		-
Net income		-		-		-		-		-			-		58,160,977			-		58,160,977
Foreign currency translation adjustment		-		-		-		-		-			-		-			675,123		675,123
Balance as of December 31, 2009		-	$	-		61,576,992	$	6,158	$	12,357,466		$	6,530,869	$	78,617,601		$	2,418,609	$	99,930,703

The accompanying notes are an integral part of these audited consolidated financial statements.

F-4

Index

CHINA INDUSTRIAL STEEL INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In US Dollars)

	For the Year Ended						For the Period March 7, 2007 (Inception) to
	December 31,						December 31,
	2009			2008			2007
Cash Flows from Operating Activities:
Net Income (Loss)	$	58,160,977		$	27,848,080		$	(860,587	)
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities:
Allowance for doubtful accounts receivable		184,132			53,659			-
Allowance for lower of cost or market inventory valuation		(360,292	)		2,552,845			96,633
Depreciation		10,230,713			9,404,415			1,356,168
Amortization of land use rights and buildings under capital leases		530,882			531,244			-
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivables		(6,627,595	)		(966,598	)		(22,553	)
(Increase) decrease in bank notes receivable		(1,437,218	)		2,093,509			(2,336,499	)
(Increase) decrease in inventories		52,212,222			(75,480,957	)		(3,266,377	)
(Increase) decrease in advance to suppliers		20,952,103			(33,521,351	)		(5,951,524	)
(Increase) decrease in prepaid expenses		1,596,224			(9,867,211	)		-
(Increase) decrease in advance to related parties		(38,760,885	)		1,824,682			(2,978,006	)
Increase (decrease) in accounts payable		13,443,084			61,665,501			429,962
Increase (decrease) in accounts payable - related parities		(24,278,021	)		32,604,087			1,435,628
Increase (decrease) in accrued liabilities		(1,380,564	)		3,525,112			3,388,958
Increase (decrease) in bank notes payable		2,930,000			-			-
Increase (decrease) in advances from customers		(3,268,203	)		2,947,651			14,977,745
Increase (decrease) in VAT and other tax payables		417,318			1,081,854			342,784
Net Cash Provided by Operating Activities		84,544,877			26,296,522			6,612,332

Cash Flows from Investing Activities:
Capital expenditures		(35,121,084	)		(23,869,851	)		(4,349,299	)
Net Cash Used in Investing Activities		(35,121,084	)		(23,869,851	)		(4,349,299	)

Cash Flows from Financing Activities:
Contribution to paid-in capital		-			-			3,552,354
Repayment of equipment loans - related parties		(46,059,634	)		(7,093,604	)		(2,496,300	)
Payment to obligation under capital leases		(192,359	)		(177,418	)		-
Restricted cash		(1,758,000	)		-			-
Proceeds from employee loan		-			684,537			-
Net Cash Provided by (Used in) Financing Activities		(48,009,993	)		(6,586,485	)		1,056,054

Effect of Exchange Rate Changes on Cash		899,458			624,096			427,903
Net Increase (Decrease) in Cash and Cash Equivalents		2,313,258			(3,535,718	)		3,746,990
Cash and Cash Equivalents - Beginning of the Period		211,272			3,746,990			-

Cash and Cash Equivalents - End of the Period	$	2,524,530		$	211,272		$	3,746,990

Supplemental Cash Flow Information:
Interest Paid	$	5,885,927		$	586,852		$	10,470
Income taxes	$	-		$	266,791		$	-

Non Cash Transaction:
Acquired equipment from related parties through long term loans	$	56,463,789		$	-		$	73,403,323
Initial capital contribution in the form of equipment	$	-		$	-		$	8,811,270
Land use rights and buildings under capital leases	$	936,391		$	-		$	6,129,252

The accompanying notes are an integral part of these audited consolidated financial statements.

F-5

Index

CHINA INDUSTRIAL STEEL INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

1.	Organization and Basis of Presentation

Organizations

China Industrial Steel Inc. (“CIS”) was incorporated January 27, 2010 under the laws of the State of Maryland. The Company is a holding Company to develop business opportunities in the People’s Republic of China (“PRC”).

On February 5, 2010, CIS formed a wholly-owned subsidiary, Northern Steel Inc. (“Northern”) under the laws of the State of Colorado to facilitate the Company’s operations in China.

On July 15, 2010, Northern formed its wholly owned foreign enterprise in Handan City, Hebei Province, China, Nuosen (Handan) Trading Co., Ltd (“Nuosen”), under the laws of China. Nuosen is a management company to manage operations in China.

Handan Hongri Metallurgy Co., Ltd. (“Hongri”) is a Chinese company located at Handan City, Hebei Province, China. Hongri was incorporated under the Chinese laws on March 7, 2007 with registered capital of Renminbi (“RMB”) 90,489,999 (approximately $12 million US dollars). Hongri is primarily engaged in the business of manufacturing and selling steel plate, steel bars and steel billets for domestic customers.

Hebei Wu’an Yuanbaoshan Industry Group Co., Ltd (“YBS Group”) is an enterprise incorporated and existing within the territory of China. YBS Group owns 70% equity interest of Hongri.

Fakei Investment (Hong Kong) Ltd (“Fakei”) is an enterprise incorporated in Hong Kong. Fakei owns 30% equity interest of Hongri.

On August 1, 2010, CIS, through Northern and its wholly owned foreign enterprise, Nuosen, entered into Entrusted Management Agreement, Exclusive Option Agreement, and Covenants Agreement (collectively, the “Entrusted Agreements”) with Hongri and shareholders of Hongri, YBS Group and Fakei. The effect of the Entrusted Agreements is to cede control of management and economic benefits of Hongri to Nuosen. As a consideration, CIS issued 44,083,529 restricted shares of its common stock, par value $0.0001, to Karen Prudente, a nominee and trustee for the shareholders of YBS Group entering into the Entrusted Agreements with Nuosen. CIS also issued 17,493,463 restricted shares of its common stock to the shareholders of Fakei in consideration for Fakei entering into the Entrusted Management Agreement with Nuosen.

According to the Call Option Agreements, Karen Prudente would transfer all restricted shares of our common stock that she received to the shareholders of YBS Group subject to the terms and conditions thereunder and entrust the shareholders of YBS Group with her voting rights in the Company. For accounting purposes, the above transactions were accounted for in a manner similar to a reverse merger or recapitalization, since the former equity shareholders of Hongri now effectively owns a majority of CIS’ common stock immediately following the transactions. Consequently, the assets and liabilities and historical operations reflected in the consolidated financial statements prior to the transactions are those of Hongri and are recorded at the historical cost of Hongri, and the consolidated financial statements after completion of the transactions include the assets and liabilities of CIS, Northern, Nuosen, and Hongri (collectively, CIS or the “Company”), historical operations of Hongri, and operations of CIS, Northern, Nuosen and Hongri from the date of the transaction. The 44,083,529 restricted shares of common stock issued to Karen Prudente and 17,493,463 restricted shares of common stock issued to Fakei were presented as of the beginning of the first period presented in the accompanying consolidated financial statements.

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Index

CIS through Hongri, its operating company in China, produces and sells steel plates, steel bars and steel billets. The Company currently operates four production lines with an aggregate production capacity of 2.3 million metric tons of steel per year from its headquarters on approximately 1,000 acres in Handan City, Hebei Province, China. Most of the Company’s products are domestically sold in China.

Basis of Presentation

The accompanying consolidated financial statements have been prepared in order to present the financial position and results of operations in accordance with the accounting principles generally accepted in the United States of America (“U.S. GAAP”) and are expressed in U.S. dollars. The consolidated financial statements include the historical operations of Hongri. The 44,083,529 restricted shares of common stock issued to Karen Prudente, a trustee, and 17,493,463 restricted shares of common stock issued to Fakei were presented as of the beginning of the first period presented in the accompanying consolidated financial statements.

2.	Summary of Significant Accounting Policies

Use of Estimates

In preparing the consolidated financial statements in conformity with U.S. GAAP, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the dates of the consolidated financial statements, as well as the reported amounts of revenues and expenses during the reporting year. Significant estimates, required by management, include bad debt allowance, recoverability of long-lived assets and the valuation of inventories. Actual results could differ from those estimates.

Fair Value of Financial Instruments

The Company’s financial instruments consist of cash and cash equivalents, restricted cash, bank notes receivable, accounts receivable, net, advances to suppliers, VAT tax recoverable, advance to related parties, current portion of equipment loan payables and accrued interest – related parties, employee loan and accrued interest payable, bank notes payable, accounts payable, accrued liabilities, VAT and other tax payables, advances from customers, and accounts payable - related parties. The fair value of these financial instruments approximate their carrying amounts reported in the balance sheets due to their short-term maturity or by comparison to other instruments with similar terms.

The company evaluated the fair value of the equipment loans payable – related parties, net of current portion at the year end of 2009, 2008 and 2007, and determined that the book value of equipment loans payable approximated the fair market value based on information available as of December 31, 2009, 2008 and 2007.

Cash and Cash Equivalents

The Company considers all highly liquid investments with original maturity periods of three months or less to be cash equivalents.

Accounts Receivable

Accounts receivable consists of balances due from customers for the sale of the Company’s steel products. Accounts receivable is recorded at the net realizable value consisting of the carrying amount less an allowance for uncollectible amounts.

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Index

The Company estimates the valuation allowance for anticipated uncollectible receivable balances after taking into consideration industry experience, the current economic climate and facts and circumstances specified to the applicable customer. When facts subsequently become available to indicate that the amount provided as the allowance need be modified, an adjustment in the current period is made.

Inventories

Inventories are stated at the lower of cost, as determined on a weighted average basis or market. Costs of inventories include the purchase price and related manufacturing costs incurred in bringing the products to their present location and condition. Market value is determined by reference to selling prices or to management’s estimates based on prevailing market conditions. Management writes down the inventories to market value if it is below cost and also regularly evaluates the composition of its inventories to identify slow-moving and obsolete inventories to determine if a valuation allowance is required.

Advances to Suppliers

In order to ensure a steady supply of raw materials, the Company is required from time to time to make cash advances when placing its purchase orders. Management regularly evaluates the balance of advances and will make a reserve if necessary.

Machinery and Equipment

Machinery and equipment are stated at cost less accumulated depreciation. The cost of an asset comprises its purchase price and any directly attributable costs of bringing the asset to its present working condition and location for its intended use.

Depreciation is computed on a straight-line basis over the estimated useful lives of the related assets. The estimated useful lives for significant machinery and equipment are as follows:

Machineries	10 years
Office equipment	3 – 5 years
Motor vehicles	5 years

Repairs and maintenance costs are normally charged to the statement of operations in the year in which they are incurred. In situations where it can be clearly demonstrated that the expenditure has resulted in an increase in the future economic benefits expected to be obtained from the use of the asset, the expenditure is capitalized as an additional cost of the asset.

Construction in Progress

Construction in progress includes direct costs of construction or acquisition and design fees incurred. Capitalization of these costs ceases and the construction in progress is transferred to plant and equipment when substantially all the activities necessary to prepare the assets for their intended use are completed. No depreciation is provided until it is completed and ready for its intended use.

Land Use Rights and Buildings under Capital Leases

Land use rights and buildings are operated under lease agreements. The lease of land use rights and building meet capital lease criteria and are capitalized at lower of the present value of the related lease payments or the fair value of the leased assets at the inception of the lease. Amortization is calculated on the straight-line method based on the lease term.

Impairment of Long-Lived Assets

The Company evaluates potential impairment of long-lived assets, in accordance with Accounting Standards Codification (“ASC”) 360, Property, Plant and Equipment, which requires the Company to evaluate a long-lived asset for recoverability when there is an event or circumstance that indicates the carrying value of the asset may not be recoverable. An impairment loss is recognized when the carrying amount of a long-lived asset or asset group is not recoverable (when carrying amounts exceed the gross, undiscounted cash flows from use and disposition).

F-8

Index

Advances from Customer

Customer advances consist of amounts received from customers relating to the sales of the Company’s steel products. The Company recognizes these funds as a current liability until the revenue can be recognized.

Revenue Recognition

The Company recognizes revenues under FAS Codification Topic 605 (“ASC 605”). Revenue is recognized when all of the following have occurred: (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred or services have been rendered, (iii) the price is fixed or determinable, and (iv) the ability to collect is reasonably assured. These criteria are generally satisfied by the Company at the time of delivery for sales, which is the point when risk of loss and title passes to the customer. Revenue is reported net of all value added taxes. The Company does not routinely permit customers to return products and historically, customer returns have been immaterial.

Cost of Revenue

Costs of revenue include costs of raw materials purchased, inbound freight costs, cost of direct labor, depreciation expense and other overhead. Costs of revenue also include the cost of raw materials and electricity purchased from related parties. Write-down of inventory to lower of cost or market value is also recorded in cost of goods sold.

Foreign Currency Translation

The Company’s financial information is presented in U.S. dollars. The functional currency of the Company is RMB, the currency of the PRC. The Company’s transactions, which are denominated in currencies other than RMB, are translated into RMB at the exchange rate quoted by the People’s Bank of China prevailing at the dates of the transactions. Exchange gains and losses resulting from transactions denominated in a currency other than the RMB are included in statements of operations as foreign currency transaction gain or loss. The consolidated financial statements of the Company have been translated into U.S. dollars in accordance with ASC 830, “Foreign Currency Matters”. The financial information is first prepared in RMB and then is translated into U.S. dollars at period-end exchange rates for assets and liabilities and average exchange rates for revenue and expenses. Capital accounts are translated at their historical exchange rates when the capital transactions occurred. The effects of foreign currency translation adjustments are included as a component of accumulated other comprehensive income (loss) in stockholders’ equity.

	2009		2008		2007
RMB/US$ exchange rate at December 31,		0.14650		0.14660		0.13710

Average RMB/US$ exchange rate for the periods ended December 31,		0.14475		0.14396		0.13520

The RMB is not freely convertible into foreign currency and all foreign exchange transactions must take place through authorized institutions. No representation is made that the RMB amounts could have been, or could be, converted into U.S. dollars at the rates used in translation.

Cash flows from the Company’s operations are calculated based upon the local currencies using the average translation rate. As a result, amounts related to assets and liabilities reported on the statements of cash flows will not necessarily agree with changes in the corresponding balances on the balance sheets.

Income Taxes

The Company accounts for income taxes under the provisions of ASC 740 “Income Taxes”, which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of the events that have been included in the consolidated financial statements or tax returns. Deferred income taxes are recognized for all significant temporary differences between tax and financial statement basis of assets and liabilities. Valuation allowances are established against net deferred tax assets when it is more likely than not that some portion or all of the deferred tax asset will not be realized. The Company had no deferred taxes as of December 31, 2009, 2008 and 2007.

F-9

Index

Value Added Tax

The Provisional Regulations of the People’s Republic of China Concerning Value Added Tax (“VAT”) promulgated by the State Council came into effect on January 1, 1994. Under these regulations and the Implementing Rules of the Provisional Regulations of the People’s Republic of China concerning Value Added Tax, VAT is imposed on goods sold or imported into the PRC and on processing, repair and replacement services provided within the PRC.

VAT payable in the PRC is charged on an aggregated basis at a rate of 13% or 17% (depending on the type of goods involved) on the full price collected for the goods sold or, in the case of taxable services provided, at a rate of 17% on the charges for the taxable services provided, but excluding, in respect of both goods and services, any amount paid in respect of VAT included in the price or charges, and less any deductible VAT already paid by the taxpayer on purchases of goods and services in the same financial year. Certain offshore and overseas sales are not subject to VAT tax.

The Company reports revenues and costs net of the PRC’s value added tax for all periods presented in the statements of operations.

Comprehensive Income (Loss)

Comprehensive income (loss) is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. Accumulated other comprehensive income (loss) arose from the changes in foreign currency exchange rates.

Shipping Costs

Shipping costs include shipping and handling costs. Shipping costs are expensed as incurred. The freight-in costs are usually included in the cost of revenue. The freight-out costs are usually handled by the customers. There were no significant shipping costs for the years ended December 31, 2009, 2008, and the period ended December 31, 2007.

Advertising

Advertising is expensed as incurred and is included in selling expenses. The Company did not incur significant advertising expenses for the years ended December 31, 2009, 2008, and period ended December 31, 2007.

Selling Expenses

Selling expenses include travel, communication expenses relating to sales, and salaries for sales personnel. Selling expenses were $11,626, $2,036 and $0 for the years ended December 31, 2009 and 2008 and period ended December 31, 2007, respectively.

General and Administrative Expenses

General and administrative expenses include administrative, staff salaries and welfare, insurance, license and permits, other business taxes and auto expenses. General and administrative expenses were $665,334, $1,016,627 and $17,407 for the years ended December 31, 2009 and 2008, and the period ended December 31, 2007, respectively.

Earnings (Loss) Per Common Share

The Company has adopted ASC 260-10, which requires presentation of basic and diluted EPS on the face of the income statement for all entities with complex capital structures and requires a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation.

Basic earnings (loss) per common share are computed on the basis of the weighted average number of common shares outstanding during the period.

F-10

Index

Diluted earnings (loss) per common share are computed similarly to basic earnings per common share except that it includes the dilutive securities (convertible notes and warrants) outstanding and potential dilution that could occur if dilutive securities were converted. Dilutive securities, if any, having an anti-dilutive effect on diluted earnings (loss) per common share are excluded from the calculation.

Risks and Uncertainties

The operations of the Company are located in the PRC. Accordingly, the Company’s business, financial condition, and results of operations may be influenced by the political, economic, and legal environments in the PRC, as well as by the general state of the PRC economy. The Company’s operations in the PRC are subject to special considerations and significant risks not typically associated with companies in North America and Western Europe. These include risks associated with, among others, the political, economic and legal environment and foreign currency exchange. The Company’s results may be adversely affected by changes in the political and social conditions in the PRC, and by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion, remittances abroad, and rates and methods of taxation, among other things. The Company has not experienced any of these losses.

Due to the nature of our business, the Company has significant exposure to the fluctuation of raw material and energy products prices as part of its normal operations. There are many factors of our business which are impacted by prevailing market conditions, specifically, a change in the raw material and energy product pricing environment, rise or decline, will influence our inventory levels, purchasing decisions and will, ultimately, all have an impact on our gross profit. Our management operational decisions are a direct response to the market and as such will change as market conditions change. As of December 31, 2009, 2008 and 2007, the Company had not entered into any commodity contracts to mitigate this risk.

The Company provides credit in the normal course of business. Our management continues to take appropriate actions to perform ongoing business and credit reviews of our customers to reduce our exposure to new and recurring customers who have been deemed to pose a high credit risk to our business based on their commercial credit reports, our collection history, and our perception of the risk posed by their geographic location. Concentration of credit risk with respect to accounts receivable is limited because a large number of geographically diverse customers make up the Company’s customer base.

The Company is potentially exposed to risks of losses that may result from business interruptions, injury to others (including employees) and damage to property. These losses may be uninsured, especially due to the fact that the Company’s operations are in China, where business insurance is not readily available. If: (i) information that is available before the Company’s financial statements are issued or are available to be issued indicates that such loss is probable and (ii) the amount of the loss can be reasonably estimated, an estimated loss will be accrued by a charge to income. If such loss is probable but the amount of loss cannot be reasonably estimated, the loss shall be charged to the income in the period in which the loss can be reasonably estimated. As of December 31, 2009, 2008 and 2007, the Company has not experienced any uninsured losses from injury to others or other losses.

Recent Accounting Pronouncements

In June 2009, the Financial Accounting Standards Board (“FASB”) issued a standard that established the FASB ASC and amended the hierarchy of U.S. GAAP such that the ASC became the single source of authoritative nongovernmental U.S. GAAP. The ASC did not change current U.S. GAAP, but was intended to simplify user access to all authoritative U.S. GAAP by providing all the authoritative literature related to a particular topic in one place. All previously existing accounting standard documents were superseded and all other accounting literature not included in the ASC is considered non-authoritative. New accounting standards issued subsequent to June 30, 2009 are communicated by the FASB through Accounting Standards Updates (“ASUs”). The Company adopted the ASC. This standard did not have an impact on the Company’s consolidated results of operations or financial condition. However, throughout the notes to the consolidated financial statements, references that were previously made to various former authoritative U.S. GAAP pronouncements have been changed to coincide with the appropriate section of the ASC.

F-11

Index

In December 2007, the FASB issued and, in April 2009, amended a new business combinations standard codified within ASC 805, which changed the accounting for business acquisitions. Accounting for business combinations under this standard requires the acquiring entity in a business combination to recognize all (and only) the assets acquired and liabilities assumed in the transaction and establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed in a business combination. Certain provisions of this standard impact the determination of acquisition-date fair value of consideration paid in a business combination (including contingent consideration); exclude transaction costs from acquisition accounting; and change accounting practices for acquisition-related restructuring costs, in-process research and development, indemnification assets, and tax benefits. The adoption of this standard did not have a material impact on the Company’s results of operations or financial condition.

In April 2009, the FASB issued an accounting standard regarding interim disclosures about fair value of financial instruments. The standard essentially expands the disclosure about fair value of financial instruments that were previously required only annually to also be required for interim period reporting. In addition, the standard requires certain additional disclosures regarding the methods and significant assumptions used to estimate the fair value of financial instruments. The adoption of this standard did not have a material impact on the Company’s results of operations or financial condition.

In May 2009, the FASB issued a new accounting standard regarding subsequent events. This standard incorporates into authoritative accounting literature certain guidance that already existed within generally accepted auditing standards, with the requirements concerning recognition and disclosure of subsequent events remaining essentially unchanged. This guidance addresses events which occur after the balance sheet date but before the issuance of financial statements. Under the new standard, as under previous practice, an entity must record the effects of subsequent events that provide evidence about conditions that existed at the balance sheet date and must disclose but not record the effects of subsequent events which provide evidence about conditions that did not exist at the balance sheet date. For the Company, this standard was effective beginning April 1, 2009 and adoption of this standard did not have a material impact on the Company’s results of operations or financial condition.

In June 2009, the FASB issued an accounting standard that revised the consolidation guidance for variable-interest entities. The modifications include the elimination of the exemption for qualifying special purpose entities, a new approach for determining who should consolidate a variable-interest entity, and changes to when it is necessary to reassess who should consolidate a variable-interest entity. The standard is effective January 1, 2010. The adoption of this standard did not have a material impact on the Company’s results of operations or financial condition.

In August 2009, the FASB issued ASU No. 2009-05, Measuring Liabilities at Fair Value, which provides additional guidance on how companies should measure liabilities at fair value under ASC 820. The ASU clarifies that the quoted price for an identical liability should be used. However, if such information is not available, a entity may use, the quoted price of an identical liability when traded as an asset, quoted prices for similar liabilities or similar liabilities traded as assets, or another valuation technique (such as the market or income approach). The ASU also indicates that the fair value of a liability is not adjusted to reflect the impact of contractual restrictions that prevent its transfer and indicates circumstances in which quoted prices for an identical liability or quoted price for an identical liability traded as an asset may be considered level 1 fair value. This ASU is effective October 1, 2009. The adoption of this standard did not have a material impact on the Company’s results of operations or financial condition.

F-12

Index

In October 2009, the FASB issued ASU No. 2009-13, Multiple-Deliverable Revenue Arrangements—a consensus of the FASB Emerging Issues Task Force, that provides amendments to the criteria for separating consideration in multiple-deliverable arrangements. As a result of these amendments, multiple-deliverable revenue arrangements will be separated in more circumstances than under existing U.S. GAAP. The ASU does this by establishing a selling price hierarchy for determining the selling price of a deliverable arrangement. The selling price used for each deliverable arrangement will be based on vendor-specific objective evidence if available, third-party evidence if vendor-specific objective evidence is not available, or estimated selling price if neither vendor-specific objective evidence nor third-party evidence is available. A vendor will be required to determine its best estimate of selling price in a manner that is consistent with that used to determine the price to sell the deliverable arrangement on a standalone basis. This ASU also eliminates the residual method of allocation and will require that arrangement consideration be allocated at the inception of the arrangement to all deliverable arrangement using the relative selling price method, which allocates any discount in the overall arrangement proportionally to each deliverable arrangement based on its relative selling price. Expanded disclosures of qualitative and quantitative information regarding application of the multiple-deliverable revenue arrangement guidance are also required under the ASU. The ASU does not apply to arrangements for which industry specific allocation and measurement guidance exists, such as long-term construction contracts and software transactions. The ASU is effective January 1, 2011. The adoption of this standard is not expected to have a material impact on the Company’s results of operations or financial condition.

3.	Restricted Cash

Restricted cash represents required cash deposits by the bank as a part of collateral to bank notes payable (see Note 9). The Company has to maintain a minimum of 50% of the balance of the bank notes payable to ensure future credit availability. The Company earns interest at a variable rate per month on this restricted cash. As of December 31, 2009, 2008 and 2007, the restricted cash was $1,758,000, $0 and $0, respectively.

4.	Bank Notes Receivable

Bank notes receivable are highly liquid negotiable instruments issued by banks in the PRC on behalf of Hongri’s customers, which are collateralized by deposits made by such customers at the subject banks. These notes typically have maturities between one to six months. With these bank notes, The Company can: (a) redeem the notes for face value at maturity, (b) endorse the notes to the Company’s vendors as a form of payment instrument at full value, or (c) factor the notes to a bank. In the event that the Company factors these notes to a bank, it will record as interest expense the difference between cash received and the face value of the note.

5.	Accounts Receivable

Accounts receivable at December 31, 2009, 2008 and 2007 consisted of the following:

	2009			2008			2007
Accounts receivable	$	7,715,473		$	1,008,440		$	22,553
Allowance for doubtful accounts		(240,964	)		(54,643	)		-
Accounts receivable, net	$	7,474,509		$	953,797		$	22,553

The bad debt provisions were $184,132, $53,659 and $0 for the years ended December 31, 2009 and 2008, and the period ended December 31, 2007, respectively.

F-13

Index

6.	Inventories

Inventories at December 31, 2009, 2008 and 2007 consisted of the following:

	2009		2008		2007
Raw materials	$	1,590,903	$	45,847,747	$	447,617
Work in process		-		394,556		-
Finished products		23,332,347		30,259,079		2,692,173
Spare parts		305,862		1,256,830		28,596
Total	$	25,229,112	$	77,758,212	$	3,168,386

7.	Machinery and Equipment, Net

Machinery and equipment stated at cost less accumulated depreciation at December 31, 2009, 2008 and 2007 consisted of the following:

	2009			2008			2007
Machinery and equipment	$	204,741,266		$	97,694,288		$	84,070,577
Auxiliary facilities		2,789,166			2,791,070			2,399,401
Transportation equipment		427,997			96,385			-
Office equipment		24,541			18,391			-
Electronic equipment		33,873			33,618			-
Subtotal		208,016,843			100,633,752			86,469,978
Accumulated depreciation		(21,394,261	)		(11,047,397	)		(1,375,227	)
Construction in progress		-			15,798,219			93,914
Total	$	186,622,582		$	105,384,574		$	85,188,665

Depreciation expenses were $10,230,713, $9,404,415 and $1,356,168 for the years ended December 31, 2009 and 2008, and the period ended December 31, 2007, respectively.

8.	Obligations Under Capital Leases

The following leased properties meeting capital lease criteria are capitalized at lower of present value of the related lease payments or the fair value of the leased assets at inception of the lease.

The Company leases the manufacturing building of Plate-Rolling I from YBS Group. The annual lease payment is RMB 3,522,211 (approximately $476,888) commencing on January 1, 2008. The lease is set to expire on December 31, 2017. The present value of the total lease payments at inception was RMB 23,816,623 (approximately $3,489,135), which was calculated with a discount rate of 7.83%, a PRC long term borrowing rate in December 2007.

The Company leases the manufacturing building of Steel-Making I from Hongrong, a related party. The annual lease payment is RMB 1,210,716 (approximately $177,370) commencing on January 1, 2008. The lease is set to expire on December 31, 2017. The present value of the total lease payments at inception was RMB 8,186,666 (approximately $1,199,347), which was calculated with a discount rate of 7.83%, a PRC long term borrowing rate in December 2007.

F-14

Index

The Company leases the manufacturing building of Steel-Making II from YBS Group. The annual lease payment is RMB 107,469 (approximately $15,743) commencing on January 1, 2010. The lease is set to expire on December 31, 2019. The present value of the total lease payments at inception was RMB 793,198 (approximately $116,204), which was calculated with a discount rate of 5.94%, a PRC long term borrowing rate in December 2009.

The Company leases the manufacturing building of Bar-Rolling III from Hongrong. The annual lease payment is RMB 758,503 (approximately $111,121) commencing on January 1, 2010. The lease is set to expire on December 31, 2019. The present value of the total lease payments at inception was RMB 5,598,552 (approximately $820,188), which was calculated with a discount rate of 5.94%, a PRC long term borrowing rate in December 2009.

As of December 31, 2009, future minimum rental payments applicable to the above non-cancelable capital leases with remaining terms in excess of one year were as follows:

	Capital Leases
2010	$	820,238
2011		1,030,385
2012		1,030,385
2013		1,030,385
2014		1,030,385
Thereafter		7,547,821
Total minimum lease payments		12,489,599
Less amount representing interest		(5,378,948	)
Present value of net minimum lease payments		7,110,651
Less current obligations		(450,602	)
Long-term obligations	$	6,660,049

9.	Bank Notes Payable

The bank notes payable does not carry a stated interest rate, but does carry a specific due date usually for a short-term period of six months. These notes are negotiable documents issued by financial institutions on the Company’s behalf to vendors. These notes can either be endorsed by the vendor to other third parties as payment, or prior to becoming due, they can factor these notes to other financial institutions. These notes are short-term in nature, as such; the Company does not calculate imputed interest with respect to them. These notes are collateralized by the Company’s restricted bank deposits as described in Note 3. Restricted Cash

10.	Accrued Liabilities

Accrued liabilities at December 31, 2009, 2008 and 2007 consisted of:

	2009		2008		2007
Accrued expenses	$	5,469,337	$	3,606,073	$	3,388,958
Accrued equipment loan interest - related parties		-		3,436,337		-
Accrued employee loan interest		342,032		171,134		-
Total	$	5,811,369	$	7,213,544	$	3,388,958

F-15

Index

11.	VAT and Other Tax Payables

VAT and other tax payables at December 31, 2009, 2008 and 2007 consisted of:

	2009		2008		2007
PRC corporation income tax	$	-	$	-	$	270,541
Value added tax payable		1,889,592		1,466,539		72,243
Other taxes payable		-		1,691		-
Total	$	1,889,592	$	1,468,230	$	342,784

12.	Related Party Transactions

Hongri is 70% owned by YBS Group, who is a major shareholder of some other steel production related companies, mainly Hongrong Iron and Steel Co. Ltd. (“Hongrong”), Wu'an Baoye Coke Industrial Co. Ltd.(“Baoye”), Wu'an Yuanbaoshan Cement Plant (“Cement Plant”), Wu'an Yuanbaoshan Ore Treatment Plant (“Ore Treatmen”), Wu'an Yuanbaoshan Industrial Group Go. Ltd - Gas Station and Wu’an Yeijin Iron Co. Ltd. (“Yeijin”). During the routine business process, Hongri purchases raw materials and supplies from these companies and advances to or owes cash to these companies.

The relationships and the nature of related party transactions are summarized as follow:

Name of Related Party	Owned by YBS			Relationship to Hongri	Nature of Transactions
Hebei Wu'an Yuanbaoshan Industrial Group Co. Ltd. (“YBS Group”)	Self			70% parent	Services, information and public relationship, and coordination
Wu'an Yuanbaoshan Industrial Group Co. Ltd - Gas Station		100	%	Affiliated company	Supplier of gas
Wu'an Hongrong Iron & Steel Co. Ltd (“Hongrong”)		67	%	Affiliated company	Supplier of molten iron
Wu'an Baoye Coke Industrial Co. Ltd. (“Baoye”)		49	%	Affiliated company	Supplier of coke
Wu'an Yuanbaoshan Cement Plant		36	%	Affiliated company	Supplier of cement
Wu'an Yuanbaoshan Ore Treatment Plant		33	%	Affiliated company	Supplier of granular
Wu’an Yeijin Iron Co. Ltd		31	%	Affiliated company	Supplier of iron

U.S. GAAP requires consolidation when an entity holds a controlling interest in another entity (often in the form of control through voting interests) or if the entity meets the requirements of a variable interest entity (“VIE”). The Company has no direct control of the affiliated companies, noted above, through voting interests. However, because the Company has a variable interest in some of these affiliated companies via the supply relationships noted above (i.e. implied relationships), the Company is required to determine whether such affiliates are VIE’s and, if so, whether the Company is the primary beneficiary so that consolidation must occur. A VIE has the following characteristics in accordance with ASC 810-10-15-14: insufficient equity investment at risk; equity lacking decision-making rights; equity with nonsubstantive voting rights; lacking the obligation to absorb an entity’s expected losses and lacking the right to receive an entity’s expected residual returns. The Company’s analysis concluded that such affiliates were not VIE’s.

F-16

Index

Hongri purchased raw materials from the above-mentioned related parties, and received services from the parent company, and had advances and accounts payable to these related parties in the routine business operations. As of December 31, 2009, 2008 and 2007, advance to related parties and accounts payable - related parties consisted of:

Advance to Related Parties
Name of related parties	2009			2008			2007
Wu'an Yuanbaoshan Industrial Group Co. Ltd	$	20,611,677		$	-		$	2,978,006
Wu'an Hongrong Iron & Steel Co. Ltd		19,943,131			-			-
Wu'an Baoye Coke Industrial Co. Ltd.		-			11,687			-
Wu'an Yuanbaoshan Ore Treatment Plant		-			1,314,529			-
Total Advance to Related Parties	$	40,554,808		$	1,326,216		$	2,978,006

Accounts Payable - Related Parties
Name of related parties		2009			2008			2007
Wu'an Yuanbaoshan Industrial Group Co. Ltd	$	-		$	(23,442,443	)	$	-
Wu'an Yuanbaoshan Industrial Group Co. Ltd - Gas Station		(606,938	)		(230,143	)		(104,218	)
Wu'an Hongrong Iron & Steel Co. Ltd		-			(9,586,270	)		(1,331,410	)
Wu'an Baoye Coke Industrial Co. Ltd.		(5,528,680	)		-			-
Wu'an Yuanbaoshan Cement Plant		(78,132	)		(10,555	)		-
Wu'an Yuanbaoshan Ore Treatment Plant		(635,657	)		-			-
Wu'an Yeijin Iron Co. Ltd		(3,292,461	)		(1,467,690	)		-
Total Accounts Payable - Related Parties	$	(10,141,868	)	$	(34,737,101	)	$	(1,435,628	)

Advance to Related Parties and Acounts Payable - Related Parties, Net	$	30,412,940		$	(33,410,885	)	$	1,542,378

On November 30, 2007, the Company purchased Oxygen-Making I production line and related auxiliary equipment from YBS Group at a price of RMB 18,207,877 (approximately $2,496,300). The Company repaid RMB 18,207,877 (approximately $2,496,300) to YBS Group in 2007.

On November 30, 2007, the Company purchased Plate-Rolling I production line and related auxiliary equipment from YBS Group at a price of RMB 191,163,559 (approximately $26,208,524). YBS Group provided a 10 year seller-financed loan to the Company to finance the purchase. The loan bears interest at 5% per annum, and has a fixed repayment schedule at RMB 17,973,455 (approximately $2,633,111) per annum. The remaining balance is to be paid equally in the years of 2016 and 2017. The Company repaid RMB 17,973,455 (approximately $2,633,111) and RMB 17,973,455 (approximately $2,634,909) in 2009 and 2008, respectively.

On November 30, 2007, the Company purchased Steel-Making I production line and related auxiliary equipment from Hongrong at a price of RMB 326,028,440 ($44,698,499). Hongrong provided a 10 year seller-financed loan to The Company to finance the purchase. The loan bears interest at 5% per annum, and has a fixed repayment schedule at RMB 30,414,021 (approximately $4,455,654) per annum. The remaining balance is to be paid equally in the years of 2016 and 2017. The Company repaid RMB 30,414,021 (approximately $4,455,654) and RMB 30,414,021 (approximately $4,458,695) in 2009 and 2008, respectively. The Company made additional payments of RMB 100,000,000 (approximately $14,650,000) during 2009.

F-17

Index

On November 30, 2009, the Company purchased Steel-Making II production line and related auxiliary equipment from YBS Group at a price of RMB 243,811,599 (approximately $35,718,399). YBS Group provided a 10 year seller-financed loan to the Company to finance the purchase. The loan bears interest at 5% per annum, and has a fixed repayment schedule at RMB 24,380,000 (approximately $3,571,670) per annum. The remaining balance is to be paid equally in the years of 2017 and 2018. The Company repaid RMB 24,380,000 (approximately $3,571,670) in 2009.

On November 30, 2009, the Company purchased Bar-Rolling III production line and related auxiliary equipment from Hongrong at a price of RMB 141,606,756 (approximately $20,745,390). Hongrong provided a 10 year seller-financed loan to the Company to finance the purchase. The loan bears interest at 5% per annum, and has a fixed repayment schedule at RMB 14,000,000 (approximately $2,051,000) per annum. The remaining balance is to be paid equally in the years of 2017 and 2018. The Company repaid RMB 141,606,756 (approximately $20,745,390) in full in 2009.

The Company paid interest totaling RMB 17,334,635 (approximately $2,540,390) for the years 2008 and 2009 to YBS Group in 2009.

The Company paid interest totaling RMB 23,040,741 (approximately $3,376,947) for the years 2008 and 2009 to Hongrong in 2009.

The Company also leases the land and the manufacturing buildings where the above-mentioned production lines are situated from YBS Group and Hongrong under various capital leases (see Note 8).

Hongrong was a fee based sub-contracted molten iron suppler of the Company before February 2010. The Company paid $20,178,180, $9,239,186 and $0 processing fee to Hongrong during 2009, 2008 and 2007, respectively.

The Company purchased raw materials from third parties through YBS Group in the amount of $2,767,262, $36,874,924 and $11,916,667 during 2009, 2008 and 2007, respectively.

The Company purchased $51,752,940, $8,850,785 and $0 of raw materials from Baoye during the years ended December 31, 2009 and 2008 and the period ended December 31, 2007, respectively.

The Company sold its products to third parties through YBS group amounted to $30,366,019, $0 and $0 for the years ended December 31, 2009, 2008 and the period ended December 31, 2007, respectively.

13.	Equipment Loans Payable – Related Parties

Equipment loan payables – related parties at December 31, 2009, 2008 and 2007 consisted of:

Equipment Loans Payable	2009			2008			2007

Equipment loan - YBS Group payable	$	54,885,968		$	25,389,669		$	26,208,524
Equipment loan - Hongrong payable		24,201,859			43,337,074			44,698,499
Total equipment loans payable		79,087,827			68,726,743			70,907,023
Less: current portion		(10,660,435	)		(10,529,941	)		(6,633,923	)
Long-term payable	$	68,427,392		$	58,196,802		$	64,273,100

F-18

Index

The detail of various equipment loans follows:

YBS Group Loan Payable	Total Loans and Accrued Interests Payable			Accrued Loan Interests			Steel-Making II production line and related auxiliary equipment loan interest at 5% per annum, due December 31, 2018			Plate-Rolling I production line and related auxiliary equipment loan interest at 5% per annum, due December 31, 2017

Balance at March 7, 2007	$	-		$	-		$	-		$	-
Acquired in 2007		26,208,524			-			-			26,208,524
Repayment in 2007		-			-			-			-
Balance at December 31, 2007		26,208,524			-			-			26,208,524
Acquired in 2008		-			-			-			-
Accrued interest		1,269,483			1,269,483			-			-
Repayment in 2008		(2,634,909	)		-			-			(2,634,909	)
Effect of exchange rate		1,816,054			-			-			1,816,054
Balance at December 31, 2008		26,659,152			1,269,483			-			25,389,669
Acquired in 2009		35,718,399						35,718,399			-
Accrued interest		1,270,907			1,270,907						-
Repayment in 2009		(8,745,171	)		(2,540,390	)		(3,571,670	)		(2,633,111	)
Effect of exchange rate		(17,319	)		-			-			(17,319	)
Balance at December 31, 2009	$	54,885,968		$	-		$	32,146,729		$	22,739,239

Hongrong Loan Payable	Total Loans and Accrued Interests Payable			Accrued Loan Interests			Bar-Rolling III production line and related auxiliary equipment loan interest at 5% per annum, due December 31, 2018			Steel-Making I production line and related auxiliary equipment loan interest at 5% per annum, due December 31, 2017

Balance at March 31, 2007	$	-		$	-		$	-		$	-
Acquired in 2007		44,698,499			-			-			44,698,499
Repayment in 2007		-			-			-			-
Balance at December 31, 2007		44,698,499			-			-			44,698,499
Accrued interest		2,166,854			2,166,854			-			-
Repayment in 2008		(4,458,695	)		-						(4,458,695	)
Effect of exchange rate		3,097,270			-			-			3,097,270
Balance at December 31, 2008		45,503,928			2,166,854			-			43,337,074
Acquired in 2009		20,746,855			-			20,746,855			-
Accrued interest		1,210,093			1,210,093			-			-
Repayment in 2009		(43,229,456	)		(3,376,947	)		(20,746,855	)		(19,105,654	)
Effect of exchange rate		(29,561	)		-			-			(29,561	)
Balance at December 31, 2009	$	24,201,859		$	-		$	-		$	24,201,859

F-19

Index

At December 31, 2009, maturities of the equipment loan payable for the next five years and in total were as follows:

Year ending December 31,	Minimum Repayment

2010	$	10,660,435
2011		10,660,435
2012		10,660,435
2013		10,660,435
2014		10,660,435
Thereafter		25,785,652
Total	$	79,087,827

14.	Employee Loan Payable

Employee loan payable consists of loans from employees (non executive officers) of the Company, which bears an interest rate at 25% per year and is due by December 31, 2010. Accrued interest was $342,035, $171,134 and $0 at December 31, 2009, 2008 and 2007, respectively.

15.	Statutory Reserves

The Company is required to allocate a portion of its after-tax profits to the statutory reserve. Annual appropriations to the statutory reserve are required to be at least 10% of an enterprise’s after-tax net income determined under Chinese GAAP. When the surplus reserves account balance is equal to or greater than 50% of the Company’s paid-in capital (approximately $11,999,974), no further allocation to the surplus reserve account is required.

The statutory 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 shares currently held by them, provided that the remaining statutory surplus reserve balance after such issue is not less than 25% of the registered capital.

If the accumulated balance of the Company’s statutory reserve is not enough to make up for the losses of the Company of the previous year, the current years’ profit shall first be used for making up the losses before the statutory reserve is drawn. As of December 31, 2009, 2008 and 2007, the Company has made the total statutory reserves in the amount of $6,530,869, 3,342,882, and $0, respectively.

16.	Stockholders’ Equity

The Company is authorized to issue 980,000,000 shares of common stocks with par value at $0.0001 per share. The common stock has voting rights, dividend rights and liquidation rights. The Company is also authorized to issue 10,000,000 shares of Series A Convertible Preferred Stock with par value at $0.0001 per share. The Series A Convertible Preferred Stock ranked junior to any other series of Blank Check Preferred Stock but senior to any other equity securities of the Company. Series A Convertible Preferred Stock has $10 liquidation amount for each share outstanding and has no dividend and voting rights. In addition, the Company is authorized to issue 10,000,000 shares of Blank Check Preferred Stock with par value at $0.0001 per share.

The 44,083,529 restricted shares of common stock issued to Karen Prudente and 17,493,463 restricted shares of common stock issued to Fakei were presented as of the beginning of the first period presented in the accompanying consolidated financial statements (see Note 1).

F-20

Index

17.	Income Tax

The provision for income tax of $0, $0 and $266,791 for the years ended December 31, 2009 and 2008 and the period ended December 31, 2007, respectively, arose from income tax incurred and or paid to the Chinese tax agent.

Hongri is subject to the PRC’s 25% standard enterprise income tax. However, the Company applied for foreign investment enterprise exemption, and the application had been approved by the local tax authority in 2007. The Company is entitled to a tax holiday of full (100%) income tax exemption for two (2) years starting from the first profitable year of 2008 through 2009 and then a 50% reduction in income tax for additional three (3) years commencing 2010.

The corporate income tax of $266,791 for the period ended December 31, 2007 was assessed pre-depreciation expense deduction by the local tax agent. The Company was not able to recover the income tax paid for future offset. The depreciation difference for 2007 was considered a permanent difference. The Company paid the tax in full in 2008.

Foreign pretax earnings were $58,160,977, $27,848,080 for the year ended December 31, 2009 and 2008, respectively, and a loss of $593,796 for the ten months ended December 31, 2007. Pretax earnings of a foreign subsidiary are subject to U.S. taxation when effectively repatriated. The Company provides income taxes on the undistributed earnings of non-U.S. subsidiaries except to the extent that such earnings are indefinitely invested outside the United States. At December 31, 2009, approximately $85,148,470 of accumulated unadjusted earnings of non-U.S. subsidiaries was indefinitely invested. At the existing U.S. federal income tax rate, additional taxes of $28,683,689 would have to be provided if such earnings were remitted currently.

Reconciliation of the differences between the statutory US Federal income tax rate and the effective rate is as follows for the year ended December 31, 2009, 2008 and 2007, and ten months ended December 31, 2007:

	2009			2008			2007
US statutory tax rate		34.0	%		34.0	%		-34.0	%
Tax rate difference		-9.0	%		-9.0	%		-9.0	%
Tax holiday		-25.0	%		-25.0	%		0.0	%
Changes in valuation allowance		0.0	%		0.0	%		-2.0	%
Effective rate		0.0	%		0.0	%		-45.0	%

The Company did not have any significant temporary differences relating to deferred tax liabilities as of December 31, 2009, 2008 and 2007.

The Company evaluates its uncertain tax position as of December 31, 2009, 2008 and 2007, and there is no uncertain tax position noted.

18.	Commitments and Contingency

In the normal course of business, the Company is subject to contingencies, including legal proceedings and claims arising out of the normal course of businesses that relate to a wide range of matters, including among others, product liability. The Company records accruals for such contingencies based upon the assessment of the probability of occurrence and where determinable, an estimate of the liability. Management may consider many factors in making these assessments including past history, scientific evidence and the specifics of each matter. As management has not become aware of any product liability claims arising from any incident over the years, the Company has not recognized a liability for product liability claims.

As of December 31, 2009, 2008 and 2007, the Company had no pending litigation, or potential overdue charges for bank loans, as the Company normally repaid interest and loan principal based on the contractual terms.

Certain of the real properties leases are recorded as capital leases (See Note 8. Obligations Under Capital Leases).

F-21

Index

19.	Major Customers and Vendors

The Company purchased raw materials from various vendors. For the year ended December 31, 2009, the Company received 14.30% of its total purchases from its related parties and 10.85% and 8.41% from other two major vendors, respectively. For the year ended December 31, 2008, the Company received 14.76% of its total purchases from its related parties and 11.93% and 4.81% from other two major vendors, respectively. For the period ended December 31, 2007, the Company purchased 77.93% of its total purchases from its related parties.

For the year ended December 31, 2009, there were ten (10) major customers accounted for approximately 59.95% of the Company’s total sales with only one customer over 10%. For the year ended December 31, 2008, there were also ten (10) major customers accounted for approximately 57.19% of the Company’s total sales with only one customer over 10%. For the period ended December 31, 2007, there were ten (10) major customers accounted for almost 92.53% of the Company’s total sales with four (4) customers over 10% of the sales.

20.	Segment Reporting

The Company operates in one industry segment and in one geographic region, which is the PRC. Revenues and costs of goods sold by major products for the years ended December 31, 2009 and 2008 and the period from March 7, 2007 (inception) to December 31, 2007 consisted of:

Revenues	2009			2008			2007
Steel plates	$	385,531,390		$	308,238,686		$	13,466,606
Steel billets		161,712,725			49,790,008			-
By-products		9,510,845			1,029,163			-
Total Revenues	$	556,754,960		$	359,057,857		$	13,466,606

Costs of Revenue		2009			2008			2007
Steel plates	$	347,922,843		$	278,706,582		$	14,022,531
Steel billets		140,927,723			46,104,910			-
By-products		5,767,615			1,029,163			-
Total Cost of Revenue	$	494,618,181		$	325,840,655		$	14,022,531

Gross Profit Margin		2009			2008			2007
Steel plates		9.75	%		9.58	%		-4.13	%
Steel billets		12.85	%		7.40	%		-
By-products		39.36	%		-			-
Total Gross Profit Margin		11.16	%		9.25	%		-4.13	%

The Company sold 913,300 tons, 460,300 tons and 24,769 tons of steel plates for the years ended December 31, 2009 and 2008 and the period ended December 31, 2007, respectively.

The Company sold 396,438 tons, 87,969 tons and 0 tons of steel billets for the years ended December 31, 2009 and 2008 and the period ended December 31, 2007, respectively.

F-22

Index

21.	Subsequent Events

On January 27, 2010, China Industrial Steel Inc. (“CIS”) was formed under the laws of the State of Maryland. CIS was set up as a holding company to develop business opportunities in China.

On February 5, 2010, CIS formed a wholly-owned subsidiary, Northern Steel Inc. (“Northern”) under the laws of the State of Colorado to facilitate the Company’s operations in China.

On July 1, 2010, the sole director of CIS approved a resolution to issue 25,000 shares of common stock to its sole director, Mr. Frank J. Pena for a consideration of $0.0001 per share; to issue 25,000 shares of common stock to its Chief Financial Officer Mr. Xiaolong Zhou for a consideration of $0.0001 per share; to issue 10, 000 shares to Mr. Mark Cohen for a consideration of $0.0001 per share.

On July 1, 2010, the sole director of CIS approved the resolution to execute the Corporate Finance Advisory Service Agreement with Friedland Capital USA Inc. (“Friedland”). Pursuant to the terms of the Agreement, the Company issued 9,325,044 shares of common stock to the designees of Friedland for a consideration totaled $1,902.

On January 28, 2011, the Company consummated a private placement offering and sold 2,579,022 of its security units to forty four (44) accredited investors at the price of $1.50 per share and received proceeds of $3,868,547. Each selling unit comprises one share of Company’s common stock and one three-year warrant to purchase one share of Company’s common stock at $4.50 per share. On February 7, 2011, the Company consummated another private placement and sold additional 1,000 of its security units to one (1) accredited investors at the price of $4.50 and received proceeds of $4,500. Each selling unit comprises one share of Company’s common stock and one three-year warrant to purchase one share of Company’s common stock at $2.00 per share and additional one three-year warrant to purchase one share of Company’s common stock at $4.50 per share. On February 7, 2011, the Board of the Company authorized and approved abovementioned private placements. Total shares issued and outstanding after private placements were 73,542,058 as of February 7, 2011.

F-23

Index

CHINA INDUSTRIAL STEEL INC. AND SUBSIDIARIES

INDEX TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

	Page



Condensed Consolidated Balance Sheets as of September 30, 2010 (Unaudited) and December 31, 2009	F-25

Condensed Consolidated Statements of Operations and Comprehensive Income for the Nine Months ended September 30, 2010 and September 30, 2009 (Unaudited)	F-26

Consolidated Statements of Stockholders’ Equity for the Nine Months ended September 30, 2010 (Unaudited) and Year ended December 31, 2009	F-27

Condensed Consolidated Statements of Cash Flows for the Nine Months ended September 30, 2010 and September 30, 2009 (Unaudited)	F-28

Notes to Condensed Consolidated Financial Statements (Unaudited)	F-29

F-24

Index

CHINA INDUSTRIAL STEEL INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (IN US DOLLARS)

(UNAUDITED)

	As of September 30,		As of December 31,
	2010		2009

ASSETS
Current Assets:
Cash and cash equivalents	$	871,794	$	2,524,530
Restricted cash		1,793,640		1,758,000
Bank notes receivable		5,678,365		1,820,844
Accounts receivables, net		20,314,743		7,474,509
Inventories, net		9,281,775		25,229,112
Advances to suppliers		25,616,377		19,266,964
VAT tax recoverable		10,435,338		8,425,784
Advance to related parties		53,310,434		40,554,808
Total Current Assets		127,302,466		107,054,551

Machinery and Equipment, Net		178,832,042		186,622,582

Land use rights and buildings under capital leases		6,076,471		6,424,121

TOTAL ASSETS	$	312,210,979	$	300,101,254

LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Equipment loan payables - related parties	$	10,876,555	$	10,660,435
Current obligations under capital leases		510,453		450,602
Employee loan payable		697,939		684,070
Short-term bank loan payable		2,839,930		-
Bank notes payable		2,989,400		2,930,000
Accounts payable		42,999,839		76,818,564
Accounts payable - related parties		14,407,458		10,141,868
Accrued liabilities		17,949,552		5,811,369
VAT and other tax payables		1,506,828		1,889,592
Advances from customers		21,477,007		15,696,610
Total Current Liabilities		116,254,961		125,083,110

Long Term Liabilities:
Equipment loan payables - related parties		69,814,622		68,427,392
Obligation under capital leases		6,529,198		6,660,049
Total Long Term Liabilities		76,343,820		75,087,441

TOTAL LIABILITIES		192,598,781		200,170,551

Commitments and Contingencies

Stockholders' Equity:
Series A Convertible Preferred Stock, $0.0001 par value, 10,000,000 shares authorized, none issued and outstanding		-		-
Blank Check Preferred Stock, $0.0001 par value, 10,000,000 shares authorized, none issued and outstanding		-		-
Common stock, $0.0001 par value, 980,000,000 authorized, 70,962,036 issued and outstanding at September 30, 2010, and 61,576,992 at December 31, 2009		7,096		6,158
Paid-in capital		12,357,746		12,357,466
Stock to be issued		1,558,128		-
Statutory reserves		6,530,869		6,530,869
Retained earnings		94,423,043		78,617,601
Accumulated other comprehensive income		4,735,316		2,418,609
Total Stockholders' Equity		119,612,198		99,930,703
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	312,210,979	$	300,101,254

The accompanying notes are an integral part of these consolidated financial statements.

F-25

Index

CHINA INDUSTRIAL STEEL INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME

(IN US DOLLARS)

(UNAUDITED)

	For the Nine Months Ended
	September 30,
	2010			2009

Net Revenues	$	369,747,456		$	417,246,853

Cost of Revenue		344,679,788			365,512,212

Gross Profit		25,067,668			51,734,641

Selling and General and Administrative Expenses		1,886,076			696,754

Income From Operations		23,181,592			51,037,887

Other Income (Expenses)
Interest income		18,811			6,946
Interest expense		(3,712,745	)		(3,075,123	)
Total Other Income (Expenses)		(3,693,934	)		(3,068,177	)

Income from operation before income tax		19,487,658			47,969,710
Provision for income tax		3,682,216			-
Net Income	$	15,805,442		$	47,969,710

Other Comprehensive Income:
Foreign currency translation gain		2,316,707			3,864
Comprehensive Income	$	18,122,149		$	47,973,574

Net Income Per Share - Basic and Diluted	$	0.24		$	0.78
Weighted Average Shares Outstanding - Basic and Diluted		64,739,718			61,576,992


The accompanying notes are an integral part of these consolidated financial statements.

F-26

Index

CHINA INDUSTRIAL STEEL INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN US DOLLARS)

FOR THE NINE MONTHS ENDED SEPTERMBER 30, 2010 AND YEARS ENDED DECEMBER 31, 2009

(UNAUDITED)

	Preferred Stock				Common Stock				Stock to be		Additional Paid-In			Statutory		Retained			Accumulated Other Comprehensive
	Shares		Amount		Shares		Amount		Issued		Capital			Reserves		Earnings			Income		Total
Balance as of March 7, 2007 - Inception		-	$	-		61,576,992	$	6,158	$	-	$	(6,158	)	$	-	$	-		$	-	$	-
Capital contribution		-		-		-		-		-		12,363,624			-		-			-		12,363,624
Net loss		-		-		-		-		-		-			-		(860,587	)		-		(860,587	)
Foreign currency translation adjustment		-		-		-		-		-		-			-		-			407,486		407,486
Balance as of December 31, 2007		-		-		61,576,992		6,158		-		12,357,466			-		(860,587	)		407,486		11,910,523
Allocation of statutory reserves		-		-		-		-		-		-			3,342,882		(3,342,882	)		-		-
Net income		-		-		-		-		-		-			-		27,848,080			-		27,848,080
Foreign currency translation adjustment		-		-		-		-		-		-			-		-			1,336,000		1,336,000
Balance as of December 31, 2008		-		-		61,576,992		6,158		-		12,357,466			3,342,882		23,644,611			1,743,486		41,094,603
Allocation of statutory reserves		-		-		-		-		-		-			3,187,987		(3,187,987	)		-		-
Net income		-		-		-		-		-		-			-		58,160,977			-		58,160,977
Foreign currency translation adjustment		-		-		-		-		-		-			-		-			675,123		675,123
Balance as of December 31, 2009		-		-		61,576,992		6,158		-		12,357,466			6,530,869		78,617,601			2,418,609		99,930,703
Effect of recapitalization		-		-		-		-		-		(691	)		-		-			-		(691	)
Common stock issued		-		-		9,385,044		938		-		971			-		-			-		1,909
Stock to be issued		-		-		-		-		1,558,128		-			-		-			-		1,558,128
Net income for the nine months ended September 30, 2010		-		-		-		-		-		-			-		15,805,442			-		15,805,442
Foreign currency translation adjustment		-		-		-		-		-		-			-		-			2,316,707		2,316,707
Balance as of September 30, 2010 (Unaudited)	$	-	$	-		70,962,036	$	7,096	$	1,558,128	$	12,357,746		$	6,530,869	$	94,423,043		$	4,735,316	$	119,612,198

The accompanying notes are an integral part of these consolidated financial statements.

F-27

Index

CHINA INDUSTRIAL STEEL INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (IN US DOLLARS)

(UNAUDITED)

	For the Nine Months Ended
	September 30,
	2010			2009

Cash Flows from Operating Activities:
Net Income	$	15,805,442		$	47,969,710
Adjustments to Reconcile Net Income to
Net Cash Provided by (Used in) Operating Activities:
Allowance for doubtful accounts receivable		1,366,220			265,965
(Reduction in) for lower of cost or market inventory valuation		(1,417,263	)		(1,242,793	)
Amortization of land use rights and buildings under capital leases		469,670			397,618
Depreciation		16,055,690			7,611,198
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivables		(13,836,389	)		(22,262,538	)
(Increase) decrease in bank notes receivable		(3,754,915	)		(56,595,476	)
(Increase) decrease in inventories		17,593,077			44,641,370
(Increase) decrease in advances to suppliers		(5,831,357	)		1,874,336
(Increase) decrease in prepaid expenses		(1,807,122	)		4,838,307
(Increase) decrease in advance to related parties		(12,755,626	)		(6,273,354	)
Increase (decrease) in accounts payable		(34,794,780	)		14,078,459
Increase (decrease) in accounts payable - related parties		3,990,176			(21,659,723	)
Increase (decrease) in accrued expenses		11,813,690			5,317,050
Increase (decrease) in bank notes payable		-			4,395,000
Increase (decrease) in advances from customers		5,368,262			(6,846,175	)
Increase (decrease) in VAT and other tax payables		(413,832	)		4,195,094
Net Cash Provided by (Used in) Operating Activities		(2,149,057	)		20,704,048

Cash Flows from Investing Activities:
Cash acquired from recapitalization		1,278			-
Capital expenditures		(4,762,637	)		(16,424,485	)
Net Cash Used in Investing Activities		(4,761,359	)		(16,424,485	)

Cash Flows from Financing Activities
Proceeds from bank loans		2,839,930			-
Proceeds from stock to be issued		1,558,128			-
Proceeds from stock issued		1,909			-
Payment to obligation under capital lease		(211,455	)		(145,815	)
Restricted cash		-			(3,223,000	)
Net Cash Provided by (Used in) Financing Activities		4,188,512			(3,368,815	)

Effect of Exchange Rate Changes on Cash		1,069,168			(16,047	)
Net Increase (Decrease) in Cash and Cash Equivalents		(1,652,736	)		894,701
Cash and Cash Equivalents - Beginning of the Period		2,524,530			211,272

Cash and Cash Equivalents - End of the Period	$	871,794		$	1,105,973

Supplemental Cash Flow Information:
Interest Paid	$	549,028		$	373,827
Income taxes	$	2,930,671		$	-


The accompanying notes are an integral part of these consolidated financial statements.

F-28

Index

CHINA INDUSTRIAL STEEL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1.	Organization and Basis of Presentation

Organizations

China Industrial Steel inc. (“CIS”) was incorporated January 27, 2010 under the laws of the State of Maryland. The Company is a holding Company to develop business opportunities in the People’s Republic of China (“PRC”).

On February 5, 2010, CIS formed a wholly-owned subsidiary, Northern Steel Inc. (“Northern”) under the laws of the State of Colorado to facilitate the Company’s operations in China.

Handan Hongri Metallurgy Co., Ltd. (“Hongri”) is a Chinese company located at Handan City, Hebei Province, China. Hongri was incorporated under the Chinese laws on March 7, 2007 with registered capital of Reminbi (“RMB”) 90,489,999 (approximately $12 million US dollars). Hongri is primarily engaged in the business of manufacturing and selling steel plate, steel bars and steel billets for domestic customers.

Hebei Wu’an Yuanbaoshan Industry Group Co., Ltd (“YBS Group”) is an enterprise incorporated and existing within the territory of China. YBS Group owns 70% equity interest of Hongri.

Fakei Investment (Hong Kong) Ltd (“Fakei”) is an enterprise incorporated in Hong Kong. Fakei owns 30% equity interest of Hongri.

F-29

Index

Basis of Presentation

The accompanying financial statements have been prepared in order to present the financial position and results of operations in accordance with the accounting principles generally accepted in the United States of America (“U.S. GAAP”) and are expressed in U.S. dollars.

Principal of Consolidation

The unaudited consolidated financial statements include the accounts of the China Industrial Steel, Inc. and its subsidiaries. All significant inter-company transactions were eliminated in consolidation.

Interim Financial Statements

The unaudited consolidated financial statements as of September 30, 2010 and for the nine months ended September 30, 2010 and 2009 were prepared in accordance with U.S. GAAP for interim financial information. In the opinion of management, the unaudited consolidated financial statements were prepared on the same basis as the annual consolidated financial statements and reflect all adjustments, which include only normal recurring adjustments, necessary to present fairly the financial position as of September 30, 2010 and the results of operations and cash flows for the nine months ended September 30, 2010 and 2009. The financial data and other information disclosed in these notes to the interim financial statements related to these periods are unaudited. The results for the nine month period ended September 30, 2010 is not necessarily indicative of the results to be expected for the full year.

2.	Summary of Significant Accounting Policies

Use of Estimates

In preparing the financial statements in conformity with U.S. GAAP, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the dates of the financial statements, as well as the reported amounts of revenues and expenses during the reporting year. Significant estimates, required by management, include bad debt allowance, recoverability of long-lived assets and the valuation of inventories. Actual results could differ from those estimates.

Fair Value of Financial Instruments

The Company’s financial instruments consist of cash and cash equivalents, restricted cash, bank notes receivable, accounts receivable, net, advance to suppliers, VAT tax recoverable, advance to related parties, current portion of equipment loan payables and accrued interest – related parties, employee loan and accrued interest payable, bank notes payable, accounts payable, accrued liabilities, VAT and other tax payables, advances from customers, and accounts payable - related parties. The fair value of these financial instruments approximate their carrying amounts reported in the balance sheets due to their short-term maturity or by comparison to other instruments with similar terms.

The company evaluated the fair value of the equipment loans payable – related parties, net of current portion at the nine months ended September 30, 2010 and the year end of 2009, and determined that book value of equipment loans payable approximated the fair market value based on information available as of September 30, 2010 and December 31, 2009.

F-30

Index

Cash and Cash Equivalents

The Company considers all highly liquid investment with original maturity periods of three months or less to be cash equivalents.

Accounts Receivable

Inventories

Inventories are stated at the lower of cost, as determined on a weighted average basis, or market. Costs of inventories include the purchase price and related manufacturing costs incurred in bringing the products to their present location and condition. Market value is determined by reference to selling prices or to management’s estimates based on prevailing market conditions. Management writes down the inventories to market value if it is below cost- and also regularly evaluates the composition of its inventories to identify slow-moving and obsolete inventories to determine if a valuation allowance is required.

Advances to Suppliers

In order to ensure a steady supply of raw materials, the Company is required, from time to time, to make cash advances when placing its purchase orders. Management regularly evaluates the balance of advances and will make a reserve if the advance is over one year.

Machinery and Equipment

Depreciation is computed on a straight-line basis over the estimated useful lives of the related assets. The estimated useful lives for significant machinery and equipment are as follows:

Machineries	10 years
Office equipment	3 - 5 years
Motor vehicles	5 years

Construction in Progress

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Land Use Rights and Buildings Under Capital Leases

Impairment of Long-Lived Assets

The Company evaluates potential impairment of long-lived assets, in accordance with ASC 360, Property, Plant and Equipment, which requires the Company to evaluate a long-lived asset for recoverability when there is an event or circumstance that indicates the carrying value of the asset may not be recoverable. An impairment loss is recognized when the carrying amount of a long-lived asset or asset group is not recoverable (when carrying amounts exceed the gross, undiscounted cash flows from use and disposition).

Advances from Customer

Revenue Recognition

The Company recognizes revenues under ASC 605. Revenue is recognized when all of the following have occurred: (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred or services have been rendered, (iii) the price is fixed or determinable, and (iv) the ability to collect is reasonably assured. These criteria are generally satisfied by the Company at the time of delivery for sales, which is the point when risk of loss and title passes to the customer. Revenue is reported net of all value added taxes. The Company does not routinely permit customers to return products and historically, customer returns have been immaterial.

Stock-Based Compensation

Stock-based compensation is accounted for at fair value in accordance with ASC 718-10, Stock Compensation

In addition to requiring supplemental disclosures, ASC 718, addresses the accounting for share-based payment transactions in which a company receives goods or services in exchange for (a) equity instruments of the company or (b) liabilities that are based on the fair value of the company’s equity instruments or that may be settled by the issuance of such equity instruments. ASC 718 focuses primarily on accounting for transactions in which a company obtains employee services in share-based payment transactions.

References to the issuances of restricted stock refer to stock of a public company issued in private placement transactions to individuals who are eligible to sell all or some of their shares of restricted Common Stock pursuant to Rule 144, promulgated under the Securities Act of 1933 (“Rule 144”), subject to certain limitations. In general, pursuant to Rule 144, a stockholder who is not an affiliate and has satisfied a six-month holding period may sell all of his restricted stock without restriction, provided that the Company has current information publicly available. Rule 144 also permits, under certain circumstances, the sale of restricted stock, without any limitations, by a non-affiliate of the Company that has satisfied a one-year holding period.

Cost of Revenue

Cost of revenue includes cost of raw materials purchased, inbound freight costs, cost of direct labor, depreciation expense and other overhead. Costs of revenue also include the cost of raw materials and electricity purchased from related parties. Write-down of inventory to lower of cost or market value is also recorded in cost of revenue.

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Foreign Currency Translation

	Nine Months Ended
Exchange Rate	September 30,
	2010		2009
RMB/US$ exchange rate at periods ended		0.14947		0.14650
Average RMB/US$ exchange rate for the period ended		0.14690		0.14637

Income Taxes

The Company accounts for income taxes under the provisions of ASC740 “Income Taxes”, which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of the events that have been included in the financial statements or tax returns. Deferred income taxes are recognized for all significant temporary differences between tax and financial statement basis of assets and liabilities. Valuation allowances are established against net deferred tax assets when it is more likely than not that some portion or all of the deferred tax asset will not be realized. The Company had no deferred taxes as of September 30, 2010 and 2009.

Value Added Tax

The Company reports revenues and costs net of the PRC’s value added tax for all periods presented in the statements of operations.

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Comprehensive Income (Loss)

Shipping Costs

Advertising

Advertising is expensed as incurred and is included in selling expenses. The Company did not incur significant advertising expenses for the nine months ended September 30, 2010 and 2009.

Selling Expenses

Selling expenses include travel, communication expenses relating to sales and salaries for sales personnel. Selling expenses were $17,699, $7,177 for the nine months ended September 30, 2010 and 2009.

General and Administrative Expenses

General and administrative expenses include administrative, staff salaries and welfare, insurance, license and permits, professional fees, other business taxes and expenses. General and administrative expenses were $502,157, 423,612 for the nine months ended September 30, 2010 and 2009, respectively.

Segment Information

ASC 280-10, requires entity-wide disclosures about the products and services an entity provides, the material countries in which it holds assets and reports revenues and its major customers. The Company operates in a single segment and will evaluate additional segment disclosure requirements as it expands its operations.

Earnings (Loss) Per Common Share

Basic earnings (loss) per common share are computed on the basis of the weighted average number of common shares outstanding during the period.

Risks and Uncertainties

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Due to the nature of our business, the Company has significant exposure to the fluctuation of raw material and energy products prices as part of its normal operations. There are many factors of our business which are impacted by prevailing market conditions, specifically, a change in the raw material and energy product pricing environment, rise or decline, will influence our inventory levels, purchasing decisions and will, ultimately, all have an impact on our gross profit. Our management operational decisions are a direct response to the market and as such will change as market conditions change. As of September 30, 2010 and December 31, 2009, the Company had not entered into any commodity contracts to mitigate this risk.

Recently Adopted Accounting Standards

The Company adopted the accounting principles established by ASU 2009-17, Consolidations: Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities, effective January 1, 2010. This ASU requires an ongoing reassessment and replaces the quantitative-based risks and rewards calculation for determining which reporting entity, if any, has a controlling financial interest in a variable interest entity (“VIE”) with a primarily qualitative analysis. The qualitative analysis is based on identifying the party that has the power to direct the activities that most significantly impact the VIE’s economic performance (the “power criterion”) and the obligation to absorb losses from or the right to receive benefits of the VIE that could potentially be significant to the VIE (the “losses/benefit criterion”). The party that meets both these criteria is deemed to have a controlling financial interest. The party with the controlling financial interest is considered to be the primary beneficiary and as a result is required to consolidate the VIE. The adoption of this new guidance did not have a material effect on our financial statements.

Recently Issued Accounting Standards

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In April 2010, the FASB issued ASU 2010-13, “Compensation-Stock Compensation (Topic 718) - Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the Market in Which the Underlying Equity Security Trades - a consensus of the FASB Emerging Issues Task Force,” or ASU 2010-13. ASU 2010-13 provides amendments to Topic 718 to clarify that an employee share-based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the entity’s equity securities trades should not be considered a condition that is not a market, performance, or service condition. Therefore, an entity would not classify such an award as a liability if it otherwise qualifies as equity. The amendments in this update do not expand the recurring disclosures required by Topic 718. Disclosures currently required under Topic 718 are applicable to a share-based payment award, including the nature and the term of share-based payment arrangements. The amendments in this update are effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2010. The adoption of this standard is not expected to have a material impact on the Company’s results of operations or financial condition.

Certain other accounting pronouncements were issued by the FASB and other standard setting organizations which are not yet effective and have not yet been adopted by the Company. The impact on the Company’s financial position and results of operations from adoption of these standards is not expected to be material.

3.	Restricted Cash

Restricted cash represents required cash deposits by the bank as a part of collateral to bank notes payable (see Note 9). The Company has to maintain a minimum of 50% of the balance of the bank notes payable to ensure future credit availability. The Company earns interest at a variable rate per month on this restricted cash. As of September 30, 2010 and December 31, 2009, restricted cash was $1,793,640 and $1,758,000, respectively.

4.	Bank Notes Receivable

Bank notes receivable are highly liquid negotiable instruments issued by banks in the PRC on behalf of the Company’s customers, which are collateralized by deposits made by such customers at the subject banks. These notes typically have maturities between one to six months. With these bank notes, Company can: (a) redeem the notes for face value at maturity, (b) endorse the notes to Company’ vendors as a form of payment instrument at full value, or (c) factor the notes to a bank. In the event that Company factors these notes to a bank, it will record the difference between cash received and the face value of the note as interest expense. As of September 30, 2010 and December 31, 2009, bank notes receivable was $5,678,365 and $1,820,844, respectively.

5.	Accounts Receivable

Accounts receivable at September 30 2010 and December 31, 2009 consisted of the following:

	As of September 30,			As of December 31,
	2010			2009
Accounts receivable	$	21,950,344		$	7,715,473
Allowance for doubtful accounts		(1,635,601	)		(240,964	)
Accounts receivable, net	$	20,314,743		$	7,474,509

The bad debt provisions were $1,366,220 and $265,965 for the nine months ended September 30, 2010 and 2009, respectively.

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6.	Inventories

Inventories at September 30, 2010 and December 31, 2009 consisted of the following:

	As of September 30,		As of December 31,
	2010		2009
Raw materials	$	417,404	$	1,590,903
Finished products		8,693,163		23,332,347
Spare parts		171,208		305,862
Total	$	9,281,775	$	25,229,112

7.	Machinery and Equipment, Net

Machinery and equipment, stated at cost less accumulated depreciation, at September 30, 2010 and December 31, 2009 consisted of the following:

	As of September 30,			As of December 31,
	2010			2009
Machinery and equipment	$	213,638,972		$	204,741,266
Auxiliary facilities		2,848,701			2,789,166
Transportation equipment		444,723			427,997
Office equipment		29,657			24,541
Electronic equipment		34,560			33,873
Subtotal		216,996,613			208,016,843
Accumulated depreciation		(38,164,571	)		(21,394,261	)
Total	$	178,832,042		$	186,622,582

Depreciation expenses were $16,055,690 for the nine months ended September 30, 2010 and $10,230,713 for the years ended December 31, 2009.

Depreciation expense of $7,744 was included in the general and administrative expenses in 2010.

8.	Obligations Under Capital Leases

Hongri leases 956 mu (approximately 157.5 acres) of land as its manufacturing site from YBS Group, a related party. The rent for the first three years was waived per lease agreement. The annual lease payment is RMB 1,434,450 (approximately $214,407) commencing on 2011. The average lease payment is RMB 1,291,005 (approximately $192,967) per annum. The lease is set to expire on December 31, 2037. The present value of the total lease payments at inception was RMB 12,703,147 (approximately $1,861,011), which was calculated with a discount rate of 7.83%, a PRC long term borrowing rate in December 2007.

Hongri leases the manufacturing building of Plate-Rolling I from YBS Group. The annual lease payment is RMB 3,522,211 (approximately $526,465) commencing on January 1, 2008. The lease is set to expire on December 31, 2017. The present value of the total lease payments at inception was RMB 23,816,623 (approximately $3,489,135), which was calculated with a discount rate of 7.83%, a PRC long term borrowing rate in December 2007.

Hongri leases the manufacturing building of Steel-Making I from Hongrong, a related party. The annual lease payment is RMB 1,210,716 (approximately $180,966) commencing on January 1, 2008. The lease is set to expire on December 31, 2017. The present value of the total lease payments at inception was RMB 8,186,666 (approximately $1,199,347), which was calculated with a discount rate of 7.83%, a PRC long term borrowing rate in December 2007.

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Hongri leases the manufacturing building of Steel-Making II from YBS Group. The annual lease payment is RMB 107,464 (approximately $16,063) commencing on January 1, 2010. The lease is set to expire on December 31, 2019. The present value of the total lease payments at inception was RMB 793,198 (approximately $116,204), which was calculated with a discount rate of 5.94%, a PRC long term borrowing rate in December 2009.

Hongri leases the manufacturing building of Bar-Rolling III from Hongrong. The annual lease payment is RMB 758,503 (approximately $113,373) commencing on January 1, 2010. The lease is set to expire on December 31, 2019. The present value of the total lease payments at inception was RMB 5,598,552 (approximately $820,188), which was calculated with a discount rate of 5.94%, a PRC long term borrowing rate in December 2009.

As of September 30, 2010, future minimum rental payments applicable to the above non-cancelable capital leases with remaining terms in excess of one year were as follows:

September 30,	Capital Leases
2011	$	997,672
2012		1,051,274
2013		1,051,274
2014		1,051,274
2015		1,051,274
Thereafter		6,912,383
Total minimum lease payments		12,115,151
Less amount representing interest		(5,075,500	)
Present value of net minimum lease payments		7,039,651
Less current obligations		(510,453	)
Long-term obligations	$	6,529,198

9.	Bank Notes Payable

The bank notes payable does not carry a stated interest rate, but does carry a specific due date usually for a short-term period of six months. These notes are negotiable documents issued by financial institutions on Company’s behalf to vendors. These notes can either be endorsed by the vendor to other third parties as payment, or prior to becoming due, they can factor these notes to other financial institutions. These notes are short-term in nature, as such, the Company does not calculate imputed interest with respect to them. These notes are collateralized by Company’s restricted cash as described in Note 3. Restricted Cash.

10.	Accrued Liabilities

Accrued liabilities at September 30, 2010 and December 31, 2009 consisted of:

	September 30,		December 31,
	2009		2009
Accrued expenses	$	14,443,803	$	5,469,337
Accrued equipment loan interest - related parties		3,025,919		-
Accrued employee loan interest		479,830		342,032
Total	$	17,949,552	$	5,811,369

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11.	VAT and Other Tax Payables

VAT and other tax payables at September 30, 2010 and December 31, 2009 consisted of:

	As of September 30,		As of December 31,
	2010		2009
PRC corporation income tax	$	751,545	$	-
Value added tax payable		755,283		1,889,592
Other taxes payable		-		-
Total	$	1,506,828	$	1,889,592

12.	Related Party Transactions

Hongri is 70% owned by YBS Group, who is a major shareholder of some other steel production related companies, mainly Hongrong Iron and Steel Co. Ltd. (“Hongrong”), Wu'an Baoye Coke Industrial Co. Ltd.(“Baoye”), Wu'an Yuanbaoshan Cement Plant, Wu'an Yuanbaoshan Ore Treatment Plant (“Ore Plant”), Wu'an Yuanbaoshan Industrial Group Go. Ltd - Gas Station and Wu’an Yeijin Iron Co. Ltd. (“Yeijin”). During the routine business process, Company purchases raw materials and supplies from these companies and advanced to or owed cash to these companies.

The relationships and the nature of related party transactions are summarized as follow:

Name of Related Party	Owned by YBS			Relationship to Company	Nature of Transactions
Wu'an Yuanbaoshan Industrial Group Co. Ltd	Self			70% parent	Services, information and public relationship, and coordination
Wu'an Yuanbaoshan Industrial Group Co. Ltd - Gas Station		100	%	Affiliated company	Supplier of gas
Wu'an Hongrong Iron & Steel Co. Ltd		67	%	Affiliated company	Supplier of molten iron
Wu'an Baoye Coke Industrial Co. Ltd.		49	%	Affiliated company	Supplier of coke
Wu'an Yuanbaoshan Cement Plant		36	%	Affiliated company	Supplier of cement
Wu'an Yuanbaoshan Ore Treatment Plant		33	%	Affiliated company	Supplier of granular
Wu’an Yeijin Iron Co. Ltd		31	%	Affiliated company	Supplier of iron

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Advances to Related Parties
	As of September 30,			As of December 31,
Name of related parties	2010			2009
Wu'an Yuanbaoshan Industrial Group Co. Ltd	$	53,094,193		$	20,611,677
Wu'an Hongrong Iron & Steel Co. Ltd		-			19,943,131
Wu'an Yuanbaoshan Ore Treatment Plant		216,241			-
Total Advance to Related Parties	$	53,310,434		$	40,554,808

(Accounts Payable) - Related Parties
Name of related parties		2010			2009
Wu'an Yuanbaoshan Industrial Group Co. Ltd	$	-		$	-
Wu'an Yuanbaoshan Industrial Group Co. Ltd - Gas Station		(629,750	)		(606,938	)
Wu'an Hongrong Iron & Steel Co. Ltd		(6,032,640	)		-
Wu'an Baoye Coke Industrial Co. Ltd.		(4,288,356	)		(5,528,680	)
Wu'an Yuanbaoshan Cement Plant		(97,503	)		(78,132	)
Wu'an Yuanbaoshan Ore Treatment Plant		-			(635,657	)
Wu'an Yeijin Iron Co. Ltd		(3,359,209	)		(3,292,461	)
Total (Accounts Payable) - Related Parties	$	(14,407,458	)	$	(10,141,868	)

Advances to Related Parties and Accounts Payable - Related Parties, Net	$	38,902,976		$	30,412,940

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The Company also leases the land and the manufacturing buildings where the above-mentioned production lines are situated from YBS Group and Hongrong under various capital leases (see Note 8).

The Company paid accrued interest totaling RMB 17,334,635 (approximately $2,540,390) for the years 2008 and 2009 to YBS Group in 2009.

Company paid accrued interest totaling RMB 23,040,741 (approximately $3,376,947) for the years 2008 and 2009 to Hongrong in 2009.

The Company purchased $2,911,043 and $34,698,242 raw materials from Baoye during nine months ended September 30, 2010 and 2009, respectively.

During nine months ended September 30, 2010, the Company purchased $2,047,957 raw materials from third parties through YBS Group and $1,794,299 from Ore Plant.

The Company sold its products to third parties through YBS group amounted $22,951,936 and $19,688,091 for the nine months ended September 30, 2010 and 2009, respectively.

13.	Equipment Loans Payable – Related Parties

Equipment loan payables – related parties consisted of:

	As of September 30,			As of December 31,
Equipment Loans Payable	2010			2009
Equipment loan - YBS Group payable	$	55,998,674		$	54,885,968
Equipment loan - Hongrong payable		24,692,503			24,201,859
Total equipment loans payable		80,691,177			79,087,827
Less: current portion		(10,876,555	)		(10,660,435	)
Long-term payable	$	69,814,622		$	68,427,392

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The detail of various equipment loans follows:

YBS Group Loan Payable	Total Loans and Accrued Interests Payable			Accrued Loan Interests			Steel-Making II production line and related auxiliary equipment loan interest at 5% per annum, due December 31, 2018			Plate-Rolling I production line and related auxiliary equipment loan interest at 5% per annum, due December 31, 2017
Balance at December 31, 2008	$	26,659,152		$	1,269,483		$	-		$	25,389,669
Acquired in 2009		35,718,399			-			35,718,399			-
Accrued interest		1,270,907			1,270,907			-			-
Repayment in 2009		(8,745,171	)		(2,540,390	)		(3,571,670	)		(2,633,111	)
Effect of exchange rate		(17,319	)		-			-			(17,319	)
Balance at December 31, 2009		54,885,968			-			32,146,729			22,739,239
Accrued interest		2,063,843			2,063,843			-			-
Effect of exchange rate		1,148,813			36,107			651,712			460,994
Balance at September 30, 2010	$	58,098,624		$	2,099,950		$	32,798,441		$	23,200,233

Hongrong Loan Payable	Total Loans and Acured Interest Payable			Accrued Loan Interests			Bar-Rolling III production line and related auxiliary equipment loan interest at 5% per annum, due December 31, 2018			Steel-Making I production line and related auxiliary equipment loan interest at 5% per annum, due December 31, 2017
Balance at December 31, 2008	$	45,503,928		$	2,166,854		$	-		$	43,337,074
Acquired in 2009		20,746,855			-			20,746,855			-
Accrued interest		1,210,093			1,210,093			-			-
Repayment in 2009		(43,229,456	)		(3,376,947	)		(20,746,855	)		(19,105,654	)
Effect of exchange rate		(29,561	)		-			-			(29,561	)
Balance at December 31, 2009		24,201,859			-			-			24,201,859
Accrued interest		910,048			910,048			-			-
Effect of exchange rate		506,565			15,921			-			490,644
Balance at September 30, 2010	$	25,618,472		$	925,969		$	-		$	24,692,503

At September 30, 2010, maturities of the Long-term Debt for the next five years and in total were as follows:

Year ending September 30,	Minimum Repayment

2011	$	10,876,555
2012		10,876,555
2013		10,876,555
2014		10,876,555
2015		10,876,555
Thereafter		26,308,402
Total	$	80,691,177

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14.	Employee Loan Payable

Employee loan payable consists of loans from employees (non executive officers) of Hongri, which bears an interest rate at 25% per year and was due by December 31, 2010. The Company did not repay this loan as of the reporting date. Accrued interest was $479,830 and $299,276 for the nine months ended September 30, 2010 and 2009, respectively.

15.	Statutory Reserves

Hongri is required to allocate a portion of its after-tax profits to the statutory reserve. Appropriations to the statutory reserve are required to be at least 10% of an enterprise’s after tax-retained net income determined under Chinese GAAP. When the surplus reserves account balance is equal to or greater than 50% of Hongri’s paid-in capital (approximately $11,999,000), no further allocation to the surplus reserve account is required.

If the accumulated balance of the company’s statutory reserve is not enough to make up for the losses of the company of the previous year, the current years’ profit shall first be used for making up the losses before the statutory reserve is drawn. As of September 30, 2010, the Company has made the total statutory reserves in the amount of $6,530,869.

16.	Stockholder’s Equity

CIS is authorized to issue 980,000,000 shares of common stocks with par value at $0.0001 per share. The common stock has voting rights, dividend rights and liquidation rights. The Company is also authorized to issue 10,000,000 shares of Series A Convertible Preferred Stock with par value at $0.0001 per share. The Series A Convertible Preferred Stock ranked junior to any other series of Blank Check Preferred Stock but senior to any other equity securities of the Company. Series A Convertible Preferred Stock has $10 liquidation amount for each share outstanding and has no dividend and voting rights. In addition, the Company is authorized to issue 10,000,000 shares of Blank Check Preferred Stock with par value at $0.0001 per share.

The Company is in the process of private placement and selling the Company’s securities to the accredited investor. Each selling unit comprises one share of Company’s common stock and one three-year warrant to purchase one share of Company’s common stock at $4.50 per share. As of September, 2010, the Company received investors’ deposits of $1,558,128 for purchasing of 1,038,752 units. The deposits were recorded as stock to be issued.

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17.	Income Tax

The provision for income tax of $3,682,216 and $0 for the nine months ended September 30, 2010 and 2009, respectively, arose from foreign income tax incurred and or paid to the Chinese tax agent.

Hongri is subject to a PRC 25% standard enterprise income tax. Hongri applied for foreign investment enterprise exemption, and the application had been approved by the local tax authority in 2007. Hongri is entitled to a tax holiday of full (100%) income tax exemption starting from the first profitable year of 2008 through 2009 and then a 50% reduction in income tax for additional three (3) years commencing 2010. The reduced income tax rate will be 12.5%, 12.5% and 12.5% for the year 2010, 2011 and 2012.

Foreign pretax earnings determined under Chinese GAAP were $19,487,658 and $47,969,710 for the nine months ended September 30, 2010 and 2009, respectively. Pretax earnings of a foreign subsidiary are subject to U.S. taxation when effectively repatriated. The Company provides income taxes on the undistributed earnings of non-U.S. subsidiaries except to the extent that such earnings are indefinitely invested outside the United States. At September 30, 2010, approximately $100,953,912 of accumulated unadjusted earnings of non-U.S. subsidiaries was indefinitely invested. At the existing U.S. federal income tax rate, additional taxes of $31,697,836 would have to be provided if such earnings were remitted currently.

The Company did not have any significant temporary differences relating to deferred tax liabilities as of September 30, 2010 and December 31, 2009.

Reconciliation of the differences between the statutory US Federal income tax rate and the effective rate is as follows for nine months ended September 30, 2010 and 2009:

	Nine Months Ended September 30,
	2010			2009

US statutory tax rate		34.0	%		34.0	%
Tax rate difference		-9.0	%		-9.0	%
Tax holiday		-12.5	%		-25.0	%
Changes in valuation allowance		6.4	%		0.0	%
Effective rate		18.9	%		0.0	%

18.	Commitment and Contingency

Certain of the real properties leases are recorded as capital leases, see Note 8. - Obligations Under Capital Leases.

19.	Major Customers and Vendors

The Company purchased raw materials and supplies from various vendors. For the nine months ended September 30, 2010, 89.48% of its raw materials and supplies were purchased from its related parties and 1.53%, 0.60% from other two major vendors. For the nine months ended September 30, 2009, 13.45% of its raw materials and supplies were purchased from its related parties and 8.96%, 5.78%, 3.91% and 3.52% from other four major vendors, respectively.

Ten (10) major customers accounted for 66% of the Company’s total sales with two (2) customers over 10% for the nine months ended September 30, 2010. For the nine months ended September 30, 2009, ten (10) major customers accounted for 59% of the Company’s total sales with only one customer over 10%.

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20.	Product Line Reporting

The Company operates in one industry segment and in one geographic region, which is the PRC. Revenues and cost of goods sold by major products for the nine months ended September 30, 2010 and 2009 follows:

	Nine Months Ended
	September 30,
Revenues	2010			2009

Steel plates	$	323,062,600		$	286,396,767
Steel bars		25,163,146			-
Steel billets		19,652,433			123,542,415
By-products		1,869,277			7,307,671
Total Revenues	$	369,747,456		$	417,246,853

Costs of Revenue		2010			2009
Steel plates	$	300,823,941		$	254,937,860
Steel bars		25,921,922			-
Steel billets		17,933,925			105,921,018
By-products		-			4,653,334
Total Cost of Revenue	$	344,679,788		$	365,512,212

Gross Margin		2010			2009
Steel plates		6.88	%		10.98	%
Steel bars		-3.02	%		-
Steel billets		8.74	%		14.26	%
By-products		100.00	%		36.32	%
Total		6.78	%		12.40	%

The Company sold 621,646 and 672,392 tons of steel plates for the nine months ended September 30, 2010 and 2009, respectively.

The Company sold 47,362 and 0 tons of steel bars for the nine months ended September 30, 2010 and 2009, respectively.

The Company sold 40,620 and 300,926 tons of steel billets for the nine months ended September 30, 2010 and 2009, respectively.

21.	Subsequent Events

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PART II-INFORMATION NOT REQUIRED IN PROSPECTUS

OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

Although we will receive no proceeds from the sale of shares pursuant to this prospectus, we have agreed to bear the costs and expenses of the registration of the shares. Our expenses in connection with the issuance and distribution of the securities being registered are estimated as follows:

SEC Registration Fee	$	1,347.93
Professional Fees and Expenses*	$	30,000.00
Printing and Engraving Expenses *	$	2,000.00
Transfer Agent's Fees*	$	1,000.00
Miscellaneous Expenses*	$	1,000.00
Total*	$	35,347.93

* Estimates

INDEMNIFICATION OF DIRECTORS AND OFFICERS

The Maryland General Corporation Law (the “MGCL”) permits a Maryland corporation to include in its charter a provision limiting the liability of its directors and officers to the corporation and its stockholders for money damages except for liability resulting from actual receipt of an improper benefit or profit in money, property or services or active and deliberate dishonesty established by a final judgment as being material to the cause of action.

The MGCL requires a corporation (unless its charter provides otherwise) to indemnify a director or officer who has been successful, on the merits or otherwise, in the defense of any proceeding to which he or she is made or threatened to be made a party by reason of his or her service in that capacity. The MGCL permits a corporation to indemnify its present and former directors and officers, among others, against judgments, penalties, fines, settlements and reasonable expenses actually incurred by them in connection with any proceeding to which they may be made or are threatened to be made a party by reason of their service in those or other capacities unless it is established that:

·	the act or omission of the director or officer was material to the matter giving rise to the proceeding, and (i) was committed in bad faith, or (ii) was the result of active and deliberate dishonesty;

·	the director or officer actually received an improper personal benefit in money, property or services; or

·	in the case of any criminal proceeding, the director or officer had reasonable cause to believe that the act or omission was unlawful.

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However, under the MGCL, a Maryland corporation may not indemnify a director or officer for an adverse judgment in a suit by or in the right of the corporation or if the director or officer was adjudged liable on the basis that personal benefit was improperly received, unless in either case a court orders indemnification and then only for expenses.

In addition, the MGCL permits a corporation to advance reasonable expenses to a director or officer upon the corporation's receipt of:

·	a written affirmation by the director or officer of his or her good faith belief that he or she has met the standard of conduct necessary for indemnification by the corporation; and

·	a written undertaking by the director or officer on his or her behalf to repay the amount paid or reimbursed by the corporation if it is ultimately determined that he or she did not meet the standard of conduct.

Article Seventh of our Articles of Incorporation also allows us to indemnify our directors to the fullest extent permitted by the MGCL, along with indemnify any and all persons whom the Company has the power to indemnify under the MGCL from and against any and all of the expenses, liabilities or other matters referred to in or covered by the MGCL.

Insofar as the foregoing provisions permit indemnification of directors, officers or persons controlling us for liability arising under the Securities Act, we have been informed that, in the opinion of the SEC, this indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.

RECENT SALES OF UNREGISTERED SECURITIES

The following sets forth sales by the Company within the past three years of unregistered securities:

On January 28, 2011, we sold an aggregate of 2,579,022 units at a price per unit of $1.50 in a private placement transaction. Each unit consisted of one share of our common stock and a three-year warrant to purchase one share of our common stock at an exercise price of $4.50 per share. We received gross proceeds of $3,868,547 from the sale of the units and paid commissions of $386,854.73, resulting in net proceeds of $3,481,692.27

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EXHIBITS

Exhibit Index

3.1	Articles of Incorporation filed with the Secretary of State of the State of Maryland on January 27, 2010

3.2	Bylaws of the Company

5.1	Legal Opinion of Sichenzia Ross Friedman Ference LLP re legality of the common stock being registered

10.1	Financial Advisory Agreement, dated 8, 2008, entered into between the Company and Friedland Capital Inc.

10.2	Entrusted Management Agreement, by and among Fakei, Hebei, Hongri Metallurgy and Nuosen

10.3	Exclusive Option Agreement, by and among Nuosen, Fakei, Hebei and Hongri Metallurgy

10.4	Covenant Letter

10.5	Call Option Agreement

10.6	Molten Iron Purchase Contract

21	List of subsidiaries

23.1	Consent of independent registered accounting firm for use of their report

23.2	Consent of counsel to the use of the opinion annexed at Exhibit 5.1 (contained in the opinion annexed at Exhibit 5.1)

24.1	Power of Attorney (included on signature page)

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UNDERTAKINGS

The undersigned Registrant hereby undertakes:

(1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement:

(i) To include any prospectus required by Section 10(a)(3) of the Securities Act;

(ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement(or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the SEC pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20% change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective Registration Statement;

(iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement.

(2) That, for the purpose of determining any liability under the Securities Act, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof;

(3) File a post-effective amendment to remove from registration any of the securities that remain unsold at the end of the offering.

(4) If the registrant is subject to Rule 430C, each prospectus filed pursuant to Rule 424(b) as part of a registration statement relating to an offering, other than registration statements relying on Rule 430B or other than prospectuses filed in reliance on Rule 430A, shall be deemed to be part of and included in the registration statement as of the date it is first used after effectiveness. Provided, however, that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such first use, supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to such date of first use.

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(5) For determining a liability of the undersigned small business issuer under the Securities Act to any purchaser in the initial distribution of the securities, the undersigned registrant undertakes that in a primary offering of securities of the undersigned registrant pursuant to this registration statement, regardless of the underwriting method used to sell the securities to the purchaser, if the securities are offered or sold to such purchaser by means of any of the following communications, the undersigned small business issuer will be a seller to the purchaser and will be considered to offer or sell such securities to such purchaser:

(i) Any preliminary prospectus or prospectus of the undersigned registrant relating to the offering required to be filed pursuant to Rule 424;

(ii) Any free writing prospectus relating to the offering prepared by or on behalf of the undersigned registrant or used or referred to by the undersigned small business issuer;

(iii) The portion of any other free writing prospectus relating to the offering containing material information about the undersigned small business issuer or its securities provided by or on behalf of the undersigned registrant; and

(iv) Any other communication that is an offer in the offering made by the undersigned registrant to the purchaser.

(b) Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.

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SIGNATURES

In accordance with the requirements of the Securities Act of 1933, as amended, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements of filing on Form S-1 and authorized this registration statement to be signed on its behalf by the undersigned, in the City of Handan, PRC, on February 9, 2011.

CHINA INDUSTRIAL STEEL INC.

/s/ Liu Shenghong
By: Liu Shenghong
Chairman of the Board of Directors, Chief Executive Officer and Chief Operating Officer
(principal executive officer)

/s/ Xiaolong Zhou
By: Xiaolong Zhou
Chief Financial Officer
(principal accounting and financial officer)

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints Frank J. Pena his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for such person and in his name, place and stead, in any and all capacities, to sign any or all further amendments or supplements (including post-effective amendments filed pursuant to Rule 462(b) of the Securities Act of 1933) to this registration statement and to file the same, with all exhibits thereto, and other documents in connection therewith, with the SEC, granting unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully as to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that each of said attorneys-in-fact and agents, or their substitutes, may lawfully do or cause to be done by virtue hereof.

In accordance with the requirements of the Securities Act of 1933, this registration statement was signed by the following persons in the capacities and on the dates stated.

Name and Title		Date

/s/ Liu Shenghong		February 9, 2011
By: Liu Shenghong
Chairman of the Board of Directors, Chief Executive Officer and Chief Operating Officer
(principal executive officer)

/s/ Xiaolong Zhou		February 9, 2011
By: Xiaolong Zhou
Chief Financial Officer (principal accounting and financial officer)

/s/ Frank J. Pena		February 9, 2011
By: Frank J. Pena
Director
		February 9, 2011
/s/ Liu Beifang
By: Liu Beifang
Director

/s/ Liu Fengye		February 9, 2011
By: Liu Fengye
Director

/s/ Liu Jihnghe		February 9, 2011
By: Liu Jihnghe
Director

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China Industrial Steel Inc. - FORM S-1 - February 9, 2011

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