10-Q

FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2011

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

[X]           QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2011

or

[   ]           TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________________ to __________________________

Commission file number: 001 - 34631

CHINA ARMCO METALS, INC.

(Exact name of registrant as specified in its charter)

Nevada	26-0491904
(State or other jurisdiction of	(I.R.S. Employer Identification No.)
incorporation or organization)
One Waters Park Drive, Suite 98, San Mateo, CA	94403
(Address of principal executive offices)	(Zip Code)

(650) 212-7620

(Registrant's telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes [   ]    No [   ]

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

Large accelerated filer [   ] Accelerated filer [   ]

Non-accelerated filer(Do not check if smaller reporting company) [   ] Smaller reporting company [X]

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

Indicated the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. 15,232,173 shares of common stock are issued and outstanding as of August 11, 2011.

i

TABLE OF CONTENTS

Page No.

PART I - FINANCIAL INFORMATION

Item 1.	Financial Statements.	F-1
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations.	1
Item 3.	Quantitative and Qualitative Disclosures About Market Risk.	14
Item 4.	Controls and Procedures.	14

PART II - OTHER INFORMATION

Item 1.	Legal Proceedings.	16
Item 1A.	Risk Factors.	16
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	16
Item 3.	Defaults Upon Senior Securities.	16
Item 4.	(Removed and Reserved).
Item 5.	Other Information.	16
Item 6.	Exhibits.	17

INDEX OF CERTAIN DEFINED TERMS USED IN THIS REPORT

When used in this report the terms:

– “China Armco Metals,” “we,” “us" or “our” refers to China Armco Metals, Inc., a Nevada corporation, and our subsidiaries,

– “Armco” or “Armco & Metawise” refers to Armco Metals International Limited, a limited liability company established under the laws of Hong Kong.

– “Armet” refers to Armet (Lianyungang) Renewable Resources Co., Ltd. (a/k/a Armet (Lianyungang) Scraps Co., Ltd.), a limited liability company established under the laws of the People’s Republic of China.

– “Henan Armco” refers to Henan Armco & Metawise Trading Co., Ltd., a limited liability company established under the laws of the People’s Republic of China.

– “Lianyungang Armco” refers to Armco (Lianyungang) Holdings, Ltd., a wholly-owned foreign enterprise and limited liability company established under the laws of the People’s Republic of China.

– “Armco Shanghai” refers to Armco Metals (Shanghai) Holdings. Ltd., a wholly-owned foreign enterprise and limited liability company established under the laws of the People’s Republic of China.

ii

PART 1 - FINANCIAL INFORMATION

Item 1. Financial Statements

China Armco Metals, Inc. and Subsidiaries

June 30, 2011 and 2010

Index to Consolidated Financial Statements

Contents	Page(s)
Consolidated Balance Sheets at June 30, 2011 (Unaudited) and December 31, 2010	F-2
Consolidated Statements of Operations and Comprehensive Income (Loss) for the Three Months Ended June 30, 2011 and 2010 (Unaudited)	F-3
Consolidated Statements of Operations and Comprehensive Income (Loss) for the Six Months Ended June 30, 2011 and 2010 (Unaudited)	F-4
Consolidated Statement of Stockholders’ Equity for the Six Months Ended June 30, 2011 (Unaudited)	F-5
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2011 and 2010 (Unaudited)	F-6
Notes to the Consolidated Financial Statements (Unaudited)	F-7

F-1 

CHINA ARMCO METALS, INC. AND SUBSIDIARIES

 CONSOLIDATED BALANCE SHEETS

	June 30, 2011			December 31, 2010
	(Unaudited)
ASSETS
CURRENT ASSETS:
Cash	$	1,825,255		$	3,097,917
Pledged deposits		12,114,281			12,643,671
Marketable securities		1,380,015			2,890,380
Bank acceptance notes receivable		154,715			-
Accounts receivable		337,302			19,115,019
Inventories		13,669,273			10,439,831
Advance on purchases		11,530,060			6,509,846
Prepaid corporate income taxes-Armet		459,950			-
Prepayments and other current assets		1,558,343			4,729,935
Total Current Assets		43,029,194			59,426,599
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment		36,673,750			34,633,639
Accumulated depreciation		(2,099,639	)		(761,515	)
PROPERTY, PLANT AND EQUIPMENT, net		34,574,111			33,872,124
LAND USE RIGHT
Land use right		2,391,940			2,338,289
Accumulated amortization		(181,784	)		(153,965	)
LAND USE RIGHT, net		2,210,156			2,184,324
Total Assets	$	79,813,461		$	95,483,047
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Loans payable	$	8,827,715		$	24,765,820
Banker's acceptance notes payable		6,188,598			4,174,355
Current maturities of capital lease obligation		730,334			727,756
Current maturities of long-term debt		4,641,448			4,537,342
Accounts payable		2,114,391			3,435,528
Advances received from Chairman and CEO		726,634			799,394
Customer deposits		8,498,165			1,345,304
Corporate income tax payable-HK		134,381			1,091,038
Accrued expenses and other current liabilities		994,901			6,316,568
Total Current Liabilities		32,856,567			47,193,105
CAPITAL LEASE OBLIGATION, net of current maturities		1,202,205			1,540,915
LONG-TERM DEBT, net of current maturities		3,867,873			3,781,119
DERIVATIVE LIABILITY		10,023			138,143
Total Liabilities		37,936,668			52,653,282
STOCKHOLDERS' EQUITY:
Preferred stock, $0.001 par value; 1,000,000 shares authorized; none issued or outstanding		-			-
Common stock, $0.001 par value, 74,000,000 shares authorized, 14,994,592 and 14,840,948 shares issued and outstanding, respectively		14,995			14,841
Additional paid-in capital		29,465,145			28,966,596
Retained earnings		11,975,986			12,711,039
Accumulated other comprehensive income (loss):
Change in unrealized loss on marketable securities		(2,109,512	)		(506,278	)
Foreign currency translation gain		2,530,179			1,643,567
Total Stockholders' Equity		41,876,793			42,829,765
Total Liabilities and Stockholders' Equity	$	79,813,461		$	95,483,047

See accompanying notes to the consolidated financial statements.

F-2

CHINA ARMCO METALS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

	For the Three Months Ended June 30, 2011			For the Three Months Ended June 30, 2010
	(Unaudited)			(Unaudited)
NET REVENUES	$	30,968,138		$	16,999,602
COST OF GOODS SOLD		29,618,739			16,802,757
GROSS PROFIT		1,349,399			196,845
OPERATING EXPENSES:
Selling expenses		270,524			379,392
Professional fees		500,640			175,365
General and administrative expenses		872,967			455,757
Operating cost of Armet idle manufacturing facility		428,436			-
Total operating expenses		2,072,567			1,010,514
LOSS FROM OPERATIONS		(723,168	)		(813,669	)
OTHER (INCOME) EXPENSE:
Interest income		(25,050	)		(5,631	)
Interest expense		409,175			-
Foreign currency transaction gain		90,997			-
Gain from vendor price adjustment		-			-
Change in fair value of derivative liability		(76,897	)		(427,881	)
Loan guarantee expense		45,333			31,583
Other (income) expense		66,789			(149,647	)
Total other (income) expense		510,347			(551,576	)
LOSS BEFORE INCOME TAXES		(1,233,515	)		(262,093	)
INCOME TAXES		67,708			(14,461	)
LOSS FROM OPERATIONS		(1,301,223	)		(247,632	)
NET LOSS		(1,301,223	)		(247,632	)
OTHER COMPREHENSIVE INCOME (LOSS):
Change in unrealized loss of marketable securities		(514,848	)		-
Foreign currency translation gain (loss)		588,014			99,109
COMPREHENSIVE INCOME (LOSS)	$	(1,228,057	)	$	(148,523	)
NET LOSS PER COMMON SHARE - BASIC AND DILUTED:
Net loss per common share - basic and diluted	$	(0.08	)	$	(0.02	)
Weighted Average Common Shares Outstanding - basic and diluted		15,352,020			13,900,753

See accompanying notes to the consolidated financial statements.

F-3

CHINA ARMCO METALS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

	For the Six Months Ended June 30, 2011			For the Six Months Ended June 30, 2010
	(Unaudited)			(Unaudited)
NET REVENUES	$	80,652,790		$	25,576,172
COST OF GOODS SOLD		76,134,622			24,820,408
GROSS PROFIT		4,518,168			755,764
OPERATING EXPENSES:
Selling expenses		542,048			722,097
Professional fees		628,805			339,922
General and administrative expenses		1,768,376			862,072
Operating cost of Armet idle manufacturing facility		899,786			-
Total operating expenses		3,839,015			1,924,091
LOSS FROM OPERATIONS		679,153			(1,168,327	)
OTHER (INCOME) EXPENSE:
Interest income		(29,384	)		(5,856	)
Interest expense		963,428			85,115
Foreign currency transaction gain		(92,869	)		-
Gain from vendor price adjustment		-			(963,259	)
Change in fair value of derivative liability		(128,120	)		(106,127	)
Loan guarantee expense		134,999			31,583
Other (income) expense		323,281			(147,247	)
Total other (income) expense		1,171,335			(1,105,791	)
LOSS BEFORE INCOME TAXES		(492,182	)		(62,536	)
INCOME TAXES		242,871			131,872
LOSS FROM OPERATIONS		(735,053	)		(194,408	)
NET LOSS		(735,053	)		(194,408	)
OTHER COMPREHENSIVE INCOME (LOSS):
Change in unrealized loss of marketable securities		(2,109,512	)		-
Foreign currency translation gain (loss)		886,612			103,048
COMPREHENSIVE INCOME (LOSS)	$	(1,957,953	)	$	(91,360	)
NET LOSS PER COMMON SHARE - BASIC AND DILUTED:
Net loss per common share - basic and diluted	$	(0.05	)	$	(0.01	)
Weighted Average Common Shares Outstanding - basic and diluted		15,336,338			13,900,753

See accompanying notes to the consolidated financial statements.

F-4

CHINA ARMCO METALS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

For the Year Ended December 31, 2010 and for the Interim Period Ended June 30, 2011

(Unaudited)

	Common Stock, $0.001 Par Value									Accumulated Other Comprehensive Income (Loss)
	Number of Shares		Amount		Additional Paid-in Capital			Retained Earnings		Change in Unrealized Loss on Marketable Securities		Foreign Currency Translation Gain		Total Stockholders' Equity
Balance, December 31, 2009		10,310,699	$	10,310	$	1,880,466		$	14,936,915	$	-	$	297,681	$	17,125,372
Issuance of common stock upon exercise of warrants to purchase 1,324,346 common shares at $5.00 per share for the three-month period ending March 31, 2010		1,324,346		1,325		6,620,405									6,621,730
Issuance of 78,217 common shares upon cashless exercise of warrants to purchase 167,740 common shares at $5.00 per share for the three-month period ending March 31, 2010		78,217		78		(78	)								-
Extinguishment of derivative liability associated with the exercise of warrants to purchase common stock for the three-month period ending March 31, 2010						1,875,106									1,875,106
Reclassification of derivative liability to additional paid-in capital associated with the waiver of anti-dilution provision of warrants to purchase 1,031,715 common shares						1,292,227									1,292,227
Issuance of common stock upon exercise of warrants to purchase 13,806 common shares at $5.00 per share for the three-month period ending June 30, 2010		13,806		14		69,016									69,030
Reclassification of derivative liability to additional paid-in capital associated with the exercise of warrants to purchase 13,806 common shares						21,229									21,229
Sale of common stock and warrant at $6.50 per unit on April 20, 2010		1,538,464		1,538		9,111,436									9,112,974
Issuance of common stock upon exercise of options to purchase 1,400,000 common shares at $5.00 per share for the three-month period ending June 30, 2010		1,400,000		1,400		6,998,600									7,000,000
Issuance of common stock to China Direct Industries, Inc. for consulting services		80,000		80		392,720									392,800

Issuance of common stock to Bespokefor consulting services	22,500	23	78,502							78,525
Loan guarantee services received and shares vested from common shares issued to Chaoyang Steel on June 11, 2010 for 5 year loan guarantee services expiring June 30, 2016	66,666	67	244,930							244,997
Issuance of restricted stock to Director pursuant to 2009 Stock Incentive Plan for future services valued at $3.28 per share granted on September 16, 2010	6,250	6	19,494							19,500
Issuance of restricted stock to Director pursuant to 2009 Stock Incentive Plan for future services valued at $3.28 per share granted on September 16, 2010			(19,500	)						(19,500	)
Amortization of deferred compensation			244,043							244,043
Issuance of stock options to an employee pursuant to 2009 Stock Incentive Plan for services on October 6, 2010			138,000							138,000
Comprehensive income (loss)
Net loss					(2,225,876	)				(2,225,876	)
Change in unrealized loss on marketable securities							(506,278	)		(506,278	)
Foreign currency translation gain									1,345,886	1,345,886
Total comprehensive income (loss)										(1,386,268	)
Appropriation to statutory reserves										-
Appropriation to employee welfare funds										-
Dividends paid										-
Dividends declared										-
Balance, December 31, 2010	14,840,948	14,841	28,966,596		12,711,039		(506,278	)	1,643,567	42,829,765
Loan guarantee services received and shares vested from common shares issued to Chaoyang Steel on June 11, 2010 for 5 year loan guarantee services expiring June 30, 2016	33,333	33	89,633							89,666
Issuance of common stock to an employee pursuant to 2009 Stock Incentive Plan for services valued at $3.38 per share granted on October 6, 2010	55,378	55	187,125							187,180
Issuance of common stock to HCI for consulting services for first quarter 2011	10,800	11	29,040							29,051
Issuance of common shares to an employee for future services	10,000	10	27,390							27,400

Issuance of common shares to an employee for future services			-		(27,400	)									(27,400	)
Amortization of deferred employee services					132,784										132,784
Loan guarantee services received and shares vested from common shares issued to Chaoyang Steel on June 11, 2010 for 5 year loan guarantee services expiring June 30, 2016	33,333		34		45,299										45,333
Issuance of common stock to HCI for consulting services for second quarter 2011	10,800		11		14,677										14,688
Comprehensive income (loss)
Net Loss								(735,053	)						(735,053	)
Change in unrealized loss on marketable securities											(1,603,234	)			(1,603,234	)
Foreign currency translation gain													886,612		886,612
Total comprehensive income (loss)															(1,451,675	)
Balance, June 30, 2011	14,994,592	$	14,995	$	29,465,145		$	11,975,986		$	(2,109,512	)	2,530,179	$	41,876,793

See accompanying notes to the consolidated financial statements.

F-5

CHINA ARMCO METALS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

	For the Six Months Ended June 30, 2011			For the Six Months Ended June 30, 2010
	(Unaudited)			(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(735,053	)	$	(194,408	)
Adjustments to reconcile net loss to net cash provided by operating activities
Depreciation expense		1,322,537			60,757
Amortization expense		24,287			23,056
Change in fair value of derivative liability		(128,120	)		(610,127	)
Gain on foreign exchange rate change on investment		(92,869	)		-
Stock based compensation		311,523			337,407
Changes in operating assets and liabilities:
Bank acceptance notes receivable		(154,715	)		-
Accounts receivable		18,900,255			16,419,615
Inventories		(2,995,412	)		(3,315,143	)
Advance on purchases		(4,870,851	)		(1,941,706	)
Prepaid value added taxes		-			(1,342,876	)
Prepayments and other current assets		2,809,624			2,715,506
Accounts payable		(1,386,949	)		3,124,133
Customer deposits		7,121,994			(1,183,590	)
Taxes payable		(956,651	)		(1,537,208	)
Accrued expenses and other current liabilities		(5,263,344	)		(422,314	)
NET CASH PROVIDED BY OPERATING ACTIVITIES		13,906,256			12,133,102
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from release of pledged deposits		27,057,004			3,146,131
Payment made towards pledged deposits		(26,247,324	)		(3,945,268	)
Purchase of marketable securities		-			(3,656,981	)
Purchases of property and equipment		(1,263,008	)		(10,641,249	)
NET CASH USED IN INVESTING ACTIVITIES		(453,328	)		(15,097,367	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from loans payable		45,707,764			9,532,567
Repayment of loans payable		(61,873,516	)		(26,574,054	)
Banker's acceptance notes payable		1,918,465			-
Repayment of capital lease obligation		(388,186	)		-
Proceeds from long-term debt		-			1,468,731
Repayment of long-term debt		-			(2,203,096	)
Advances from (to) Chairman and CEO		(72,760	)		339,829
Sales of common stock and warrants, net of offering costs
Proceeds from exercise of warrants		-			6,690,760
Proceeds from exercise of options		-			7,000,000
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES		(14,708,233	)		5,367,710
EFFECT OF EXCHANGE RATE CHANGES ON CASH		(17,356	)		17,899
NET CHANGE IN CASH		(1,272,661	)		2,421,344
Cash at beginning of period		3,097,917			743,810
Cash at end of period	$	1,825,255		$	3,165,154
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:
Interest paid	$	963,428		$	361,777
Income taxes paid	$	1,205,932		$	404,897
NON CASH FINANCING AND INVESTING ACTIVITIES:
Accrued employee compensation paid in common shares in lieu of cash		-			-

See accompanying notes to the consolidated financial statements.

F-6

China Armco Metals, Inc. and Subsidiaries

June 30, 2011 and 2010

Notes to the Consolidated Financial Statements

(Unaudited)

NOTE 1 – ORGANIZATION AND OPERATIONS

Cox Distributing was founded as an unincorporated business in January 1984 and was incorporated as Cox Distributing, Inc., a C corporation in the State of Nevada on April 6, 2007 at which time 9,100,000 shares of common stock were issued to the founder in exchange for the existing unincorporated business.  No value was given to the stock issued by the newly formed corporation.  Therefore, the shares were recorded to reflect the $.001 par value and paid in capital was recorded as a negative amount ($9,100).   On June 27, 2008, the Company amended its Articles of Incorporation, and changed its name to China Armco Metals, Inc. (“Armco Metals” or the “Company”) upon the acquisition of Armco Metals International Limited (formerly “Armco HK (H.K) Limited” or “Armco HK”) and Subsidiaries.  The Company engages in, through its wholly owned subsidiaries in China, and Armco HK, import, export and distribution of ferrous and non-ferrous ores and metals, and processing and distribution of scrap steel.

Merger of Armco Metal International Limited and Subsidiaries (“Armco HK”)

On June 27, 2008, the Company entered into a share purchase agreement (the “Share Purchase Agreement”) and consummated a share purchase (the “Share Purchase”) with Armco HK and Feng Gao, who owned 100% of the issued and outstanding shares of Armco HK.  In connection with the acquisition, the Company purchased from the Armco HK Shareholder 100% of the issued and outstanding shares of Armco HK’s capital stock for $6,890,000 by delivery of the Company’s purchase money promissory note.  In addition, the Company issued to Ms. Gao a stock option entitling Ms. Gao to purchase a total of 5,300,000 shares of the Company’s common stock, par value $.001 per share (the “Common Stock”) at $1.30 per share expiring on September 30, 2008 and 2,000,000 shares at $5.00 per share expiring on September 30, 2010 (the “Gao Option”).  On August 12, 2008, Ms. Gao exercised her option to purchase and the Company issued 5,300,000 shares of its common stock in exchange for the $6,890,000 note owed to Ms. Gao.  The shares issued represented approximately 69.7% of the issued and outstanding common stock immediately after the consummation of the Share Purchase and exercise of the option to purchase 5,300,000 shares of the Company’s common stock at $1.30 per share.  As a result of the ownership interests of the former shareholders of Armco HK, for financial statement reporting purposes, the merger between the Company and Armco HK has been treated as a reverse acquisition with Armco HK deemed the accounting acquirer and the Company deemed the accounting acquiree under the purchase method of accounting in accordance with section 805-10-55 of the FASB Accounting Standards Codification. The reverse merger is deemed a capital transaction and the net assets of Armco HK (the accounting acquirer) are carried forward to the Company (the legal acquirer and the reporting entity) at their carrying value before the combination.  The acquisition process utilizes the capital structure of the Company and the assets and liabilities of Armco HK which are recorded at historical cost.  The equity of the Company is the historical equity of Armco HK retroactively restated to reflect the number of shares issued by the Company in the transaction.

Armco & Metawise (H.K) Limited was incorporated on July 13, 2001 under the laws of the Hong Kong Special Administrative Region (“HK SAR”) of the People’s Republic of China (“PRC”).  On March 22, 2011, Armco & Metawise (H.K) Limited amended its Memorandum and Articles of Association, and changed its name to Armco Metal International Limited (“Armco HK”).  Armco HK engages in the import, export and distribution of ferrous and non-ferrous ore and metals.

On January 9, 2007, Armco HK formed Armet (Lianyungang) Renewable Resources Co, Ltd. (“Armet”), a wholly-owned foreign enterprise (“WOFE”) subsidiary in the City of Lianyungang, Jiangsu Province, PRC.  On December 1, 2008, Armco HK transferred its 100% equity interest in Armet to China Armco Metals, Inc.  Armet engages in the processing and distribution of scrap metal.

Henan Armco and Metawise Trading Co., Ltd. (“Henan”) was incorporated on June 6, 2002 in the City of Zhengzhou, Henan Province, PRC.  Henan engages in the import, export and distribution of ferrous and non-ferrous ores and metals.

Merger of Henan with Armet, Companies under Common Control

On December 28, 2007, Armco HK entered into a Share Transfer Agreement with Armet, whereby Amrco HK transferred to Armet all of its equity interest in Henan, a company under common control of Armco HK.  The acquisition of Henan has been recorded on the purchase method of accounting at historical amounts as Armet and Henan were under common control since June 2002.  The consolidated financial statements have been presented as if the acquisition of Henan had occurred as of the first date of the first period presented.

F-7

Formation of Armco (Lianyungang) Holdings, Inc.

On June 4, 2009, the Company formed Armco (Lianyungang) Holdings, Inc. (“Lianyungang Armco”), a WOFE subsidiary in the City of Lianyungang, Jiangsu Province, PRC.  Lianyungang intends to engage in marketing and distribution of the recycled scrap steel.

Formation of Armco Metals (Shanghai) Holdings, Ltd.

On July 16, 2010, the Company formed Armco Metals (Shanghai) Holdings. Ltd. (“Armco Shanghai”) as a WOFE subsidiary in Shanghai, China. Armco Shanghai serves as the headquarters for the Company’s China operations and oversees the activities of the Company in financing and international trading.

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of presentation - unaudited interim financial information

The accompanying unaudited interim consolidated financial statements and related notes have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information, and with the rules and regulations of the United States Securities and Exchange Commission (“SEC”) to Form 10-Q and Article 8 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements.  The unaudited interim financial statements furnished reflect all adjustments (consisting of normal recurring accruals) which are, in the opinion of management, necessary to a fair statement of the results for the interim periods presented.  Interim results are not necessarily indicative of the results for the full year.  These unaudited interim consolidated financial statements should be read in conjunction with the consolidated financial statements of the Company for the year ended December 31, 2010 and notes thereto contained in the Company’s Annual Report on Form 10-K filed with the SEC on March 31, 2011.

Principles of consolidation

The consolidated financial statements include all accounts of Armco Metals, Armco HK, Armet, Henan Armco and Lianyungang Armco as of June 30, 2011 and 2010 and for the interim periods then ended; all accounts of Armco Shanghai as of June 30, 2011 and 2010, for the interim period ended June 30, 2011 and for the period from June 16, 2010 (inception) through June 30, 2010.  All inter-company balances and transactions have been eliminated.

Reclassification

Certain amounts in the prior period financial statements have been reclassified to conform to the current period presentation.   These reclassifications had no effect on reported losses.

Use of estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period.  Management bases its estimates on historical experience and on various assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.

The Company’s significant estimates include allowance for doubtful accounts; foreign currency; the fair value of financial instruments; normal production capacity, inventory valuation and obsolescence; the carrying value and recoverability of long-lived assets, including the values assigned to and estimated useful lives of property, plant and equipment, and land use rights; revenue recognized or recognizable; sales returns and allowances; valued added tax and income tax provision.  Those significant accounting estimates or assumptions bear the risk of change due to the fact that there are uncertainties attached to those estimates or assumptions, and certain estimates or assumptions are difficult to measure or value.

Management regularly reviews its estimates utilizing currently available information, changes in facts and circumstances, historical experience and reasonable assumptions. After such reviews, and if deemed appropriate, those estimates are adjusted accordingly. Actual results could differ from those estimates.

F-8

Fair value of financial instruments

The Company follows paragraph 825-10-50-10 of the FASB Accounting Standards Codification for disclosures about fair value of its financial instruments and has adopted paragraph 820-10-35-37 of the FASB Accounting Standards Codification (“Paragraph 820-10-35-37”) to measure the fair value of its financial instruments. Paragraph 820-10-35-37 establishes a framework for measuring fair value in accounting principles generally accepted in the United States of America (U.S. GAAP), and expands disclosures about fair value measurements. To increase consistency and comparability in fair value measurements and related disclosures, Paragraph 820-10-35-37 establishes a fair value hierarchy which prioritizes the inputs to valuation techniques used to measure fair value into three (3) broad levels.  The three (3) levels of fair value hierarchy defined by Paragraph 820-10-35-37 are described below:

Level 1	Quoted market prices available in active markets for identical assets or liabilities as of the reporting date.
Level 2	Pricing inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reporting date.
Level 3	Pricing inputs that are generally observable inputs and not corroborated by market data.

Financial assets are considered Level 3 when their fair values are determined using pricing models, discounted cash flow methodologies or similar techniques and at least one significant model assumption or input is unobservable.  Level 3 financial liabilities consist of the derivative warrant issued in July 2008 for which there is no current market for these securities such that the determination of fair value requires significant judgment or estimation.  The Company valued the automatic conditional conversion, re-pricing/down-round, change of control; default and follow-on offering provisions using a lattice model, with the assistance of a valuation specialist, for which management understands the methodologies. These models incorporate transaction details such as Company stock price, contractual terms, maturity, risk free rates, as well as assumptions about future financings, volatility, and holder behavior as of the date of issuance and each balance sheet date.

The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities and the lowest priority to unobservable inputs.  If the inputs used to measure the financial assets and liabilities fall within more than one level described above, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument.

The carrying amounts of the Company’s financial assets and liabilities, such as cash, pledged deposits, accounts receivable, advance on purchases, prepayments and other current assets, accounts payable, customer deposits, corporate income tax payable, accrued expenses and other current liabilities approximate their fair values because of the short maturity of these instruments.

The Company’s loans payable, banker’s acceptance notes payable, capital lease obligation, and long-term debt approximate the fair value of such instruments based upon management’s best estimate of interest rates that would be available to the Company for similar financial arrangements at June 30, 2011 and 2010.

Transactions involving related parties cannot be presumed to be carried out on an arm's-length basis, as the requisite conditions of competitive, free-market dealings may not exist. Representations about transactions with related parties, if made, shall not imply that the related party transactions were consummated on terms equivalent to those that prevail in arm's-length transactions unless such representations can be substantiated.

It is not however, practical to determine the fair value of advances from stockholders due to their related party nature.

Fair value of financial assets and liabilities measured on a recurring basis

The Company uses Level 1 of the fair value hierarchy to measure the fair value of the marketable securities and marks the available for sale marketable securities at fair value in the statement of financial position at each balance sheet date and reports the unrealized holding gains and losses for available-for-sale securities in other comprehensive income (loss) until realized.

The Company uses Level 3 of the fair value hierarchy to measure the fair value of the derivative liabilities and revalues its derivative warrant liability at every reporting period and recognizes gains or losses in the consolidated statements of operations and comprehensive income (loss) that are attributable to the change in the fair value of the derivative warrant liability.

Financial assets and liabilities measured at fair value on a recurring basis are summarized below and disclosed on the consolidated balance sheets:

			Fair Value Measurement Using
	Carrying Value		Level 1		Level 2		Level 3		Total
Marketable securities, available for sale	$	1,380,015	$	1,380,015	$	-	$	-	$	1,380,015
Derivative warrant liabilities	$	10,023	$	-	$	-	$	10,023	$	10,023

F-9

The table below provides a summary of the changes in fair value, including net transfers in and/or out, of all financial assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the interim period ended June 30, 2011:

	Fair Value Measurement Using Level 3 Inputs
		Derivative warrants			Total
Balance, December 31, 2010		$	138,143		$	138,143
Total gains or losses (realized/unrealized)
included in net loss			(128,120	)		(128,120	)
Included in other comprehensive income			-			-
Purchases, issuances and settlements			-			-
Transfers in and/or out of Level 3			-			-
Balance, June 30, 2011		$	10,023		$	10,023

The Company has no other assets or liabilities measured at fair value on a recurring basis or a non-recurring basis; consequently, the Company did not have any fair value adjustments for assets and liabilities measured at fair value at June 30, 2011 or December 31, 2010; no gains or losses are reported in the consolidated statement of income and comprehensive income (loss) that are attributable to the change in unrealized gains or losses relating to those assets and liabilities still held at the reporting date for the interim period ended June 30, 2011 or 2010.

Fair value of non-financial assets or liabilities measured on a recurring basis

The Company identifies potentially excess and slow-moving inventories by evaluating turn rates, inventory levels and other factors.  Excess quantities are identified through evaluation of inventory aging, review of inventory turns and historical sales experiences. The Company provides lower of cost or market reserves for such identified excess and slow-moving inventories. The Company establishes a reserve for inventory shrinkage, if any, based on the historical results of physical inventory cycle counts.

Carrying value, recoverability and impairment of long-lived assets

The Company has adopted paragraph 360-10-35-17 of the FASB Accounting Standards Codification for its long-lived assets. The Company’s long-lived assets, which include property, plant and equipment and land use rights are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.

The Company assesses the recoverability of its long-lived assets by comparing the projected undiscounted net cash flows associated with the related long-lived asset or group of long-lived assets over their remaining estimated useful lives against their respective carrying amounts. Impairment, if any, is based on the excess of the carrying amount over the fair value of those assets.  Fair value is generally determined using the asset’s expected future discounted cash flows or market value, if readily determinable.  If long-lived assets are determined to be recoverable, but the newly determined remaining estimated useful lives are shorter than originally estimated, the net book values of the long-lived assets are depreciated over the newly determined remaining estimated useful lives.

The Company considers the following to be some examples of important indicators that may trigger an impairment review: (i) significant under-performance or losses of assets relative to expected historical or projected future operating results; (ii) significant changes in the manner or use of assets or in the Company’s overall strategy with respect to the manner or use of the acquired assets or changes in the Company’s overall business strategy; (iii) significant negative industry or economic trends; (iv) increased competitive pressures; (v) a significant decline in the Company’s stock price for a sustained period of time; and (vi) regulatory changes.  The Company evaluates acquired assets for potential impairment indicators at least annually and more frequently upon the occurrence of such events.

The key assumptions used in management’s estimates of projected cash flow deal largely with forecasts of sales levels, gross margins, and operating costs of the manufacturing facilities.  These forecasts are typically based on historical trends and take into account recent developments as well as management’s plans and intentions.  Any difficulty in manufacturing or sourcing raw materials on a cost effective basis would significantly impact the projected future cash flows of the Company’s manufacturing facilities and potentially lead to an impairment charge for long-lived assets.  Other factors, such as increased competition or a decrease in the desirability of the Company’s products, could lead to lower projected sales levels, which would adversely impact cash flows.  A significant change in cash flows in the future could result in an impairment of long lived assets.

F-10

The impairment charges, if any, is included in operating expenses in the accompanying consolidated statements of income and comprehensive income (loss).

Cash equivalents

The Company considers all highly liquid investments with maturities of three months or less at the time of purchase to be cash equivalents.

Pledged deposits

Pledged deposits consist of amounts held in financial institutions for (i) outstanding letters of credit and (ii) open banker’s acceptance notes payable maturing between three (3) to nine (9) months from the date of issuance.

The Company uses letters of credit in connection with its purchases of ferrous and non-ferrous ores and metals, and scrap metal for processing and distribution.  The issuing financial institutions of those letters of credit require the Company to deposit and pledge certain percentage of the maximum amount stipulated under those letters of the credit as collateral.  The pledged deposits are either released to the Company in the event of vendors' non-performance or to be released to the Company as part of the payment toward the letters of credit when vendors delivers the goods under those letters of credit on or before maturity date.

The Company satisfies certain accounts payable, through banker’s acceptance notes issued by financial institutions to certain of the Company’s vendors.  The issuing financial institutions of those banker’s acceptance notes require the Company to deposit and pledge certain percentage of the amount stipulated under those banker’s acceptance notes as collateral.  The pledged deposits are released to the Company as part of the payment toward banker’s acceptance notes upon maturity.

The Management of the Company believes it is appropriate to classify such amounts as current assets as those letters of credit are of a short term nature, three (3) to nine (9) months in length from the date of issuance.

Marketable securities, available for sale

The Company accounts for marketable securities, available for sale, in accordance with sub-topic 320-10 of the FASB Accounting Standards Codification (“Sub-topic 320-10”).

Pursuant to Paragraph 320-10-35-1, investments in debt securities that are classified as available for sale and equity securities that have readily determinable fair values that are classified as available for sale shall be measured subsequently at fair value in the consolidated balance sheets at each balance sheet date. Unrealized holding gains and losses for available-for-sale securities (including those classified as current assets) shall be excluded from earnings and reported in other comprehensive income until realized except an available-for-sale security that is designated as being hedged in a fair value hedge, from which all or a portion of the unrealized holding gain and loss of shall be recognized in earnings during the period of the hedge, pursuant to paragraphs 815-25-35-1 through 35-4.

The Company follows Paragraphs 320-10-35-18 through 33 and assess whether an investment is impaired in each reporting period.  An investment is impaired if the fair value of the investment is less than its cost. Impairment indicators include, but are not limited to the following: a. a significant deterioration in the earnings performance, credit rating, asset quality, or business prospects of the investee; b. a significant adverse change in the regulatory, economic, or technological environment of the investee; c. a significant adverse change in the general market condition of either the geographic area or the industry in which the investee operates; d. a bona fide offer to purchase (whether solicited or unsolicited), an offer by the investee to sell, or a completed auction process for the same or similar security for an amount less than the cost of the investment; e. factors that raise significant concerns about the investee's ability to continue as a going concern, such as negative cash flows from operations, working capital deficiencies, or noncompliance with statutory capital requirements or debt covenants. If the fair value of an investment is less than its cost basis at the balance sheet date of the reporting period for which impairment is assessed, the impairment is either temporary or other than temporary. Pursuant to Paragraph 320-10-45-8A, in periods in which an entity determines that a security’s decline in fair value below its cost basis is other than temporary, the entity shall recognize and present the total other-than-temporary impairment in the statement of earnings with an offset for the amount of the total other-than-temporary impairment that is recognized in other comprehensive income, in accordance with paragraph 320-10-35-34D, if any. Pursuant to Paragraph 320-10-45-9A, An entity shall separately present, in the financial statement in which the components of accumulated other comprehensive income are reported, amounts recognized therein related to held-to-maturity and available-for-sale debt securities for which a portion of an other-than-temporary impairment has been recognized in earnings.

Accounts receivable

Accounts receivable are recorded at the invoiced amount, net of an allowance for doubtful accounts.  The Company follows paragraph 310-10-50-9 of the FASB Accounting Standards Codification to estimate the allowance for doubtful accounts.  The Company performs on-going credit evaluations of its customers and adjusts credit limits based upon payment history and the customer’s current credit worthiness, as determined by the review of their current credit information; and determines the allowance for doubtful accounts based on historical write-off experience, customer specific facts and economic conditions.

F-11

Outstanding account balances are reviewed individually for collectability.  The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in the Company’s existing accounts receivable. Bad debt expense is included in general and administrative expenses, if any.  Pursuant to paragraph 310-10-50-2 of the FASB Accounting Standards Codification account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote.  The Company has adopted paragraph 310-10-50-6 of the FASB Accounting Standards Codification and determine when receivables are past due or delinquent based on how recently payments have been received.

The Company does not have any off-balance-sheet credit exposure to its customers.

Advance on purchases

Advance on purchases primarily represent amounts paid to vendors for future delivery of products ranging from three (3) months to nine (9) months, all of which were fully or partially refundable depending upon the terms and conditions of the purchase agreements.

Inventories

The Company values inventories, consisting of raw materials, packaging material and finished goods, at the lower of cost or market.  Cost is determined on the first-in and first-out (“FIFO”) method for raw materials and packaging materials and the weighted average cost method for finished goods. Cost of finished goods comprises direct labor, direct materials, direct production cost and an allocated portion of production overhead. The Company reduces inventories for the diminution of value, resulting from product obsolescence, damage or other issues affecting marketability, equal to the difference between the cost of the inventory and its estimated market value.  Factors utilized in the determination of estimated market value include (i) current sales data and historical return rates, (ii) estimates of future demand, (iii) competitive pricing pressures, (iv) new product introductions, (v) product expiration dates, and (vi) component and packaging obsolescence.

The Company follows paragraph 330-10-30-3 of the FASB Accounting Standards Codification for the allocation of production costs and charges to inventories.  The Company allocates fixed production overhead to inventories based on the normal capacity of the production facilities expected to be achieved over a number of periods or seasons under normal circumstances, taking into account the loss of capacity resulting from planned maintenance.  Judgment is required to determine when a production level is abnormally low (that is, outside the range of expected variation in production).  Factors that might be anticipated to cause an abnormally low production level include significantly reduced demand, labor and materials shortages, and unplanned facility or equipment down time.  The actual level of production may be used if it approximates normal capacity.  In periods of abnormally high production, the amount of fixed overhead allocated to each unit of production is decreased so that inventories are not measured above cost.  The amount of fixed overhead allocated to each unit of production is not increased as a consequence of abnormally low production or idle plant and  unallocated overheads of underutilized or idle capacity of the production facilities are recognized as period costs in the period in which they are incurred rather than as a portion of the inventory cost.

The Company evaluates its current level of inventories considering historical sales and other factors and, based on this evaluation, classify inventory markdowns in the income statement as a component of cost of goods sold pursuant to Paragraph 420-10-S99 of the FASB Accounting Standards Codification to adjust inventories to net realizable value. These markdowns are estimates, which could vary significantly from actual requirements if future economic conditions, customer demand or competition differ from expectations. Other significant estimates include the allocation of variable and fixed production overheads. While variable production overheads are allocated to each unit of production on the basis of actual use of production facilities, the allocation of fixed production overhead to the costs of conversion is based on the normal capacity of the Company’s production facilities, and recognizes abnormal idle facility expenses as current period charges. Certain costs, including categories of indirect materials, indirect labor and other indirect manufacturing costs which are included in the overhead pools are estimated. The management of the Company determines its normal capacity based upon the amount of operating hours of the manufacturing machinery and equipment in a reporting period.

Property, plant and equipment

Property, plant and equipment are recorded at cost.  Expenditures for major additions and betterments are capitalized.  Maintenance and repairs are charged to operations as incurred.  Depreciation of property, plant and equipment is computed by the straight-line method (after taking into account their respective estimated residual values) over the assets estimated useful lives ranging from five (5) years to twenty (20) years.  Upon sale or retirement of property, plant and equipment, the related cost and accumulated depreciation are removed from the accounts and any gain or loss is reflected in the consolidated statements of income and comprehensive income.  Leasehold improvements, if any, are amortized on a straight-line basis over the term of the lease or the estimated useful lives, whichever is shorter.  Upon becoming fully amortized, the related cost and accumulated amortization are removed from the accounts.

F-12

Land use right

Land use right represents the cost to obtain the right to use a 32 acre parcel of land in the City of Lianyungang, Jiangsu Province, PRC.  Land use right is carried at cost and amortized on a straight-line basis over the life of the right of fifty (50) years.  Upon becoming fully amortized, the related cost and accumulated amortization are removed from the accounts.

Banker’s acceptance notes payable

The Company satisfies certain accounts payable, through the issuance of banker’s acceptance notes issued by financial institutions to certain of the Company’s vendors.  These notes are usually of a short term nature, three (3) to nine (9) months in length.  They are non-interest bearing,  are due upon maturity, and are paid by the Company’s banks directly to the vendors upon presentation on the date of maturity and the Company is obliged to repay the note in full to the financial institutions.  In the event of insufficient funds to repay these notes, the Company's bank will convert them to loans on demand with interest at a predetermined rate per annum payable monthly.

Customer deposits

Customer deposits primarily represent amounts received from customers for future delivery of products, all of which were fully or partially refundable depending upon the terms and conditions of the sales agreements.

Leases

Lease agreements are evaluated to determine whether they are capital leases or operating leases in accordance with paragraph 840-10-25-1 of the FASB Accounting Standards Codification (“Paragraph 840-10-25-1”).  When substantially all of the risks and benefits of property ownership have been transferred to the Company, as determined by the test criteria in Paragraph 840-10-25-1, the lease then qualifies as a capital lease.  Capital lease assets are depreciated on a straight line method, over the capital lease assets estimated useful lives consistent with the Company’s normal depreciation policy for tangible fixed assets.  Interest charges are expensed over the period of the lease in relation to the carrying value of the capital lease obligation.

Rent expense for operating leases, which may include free rent or fixed escalation amounts in addition to minimum lease payments, is recognized on a straight-line basis over the duration of each lease term.

Derivative instruments and hedging activities

The Company accounts for derivative instruments and hedging activities in accordance with paragraph 810-10-05-4 of the FASB Accounting Standards Codification (“Paragraph 810-10-05-4”). Paragraph 810-10-05-4 requires companies to recognize all derivative instruments as either assets or liabilities in the balance sheet at fair value.  The accounting for changes in the fair value of a derivative instrument depends upon: (i) whether the derivative has been designated and qualifies as part of a hedging relationship, and (ii) the type of hedging relationship.  For those derivative instruments that are designated and qualify as hedging instruments, a company must designate the hedging instrument based upon the exposure being hedged as either a fair value hedge, cash flow hedge or hedge of a net investment in a foreign operation.

From time to time, the Company employs foreign currency forward contracts to convert unforeseeable foreign currency exchange rates to fixed foreign currency exchange rates.  The Company does not use derivatives for speculation or trading purposes.  Changes in the fair value of derivatives are recorded each period in current earnings or through other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and the type of hedge transaction.  The ineffective portion of all hedges is recognized in current earnings.  The Company has sales and purchase commitments denominated in foreign currencies.  Foreign currency forward contracts are used to hedge against the risk of change in the fair value of these commitments attributable to fluctuations in exchange rates (“Fair Value Hedges”).  Changes in the fair value of the derivative instrument are generally offset in the income statement by changes in the fair value of the item being hedged.

The Company did not employ foreign currency forward contracts to convert unforeseeable foreign currency exchange rates to fixed foreign currency exchange rates in 2011 or 2010.

Derivative warrant liability

The Company evaluates its convertible debt, options, warrants or other contracts, if any, to determine if those contracts or embedded components of those contracts qualify as derivatives to be separately accounted for in accordance with paragraph 810-10-05-4 and paragraph 815-40-25 of the FASB Accounting Standards Codification.  The result of this accounting treatment is that the fair value of the embedded derivative is marked-to-market each balance sheet date and recorded as either an asset or a liability.  In the event that the fair value is recorded as a liability, the change in fair value is recorded in the Statement of Operations and Comprehensive Income (loss) as other income or expense.  Upon conversion, exercise or cancellation of a derivative instrument, the instrument is marked to fair value at the date of conversion, exercise or cancellation and then that the related fair value is reclassified to equity.

F-13

In circumstances where the embedded conversion option in a convertible instrument is required to be bifurcated and there are also other embedded derivative instruments in the convertible instrument that are required to be bifurcated, the bifurcated derivative instruments are accounted for as a single, compound derivative instrument.

The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is re-assessed at the end of each reporting period.  Equity instruments that are initially classified as equity that become subject to reclassification are reclassified to liability at the fair value of the instrument on the reclassification date.  Derivative instrument liabilities will be classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument is expected within 12 months of the balance sheet date.

On January 1, 2009, the Company adopted Section 815-40-15 of the FASB Accounting Standards Codification (“Section 815-40-15”)to determine whether an instrument (or an embedded feature) is indexed to the Company’s own stock.  Section 815-40-15 provides that an entity should use a two-step approach to evaluate whether an equity-linked financial instrument (or embedded feature) is indexed to its own stock, including evaluating the instrument’s contingent exercise and settlement provisions.   The adoption of Section 815-40-15 has affected the accounting for (i) certain freestanding warrants that contain exercise price adjustment features and (ii) convertible bonds issued by foreign subsidiaries with a strike price denominated in a foreign currency.

The Company initially classified the warrants to purchase 2,728,913 shares of its common stock issued in connection with its July 2008 offering of common stock as additional paid-in capital upon issuance of the warrants.  Upon the adoption of Section 815-40-15 on January 1, 2009, these warrants are no longer deemed to be indexed to the Company’s own stock and were reclassified from equity to a derivative liability with a fair value of $3,251,949 effective as of January 1, 2009.  The reclassification entry included a cumulative adjustment to retained earnings of $1,845,455 and a reduction of additional paid-in capital of $5,097,404, the amount originally classified as additional paid-in capital upon issuance of the warrants on July 31, 2008.

On January 30, 2009, the Company issued 5,000 shares of its common stock for cash at $5.00 per share and received a cash payment of $25,000 in connection with the exercise of the warrant to purchase 5,000 shares with an exercise price of $5.00 per share by one investor and warrant holder.

During the three months ended March 31, 2010, warrants to purchase 1,324,346 shares of the Company’s common stock were exercised for cash at $5.00 per share and warrants to purchase 167,740 shares of the Company’s common stock were exercised on a cashless basis, for which the Company issued 1,324,346 and 78,217 shares of its common stock to the warrant holders and reclassified $1,665,011 and $210,095 of the derivative liability to additional paid-in capital, respectively.  In addition, during the three months ended March 31, 2010, certain holders of warrants to purchase 1,031,715 shares of its common stock reached agreements with the Company, effective as of January 1, 2010, whereby the Company waived its right to offer or sell additional shares of its common stock below $5.00 per share in the future and the warrant holders waived their anti-dilution or commonly known as a most favored nation clause, for which the Company reclassified $1,292,227 of the derivative liability to additional paid-in capital.

During April 2010, four (4) warrant holders exercised their warrants to purchase 13,806 shares of Company common stock at $5.00 per share resulting in cash proceeds of $69,030 to the Company, for which the Company issued 13,806 shares of its common stock to the warrant holders and reclassified $21,229 of the derivative liability to additional paid-in capital.

The Company valued the fair value of the remaining derivative warrant liability at $10,023 at June 30, 2011 and recognized a gain of $128,120 on change in the fair value of the derivative warrants to purchase 186,306 shares of Company common stock for the six months then ended.

Related parties

The Company follows subtopic 850-10 of the FASB Accounting Standards Codification for the identification of related parties and disclosure of related party transactions.

Pursuant to Section 850-10-20 the related parties include a. affiliates of the Company; b.  entities for which investments in their equity securities would be required, absent the election of the fair value option under the Fair Value Option Subsection of Section 825–10–15, to be accounted for by the equity method by the investing entity; c.  trusts for the benefit of employees, such as pension and profit-sharing trusts that are managed by or under the trusteeship of management; d.  principal owners of the Company; e.  management of the Company; f.  other parties with which the Company may deal if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests; and g.  other parties that can significantly influence the management or operating policies of the transacting parties or that have an ownership interest in one of the transacting parties and can significantly influence the other to an extent that one or more of the transacting parties might be prevented from fully pursuing its own separate interests.

F-14

The financial statements shall include disclosures of material related party transactions, other than compensation arrangements, expense allowances, and other similar items in the ordinary course of business. However, disclosure of transactions that are eliminated in the preparation of consolidated or combined financial statements is not required in those statements. The disclosures shall include:  a. the nature of the relationship(s) involved ; b. a description of the transactions, including transactions to which no amounts or nominal amounts were ascribed, for each of the periods for which income statements are presented, and such other information deemed necessary to an understanding of the effects of the transactions on the financial statements; c. the dollar amounts of transactions for each of the periods for which income statements are presented and the effects of any change in the method of establishing the terms from that used in the preceding period; and d. amounts due from or to related parties as of the date of each balance sheet presented and, if not otherwise apparent, the terms and manner of settlement.

Commitment and contingencies

The Company follows subtopic 450-20 of the FASB Accounting Standards Codification to report accounting for contingencies. Certain conditions may exist as of the date the consolidated financial statements are issued, which may result in a loss to the Company but which will only be resolved when one or more future events occur or fail to occur.  The Company assesses such contingent liabilities, and such assessment inherently involves an exercise of judgment.  In assessing loss contingencies related to legal proceedings that are pending against the Company or unasserted claims that may result in such proceedings, the Company evaluates the perceived merits of any legal proceedings or unasserted claims as well as the perceived merits of the amount of relief sought or expected to be sought therein.

If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated liability would be accrued in the Company’s consolidated financial statements.  If the assessment indicates that a potential material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, and an estimate of the range of possible losses, if determinable and material, would be disclosed.

Loss contingencies considered remote are generally not disclosed unless they involve guarantees, in which case the guarantees would be disclosed.  Management does not believe, based upon information available at this time, that these matters will have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows. However, there is no assurance that such matters will not materially and adversely affect the Company’s business, financial position, and results of operations or cash flows.

Revenue recognition

The Company applies paragraph 605-10-S99-1 of the FASB Accounting Standards Codification for revenue recognition.  The Company recognizes revenue when it is realized or realizable and earned.  The Company considers revenue realized or realizable and earned when all of the following criteria are met: (i) persuasive evidence of an arrangement exists, (ii) the product has been shipped or the services have been rendered to the customer, (iii) the sales price is fixed or determinable, and (iv) collectability is reasonably assured.  In addition to the aforementioned general policy, the following are the specific revenue recognition policies for each major category of revenue:

(i) Import, export and distribution of ferrous and non-ferrous ore, metals and processed scrap metal:  The Company derives its revenues from sales contracts with customers with revenues being generated upon the shipment of metal ore pursuant to.  Persuasive evidence of an arrangement is demonstrated via sales invoice or contract; product delivery is evidenced by warehouse shipping log as well as a signed bill of lading from the vessel or rail company and title transfers upon shipment, based on free on board (“FOB”) warehouse terms; the sales price to the customer is fixed upon acceptance of the signed purchase order or contract and there is no separate sales rebate, discount, or volume incentive.  When the Company recognizes revenue, no provisions are made for returns because, historically, there have been very few sales returns and adjustments that have impacted the ultimate collection of revenues.

(ii) Import and export agent services:  Form time to time, the Company provides import and export agent services to certain of its customers. Revenue from import and export agent services is recognized as the services are provided.  The import and export agent services are considered provided when the goods to be imported or exported by the customer are delivered to the designated port specified by the service contract.  The Company follows paragraph 605-45-45-15 to paragraph 605-45-45-18 of the FASB Accounting Standards Codification for revenue recognition to report revenue net for its import and export agent services since (1) the Company’s supplier is the primary obligor in the arrangement, (2) the amount the Company earns is fixed, and (3) the Company’s supplier has credit risk.  The Company did not provide any import and export agent services for the interim period ended March 31, 2011 or 2010.

F-15

Net sales of products represent the invoiced value of goods, net of value added taxes (“VAT”).  The Company is subject to VAT which is levied on the majority of the Company’s products at the rate of 13% on the invoiced value of sales prior to December 31, 2008 and 17% on the invoiced value of sales as of January 1, 2009 and forward.  Sales or Output VAT is borne by customers in addition to the invoiced value of sales and Purchase or Input VAT is borne by the Company in addition to the invoiced value of purchases to the extent not refunded for export sales.

Shipping and handling costs

The Company accounts for shipping and handling fees in accordance with paragraph 605-45-45-19 of the FASB Accounting Standards Codification.  While amounts charged to customers for shipping products are included in revenues, the related costs are classified in cost of goods sold as incurred.

Foreign currency transactions

The Company applies the guidelines as set out in Section 830-20-35 of the FASB Accounting Standards Codification (“Section 830-20-35”) for foreign currency transactions.  Pursuant to Section 830-20-35 of the FASB Accounting Standards Codification, foreign currency transactions are transactions denominated in currencies other than U.S. Dollar, the Company’s reporting currency or Chinese Yuan or Reminbi, the Company’s Chinese operating subsidiaries' functional currency.  Foreign currency transactions may produce receivables or payables that are fixed in terms of the amount of foreign currency that will be received or paid.  A change in exchange rates between the functional currency and the currency in which a transaction is denominated increases or decreases the expected amount of functional currency cash flows upon settlement of the transaction. That increase or decrease in expected functional currency cash flows is a foreign currency transaction gain or lossthat generally shall be included in determining net income for the period in which the exchange rate changes. Likewise, a transaction gain or loss (measured from the transaction dateor the most recent intervening balance sheet date, whichever is later) realized upon settlement of a foreign currency transaction generally shall be included in determining net income for the period in which the transaction is settled. The exceptions to this requirement for inclusion in net income of transaction gains and losses pertain to certain intercompany transactions and to transactions that are designated as, and effective as, economic hedges of net investments and foreign currency commitments.  Pursuant to Section 830-20-25 of the FASB Accounting Standards Codification, the following shall apply to all foreign currency transactions of an enterprise and its investees: (a) at the date the transaction is recognized, each asset, liability, revenue, expense, gain, or loss arising from the transaction shall be measured and recorded in the functional currency of the recording entity by use of the exchange rate in effect at that date as defined in section 830-10-20 of the FASB Accounting Standards Codification; and (b) at each balance sheet date, recorded balances that are denominated in currencies other than the functional currency or reporting currency of the recording entity shall be adjusted to reflect the current exchange rate.

Stock-based compensation for obtaining employee services

The Company accounts for its stock based compensation in which the Company obtains employee services in share-based payment transactions under the recognition and measurement principles of the fair value recognition provisions of section 718-10-30 of the FASB Accounting Standards Codification. Pursuant to paragraph 718-10-30-6 of the FASB Accounting Standards Codification, all transactions in which goods or services are the consideration received for the issuance of equity instruments are accounted for based on the fair value of the consideration received or the fair value of the equity instrument issued, whichever is more reliably measurable.  The measurement date used to determine the fair value of the equity instrument issued is the earlier of the date on which the performance is complete or the date on which it is probable that performance will occur.

The fair value of each option award is estimated on the date of grant using a Black-Scholes option-pricing valuation model.  The ranges of assumptions for inputs are as follows:

● The Company uses historical data to estimate employee termination behavior.  The expected life of options granted is derived from paragraph 718-10-S99-1 of the FASB Accounting Standards Codification and represents the period of time the options are expected to be outstanding.

● The expected volatility is based on a combination of the historical volatility of the comparable companies’ stock over the contractual life of the options.

● The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods within the contractual life of the option.

● The expected dividend yield is based on the Company’s current dividend yield as the best estimate of projected dividend yield for periods within the contractual life of the option.

The Company’s policy is to recognize compensation cost for awards with only service conditions and a graded vesting schedule on a straight-line basis over the requisite service period for the entire award.

F-16

Equity instruments issued to parties other than employees for acquiring goods or services

The Company accounts for equity instruments issued to parties other than employees for acquiring goods or services under guidance of section 505-50-30 of the FASB Accounting Standards Codification (“Section 505-50-30”).

Pursuant to Section 505-50-30, all transactions in which goods or services are the consideration received for the issuance of equity instruments are accounted for based on the fair value of the consideration received or the fair value of the equity instrument issued, whichever is more reliably measurable.  The measurement date used to determine the fair value of the equity instrument issued is the earlier of the date on which the performance is complete or the date on which it is probable that performance will occur.

Pursuant to Paragraph 505-50-30-S99-1, if the Company receives a right to receive future services in exchange for unvested, forfeitable equity instruments, those equity instruments are treated as unissued for accounting purposes until the future services are received (that is, the instruments are not considered issued until they vest). Consequently, there would be no recognition at the measurement date and no entry should be recorded.

Income taxes

The Company accounts for income taxes under Section 740-10-30 of the FASB Accounting Standards Codification, which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns.  Under this method, deferred tax assets and liabilities are based on the differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse.  Deferred tax assets are reduced by a valuation allowance to the extent management concludes it is more likely than not that the assets will not be realized.  Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.  The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the Consolidated Statements of Income and Comprehensive Income in the period that includes the enactment date.

The Company adopted section 740-10-25 of the FASB Accounting Standards Codification (“Section 740-10-25”). Section 740-10-25 addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements.  Under Section 740-10-25, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position.  The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty (50) percent likelihood of being realized upon ultimate settlement.  Section 740-10-25 also provides guidance on de-recognition, classification, interest and penalties on income taxes, accounting in interim periods and requires increased disclosures.

The estimated future tax effects of temporary differences between the tax basis of assets and liabilities are reported in the accompanying consolidated balance sheets, as well as tax credit carry-backs and carry-forwards. The Company periodically reviews the recoverability of deferred tax assets recorded on its consolidated balance sheets and provides valuation allowances as management deems necessary.

Management makes judgments as to the interpretation of the tax laws that might be challenged upon an audit and cause changes to previous estimates of tax liability. In addition, the Company operates within multiple taxing jurisdictions and is subject to audit in these jurisdictions. In management’s opinion, adequate provisions for income taxes have been made for all years. If actual taxable income by tax jurisdiction varies from estimates, additional allowances or reversals of reserves may be necessary.

Foreign currency translation

The Company follows Section 830-10-45 of the FASB Accounting Standards Codification (“Section 830-10-45”) for foreign currency translation to translate the financial statements of the foreign subsidiary from the functional currency, generally the local currency, into U.S. Dollars.  Section 830-10-45 sets out the guidance relating to how a reporting entity determines the functional currency of a foreign entity (including of a foreign entity in a highly inflationary economy), re-measures the books of record (if necessary), and characterizes transaction gains and losses. Pursuant to Section 830-10-45, The assets, liabilities, and operations of a foreign entity shall be measured using the functional currency of that entity. An entity’s functional currency is the currency of the primary economic environment in which the entity operates; normally, that is the currency of the environment, or local currency, in which an entity primarily generates and expends cash.

The functional currency of each foreign subsidiary is determined based on management’s judgment and involves consideration of all relevant economic facts and circumstances affecting the subsidiary. Generally, the currency in which the subsidiary transacts a majority of its transactions, including billings, financing, payroll and other expenditures, would be considered the functional currency, but any dependency upon the parent and the nature of the subsidiary’s operations must also be considered.  If a subsidiary’s functional currency is deemed to be the local currency, then any gain or loss associated with the translation of that subsidiary’s financial statements is included in accumulated other comprehensive income. However, if the functional currency is deemed to be the U.S. Dollar, then any gain or loss associated with the re-measurement of these financial statements from the local currency to the functional currency would be included in the consolidated statements of income and comprehensive income (loss). If the Company disposes of foreign subsidiaries, then any cumulative translation gains or losses would be recorded into the consolidated statements of income and comprehensive income (loss).  If the Company determines that there has been a change in the functional currency of a subsidiary to the U.S. Dollar, any translation gains or losses arising after the date of change would be included within the statement of income and comprehensive income (loss).

F-17

Based on an assessment of the factors discussed above, the management of the Company determined the relevant subsidiary’s local currency to be the functional currency for its foreign subsidiary.

The financial records of the Company's Chinese operating subsidiaries are maintained in their local currency, the Renminbi (“RMB”), which is the functional currency.  Assets and liabilities are translated from the local currency into the reporting currency, U.S. dollars, at the exchange rate prevailing at the balance sheet date.  Revenues and expenses are translated at weighted average exchange rates for the period to approximate translation at the exchange rates prevailing at the dates those elements are recognized in the consolidated financial statements.  Foreign currencytranslation gain (loss) resulting from the process of translating the local currency financial statements into U.S. dollars are included in determining accumulated other comprehensive income in the consolidated statement of stockholders’ equity.

RMB is not a fully convertible currency.  All foreign exchange transactions involving RMB must take place either through the People’s Bank of China (the “PBOC”) or other institutions authorized to buy and sell foreign exchange.  The exchange rate adopted for the foreign exchange transactions are the rates of exchange quoted by the PBOC.  Commencing July 21, 2005, China adopted a managed floating exchange rate regime based on market demand and supply with reference to a basket of currencies.  The exchange rate of the US dollar against the RMB was adjusted from approximately RMB 8.28 per U.S. dollar to approximately RMB 8.11 per U.S. dollar on July 21, 2005.  Since then, the PBOC administers and regulates the exchange rate of the U.S. dollar against the RMB taking into account demand and supply of RMB, as well as domestic and foreign economic and financial conditions.

Unless otherwise noted, the rate presented below per U.S. $1.00 was the midpoint of the interbank rate as quoted by OANDA Corporation (www.oanda.com) contained in its consolidated financial statements.  Management believes that the difference between RMB vs. U.S. dollar exchange rate quoted by the PBOC and RMB vs. U.S. dollar exchange rate reported by OANDA Corporation were immaterial.  Translations do not imply that the RMB amounts actually represent, or have been or could be converted into, equivalent amounts in U.S. dollars.  Translation of amounts from RMB into U.S. dollars has been made at the following exchange rates for the respective periods:

	June 30, 2011		December 31, 2010		June 30, 2010		December 31, 2009
Balance sheet		6.4635		6.6118		6.8086		6.8372
Statement of income and comprehensive income (loss)		6.5399		6.7788		6.8347		6.8409

Net gains and losses resulting from foreign exchange transactions, if any, are included in the Company’s Consolidated Statements of Operations and Comprehensive Income (Loss).

The foreign currency translation gain (loss) was $886,612 and $103,048 and the effect of exchange rate changes on cash flows were ($17,356) and $17,899 for the interim period ended June 30, 2011 and 2010, respectively.

Comprehensive income (loss)

The Company has applied section 220-10-45 of the FASB Accounting Standards Codification. This statement establishes rules for the reporting of comprehensive income and its components.  Comprehensive income (loss), for the Company, consists of net income, change in unrealized loss of marketable securities and foreign currency translation adjustments and is presented in the Company’s Consolidated Statements of Operations and Comprehensive Income (Loss) and Stockholders’ Equity.

Net income (loss) per common share

Net income (loss) per common share is computed pursuant to section 260-10-45 of the FASB Accounting Standards Codification.   Basic net income (loss) per common share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the period.  Diluted net income (loss) per common share is computed by dividing net income (loss) by the weighted average number of shares of common stock and potentially outstanding shares of common stock during the period to reflect the potential dilution that could occur from common shares issuable through stock options and warrants.

F-18

The following table shows the potentially outstanding dilutive common shares excluded from the diluted net income (loss) per common share calculation for the interim period ended June 30, 2011 and 2010 as they were anti-dilutive:

	Number of potentially outstanding dilutive common shares
	For the Interim Period Ended June 30, 2011		For the Interim Period Ended June 30, 2010
Warrants issued on August 1, 2008 in connection with the Company’s August 1, 2008 equity financing inclusive of non-derivative warrants to purchase 1,031,715 shares and derivative warrants to purchase 186,306 shares at $5.00 per share expiring five (5) years from date of issuance		1,218,021		1,218,021
Warrants issued on April 20, 2010 in connection with the Company’s April 20, 2010 equity financing inclusive of warrants to purchase 1,538,464 shares to the investors and warrants to purchase 76,923 shares to the placement agent at $7.50 per share expiring five (5) years from date of issuance		1,615,387		1,615,387
Options issued on October 5, 2010 to an employee to purchase 40,000 common shares exercisable at $5.00 per share expiring five (5) years from the date of issuance		40,000		-
Total potentially outstanding dilutive common shares		2,873,408		2,843,408

Cash flows reporting

The Company adopted paragraph 230-10-45-24 of the FASB Accounting Standards Codification for cash flows reporting, classifies cash receipts and payments according to whether they stem from operating, investing, or financing activities and provides definitions of each category, and uses the indirect or reconciliation method (“Indirect method”) as defined by paragraph 230-10-45-25 of the FASB Accounting Standards Codification to report net cash flow from operating activities by adjusting net income to reconcile it to net cash flow from operating activities by removing the effects of (a) all deferrals of past operating cash receipts and payments and all accruals of expected future operating cash receipts and payments and (b) all items that are included in net income that do not affect operating cash receipts and payments.  The Company reports the reporting currency equivalent of foreign currency cash flows, using the current exchange rate at the time of the cash flows and the effect of exchange rate changes on cash held in foreign currencies is reported as a separate item in the reconciliation of beginning and ending balances of cash and cash equivalents and separately provides information about investing and financing activities not resulting in cash receipts or payments in the period pursuant to paragraph 830-230-45-1 of the FASB Accounting Standards Codification.

Subsequent events

The Company follows the guidance in Section 855-10-50 of the FASB Accounting Standards Codification for the disclosure of subsequent events. The Company will evaluate subsequent events through the date when the financial statements are issued.  Pursuant to ASU 2010-09 of the FASB Accounting Standards Codification, the Company as an SEC filer considers its financial statements issued when they are widely distributed to users, such as through filing them on EDGAR.

Recently issued accounting pronouncements

In January 2010, the FASB issued the FASB Accounting Standards Update No. 2010-06 “Fair Value Measurements and Disclosures (Topic 820) Improving Disclosures about Fair Value Measurements”, which provides amendments to Subtopic 820-10 that requires new disclosures as follows:

1. Transfers in and out of Levels 1 and 2. A reporting entity should disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers.

2. Activity in Level 3 fair value measurements. In the reconciliation for fair value measurements using significant unobservable inputs (Level 3), a reporting entity should present separately information about purchases, sales, issuances, and settlements (that is, on a gross basis rather than as one net number).

F-19

This Update provides amendments to Subtopic 820-10 that clarifies existing disclosures as follows:

1. Level of disaggregation. A reporting entity should provide fair value measurement disclosures for each class of assets and liabilities. A class is often a subset of assets or liabilities within a line item in the statement of financial position. A reporting entity needs to use judgment in determining the appropriate classes of assets and liabilities.

2. Disclosures about inputs and valuation techniques. A reporting entity should provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements. Those disclosures are required for fair value measurements that fall in either Level 2 or Level 3.

This Update also includes conforming amendments to the guidance on employers' disclosures about postretirement benefit plan assets (Subtopic 715-20). The conforming amendments to Subtopic 715-20 change the terminology from major categories of assets to classes of assets and provide a cross reference to the guidance in Subtopic 820-10 on how to determine appropriate classes to present fair value disclosures. The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years.

In December 2010, the FASB issued the FASB Accounting Standards Update No. 2010-28 “Intangibles—Goodwill and Other (Topic 350): When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts” (“ASU 2010-28”).Under ASU 2010-28, if the carrying amount of a reporting unit is zero or negative, an entity must assess whether it is more likely than not that goodwill impairment exists. To make that determination, an entity should consider whether there are adverse qualitative factors that could impact the amount of goodwill, including those listed in ASC 350-20-35-30. As a result of the new guidance, an entity can no longer assert that a reporting unit is not required to perform the second step of the goodwill impairment test because the carrying amount of the reporting unit is zero or negative, despite the existence of qualitative factors that indicate goodwill is more likely than not impaired. ASU 2010-28 is effective for public entities for fiscal years, and for interim periods within those years, beginning after December 15, 2010, with early adoption prohibited.

In December 2010, the FASB issued the FASB Accounting Standards Update No. 2010-29 “Business Combinations (Topic 805): Disclosure of Supplementary Pro Forma Information for Business Combinations” (“ASU 2010-29”). ASU 2010-29 specifies that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The amendments in this Update also expand the supplemental pro forma disclosures under Topic 805 to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. The amended guidance is effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. Early adoption is permitted.

Management does not believe that any other recently issued, but not yet effective accounting pronouncements, if adopted, would have a material effect on the accompanying consolidated financial statements.

F-20

NOTE 3 – PLEDGED DEPOSITS

Pledged deposits consist of amounts held in financial institutions for (i) outstanding letters of credit and (ii) open banker’s acceptance notes payable maturing between three (3) to nine (9) months from the date of issuance.  Pledged deposits at June 30, 2011 and December 31, 2010 consisted of the following:

	June 30, 2011		December 31, 2010
Armco HK
Letters of credit (i)	$	1,048,402	$	427,553
Armet
Bank acceptance notes payable (ii)		3,867,873		1,906,684
Deposit for release of collateralized finished goods for shipment (iii)		4,771,409		7,135,727
Henan Armco
Letters of credit (iv)		2,426,597		3,174,70769
	$	12,114,281	$	12,643,671

(i) $824,578 has been released to ArmcoHK and the remaining balance of $223,824 is to be released to the Company as part of the payment toward outstanding letters of credit when those letters of credit mature, ranging from August 19, 2011 through September 28, 2011.

(ii) $2,320,724 is to be released to the Company when the related banker’s acceptance note payable matures on September 17, 2011, $1,547,179 is to be released to the Company when the related banker’s acceptance note payable matures on November 3, 2011.

(iii) $632,784 is to be released to the Company for release of collateralized finished goods for shipment and future payment of loan; $773,575 is to be released to the Company for release of collateralized finished goods for shipment and payment of loan on August 15, 2011; $1,547,149 is to be released to the Company for release of collateralized finished goods for shipment and payment of loan on September 15, 2011; $1,817,901 is to be released to the Company for release of collateralized finished goods for shipment and payment of loan on September 30, 2011

(iv) $635,603 was released to the Company as part of the payment toward fulfilled letters of credit and the remaining balance of $1,790,995 is to be released to the Company as part of the payment toward outstanding letters of credit when those letters of credit mature, ranging from May 10, 2011 through October 10, 2011.

NOTE 4 – MARKETABLE SECURITIES, AVAILABLE FOR SALE

On June 8, 2010, China Armco Metals, Inc. (the “Company”) entered into a Subscription Agreement (the “Subscription Agreement”) with Apollo Minerals Limited (“Apollo Minerals”), an Australian iron ore exploration company listed on the Australian Securities Exchange (ASX: AON).  Under the terms of the Subscription Agreement, the Company agreed to acquire up to a 19.9% stake in Apollo for US $3,396,658 in cash. On July 19, 2010 Apollo Minerals issued 29,250,000 shares of its common stock to the Company.  Pursuant to the Subscription Agreement, the Company received a seat on Apollo Minerals’ Board of Directors in July 2010.  The board representation continues as long as the Company maintains a minimum 12% stake in Apollo Minerals.

The Company will have the right to name one member to Apollo Mineral’s board of directors for as long as it maintains at least a 12% stake in Apollo Minerals.  Apollo Minerals intends to use the cash infusion to advance its exploration activities, to carry out processing option studies and to evaluate opportunities to access local infrastructure and other project opportunities.

Apollo Minerals also issued to the Company, five (5) year options to purchase an additional 5 million shares of common stock at $0.25 (approximately $0.20) per share, half of which will vest on the first anniversary of the initial issuance with the balance vesting on the second anniversary of the initial issuance.  The options may only be exercised in order for the Company to maintain its 19.9% stake should Apollo Minerals issue additional common shares in the future.

The Company values marketable securities using Australia quoted market prices on Apollo Mineral stock. At June 30, 2011, the estimated fair value of investment in Apollo Minerals was $2 million less than its original costs.  The Company intends to hold these shares and the management of the Company concluded the decline in the fair value was temporary and recorded the unrealized loss of marketable securities of $2,109,512 to other comprehensive income (loss) on the accompanying consolidated balance sheet at June 30, 2011 and a gain from foreign exchange rate change of $92,869 in other income for the interim period then ended.

NOTE 5 – ACCOUNTS RECEIVABLE

Accounts receivable at June 30, 2011 and December 31, 2010 consisted of the following:

	June 30, 2011			December 31, 2010
Accounts receivable	$	337,302		$	19,115,019
Allowance for doubtful accounts		(-	)		(-	)
	$	337,302		$	19,115,019

F-21

NOTE 6 – INVENTORIES

Inventories at June 30, 2011 and December 31, 2010 consisted of the following:

	June 30, 2011			December 31, 2010
Raw materials	$	4,784,903	*	$	1,925,159	*
Finished goods		8,884,370	*		4,719,339	*
Purchased merchandise for resale		-			3,795,333
	$	13,669,273		$	10,439,831

* Armet’s raw materials and finished goods are collateralized for loans from the Bank of Communications Lianyungang Branch.

Raw materials consisted of scrap metals to be processed and finished goods are comprised of all of the processed scrap metal at Armet.  Due to the short duration time for the processing of its scrap metal, there was no material work-in-process inventory at June 30, 2011 or December 31, 2010. Armet’s raw materials at June 30, 2011 represented approximately one month production usage.

Purchased merchandise for sale is comprised of all of the metal ores to be resold through the distribution business at Armco HK and Henan, all of which were sold and delivered to the customers. There was no balance of purchased merchandise for sale as of June 30, 2011.

NOTE 7 – PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment, stated at cost, less accumulated depreciation at June 30, 2011 and December 31, 2010 consisted of the following:

	Estimated Useful Life (Years)	June 30, 2011			December 31, 2010
Buildings and leasehold improvements (i)	20	$	21,979,895		$	21,426,672
Construction in progress			-			32,682
Machinery and equipment	7		13,299,762			11,954,005
Vehicles	5		1,146,937			1,034,961
Office equipment	5-8		247,156			185,319
			36,673,750			34,633,339
Less accumulated depreciation (ii)			(2,099,639	)		(761,515	)
		$	34,574,111		$	33,872,124

(i)Capitalized interest

For the interim periods ended June 30, 2011 and 2010, the Company capitalized $0 and $257,020 of interest to fixed assets, respectively.

(ii)           Depreciation and amortization expense

Depreciation and amortization expense for the interim periods ended June 30, 2011 and 2010 was $1,322,537, and $ 60,757 respectively.

NOTE 8 – LAND USE RIGHT

Land use right, stated at cost, less accumulated amortization at June 30, 2011 and December 31, 2010, consisted of the following:

	June 30, 2011			December 31, 2010
Land use right	$	2,391,940		$	2,338,289
Accumulated amortization		(181,784	)		(153,965	)
	$	2,210,156		$	2,184,324

F-22

Amortization expense

Amortization expense for the interim periods ended June 30, 2011 and 2010 was $24,287 and $23,056 respectively.

NOTE 9 – LOANS PAYABLE

Loans payable at June 30, 2011 and December 31, 2010 consisted of the following:

	June 30, 2011		December 31, 2010
Armco HK
Loan payable to RZB Austria Finance (Hong Kong) Limited, collateralized by certain of the Company’s inventory, guaranteed by the Company’s Chairman and Chief Executive Officer, with interest at the bank’s cost of funds plus 200 basis points, per annum, payable monthly, with principal due and paid on January 26, 2011.		-		2,145,246
Loan payable to ING Bank, Hong Kong Branch, in the form of letters of credits, secured by (i) pledged deposits equal to 5% of the letters of credits, (ii) guarantee from China Armco Metals, Inc., (iii) guarantee by the Company’s Chairman and Chief Executive Officer, and (iv) assignment of specific receivables, with interest at the bank’s cost of funds plus 250 basis points, per annum, payable monthly with principal due and paid on January 3, 2011.		-		11,198,830
Unsecured loan payable to Fremery Holdings, Ltd., with interest at 15% per annum, with principal and interest due March 26, 2011 and paid in full by March 23, 2011.		-		1,500,000
Armet
Loan payable to Bank of Communications, Lianyungang Branch, under trade credit facilities, collateralized by Armet inventories and guaranteed by the Company’s Chairman and Chief Executive Officer, with interest at 110% of the bank’s benchmark rate, per annum (5.3631%), payable monthly, with principal due through August 15, 2011.		5,105,593		9,074,685
Loan payable to Bank of China, Lianyungang Branch, under trade credit facilities, guaranteed by the Company’s Chairman and Chief Executive Officer, with interest at 5.838%, per annum, payable monthly, with principal due October 28, 2011.		773,575		756,224
Henan Armco
Loan payable to Guangdong Development Bank Zhengzhou Branch, with interest at 4.5%, per annum, payable monthly, with principal due and paid March 21, 2011		-		90,835
Loan payable to Guangdong Development Bank Zhengzhou Branch, with interest at 5.8%, per annum, payable monthly, with principal due and paid July 27, 2011		1,799,373		-
Loan payable to Minsheng Bank, Zhengzhou Branch,, with interest at 3.92% per annum, with principal and interest due and paid July 26, 2011		1,149,174		-
	$	8,827,715	$	24,765,820

F-23

NOTE 10 – BANKER’S ACCEPTANCE NOTES PAYABLE

Banker’s acceptance notes payable at June 30, 2011 and December 31, 2010, consisted of the following:

	June 30, 2011		December 31, 2010
Armet
Banker’s acceptance notes payable maturing and payable from September 17, 2011 through November 3, 2011	$	6,188,598	$	4,174,355
	$	6,188,598	$	4,174,355

NOTE 11 – RELATED PARTY TRANSACTIONS

Advances from stockholder

Advances from stockholder at June 30, 2011 and December 31, 2010 consisted of the following:

	June 30, 2011		December 31, 2010
Advances from chairman, chief executive officer and stockholder	$	726,634	$	799,394
	$	726,634	$	799,394

The advances bear no interest and are due on demand.

Operating lease from Chairman, CEO and Stockholder

On January 1, 2006, Henan entered into a non-cancellable operating lease for its 176.37 square meter commercial office space in the City of Zhengzhou, Henan Province, PRC from the Chairman, Chief Executive Officer and significant stockholder of the Company for RMB10,000 per month, which expired on December 31, 2008 and has been extended through December 31, 2011.  Total lease payments for the interim periods ended June 30, 2011 and 2010 amounted to RMB60,000 (equivalent to $9,174 and $8,779).  Future minimum lease payments required under the non-cancelable operating lease are RMB60,000 per year (equivalent to $9,283) for 2011.

NOTE 12 – CAPITAL LEASE OBLIGATION

Capital lease obligation at June 30, 2011 and December 31, 2010 consisted of the following:

	June 30, 2011			December 31, 2010
Armet
Capital lease obligation to a financing company for a term of three (3) years, collateralized by all of Armet’s machinery and equipment, with interest at 11.8% per annum, with principal and interest due and payable in monthly installment of RMB497,897 (approximately $75,304) on the 23rd of each month.	$	1,932,539		$	2,268,671
Less current maturities		(730,334	)		(727,756	)
CAPITAL LEASE OBLIGATION, net of current maturities	$	1,202,205		$	1,540,915

F-24

The future minimum payments under this capital lease obligation at June 30, 2011 were as follows:

Year ending December 31:
2011 (remainder of the year)	$	464,953
2012		929,476
2013		852,020
Total capital lease obligation payments		2,246,449
Less amounts representing interest		(313,910	)
Present value of total future capital lease obligation payments		1,932,539
Less current maturities of capital lease obligation		(730,334	)
Capital lease obligation, net of current maturities	$	1,202,205

NOTE 13 – LONG-TERM DEBT

Long-term debt at June 30, 2011 and December 31, 2010 consisted of the following:

	June 30, 2011			December 31, 2010
Armet
Long-term debt due to Bank of China, Lianyungang Branch, collateralized by all of Armet’s building and land use right, with interest at 5.40% per annum payable monthly, with principal of RMB30,000,000 ($4,641,443), and RMB25,000,000 ($3,867,873) due August 25, 2011 and August 25, 2012, respectively.	$	8,509,321		$	8,318,461
Less current maturities		(4,641,448	)		(4,537,342	)
LONG-TERM DEBT, net of current maturities	$	3,867,873		$	3,781,119

NOTE 14 – DERIVATIVE INSTRUMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS

(i) Warrants issued in 2008

Description of warrants

In connection with the four (4) rounds of private placements from July 25, 2008 through August 8, 2008 (the “2008 Unit Offering”), the Company issued (i) warrants for 2,486,649 shares to the investors and (ii) warrants for 242,264 shares to the brokers, or 2,728,913 shares in aggregate (“2008 Warrants”) with an exercise price of $5.00 per share and an expiration date of August 31, 2013, all of which have been earned upon issuance.  The fair value of 2008 warrants, estimated on the date of grant, was $5,097,404, which was originally recorded as additional paid-in capital, using the Black-Scholes option-pricing model with the following weighted-average assumptions:

Expected option life (year)	5.00
Expected volatility	89.00%
Risk-free interest rate	3.23%
Dividend yield	0.00%

The remaining balance of the net proceeds of $1,523,277 has been assigned to Common stock.

F-25

Derivative analysis

The exercise price of 2008 warrants and the number of shares issuable upon exercise is subject to reset adjustment in the event of stock splits, stock dividends, recapitalization, most favored nation clause and similar corporate events.  Pursuant to the most favored nation provision of the 2008 Unit Offering, if the Company issues any common stock or securities other than the excepted issuances,  to any person or entity at a purchase or exercise price per share less than the share purchase price of the 2008 Unit Offering without the consent of the subscriber holding purchased shares, warrants or warrant shares of the 2008 Unit Offering, then the subscriber shall have the right to apply the lowest such purchase price or exercise price of the offering or sale of such new securities to the purchase price of the purchased shares then held by the subscriber (and, if necessary, the Company will issue additional shares), the reset adjustments are also referred to as full reset adjustments.

Because these warrants have full reset adjustments tied to future issuances of equity securities by the Company, they are subject to derivative liability treatment under Section 815-40-15 of the FASB Accounting Standard Codification (“Section 815-40-15”) (formerly FASB Emerging Issues Task Force (“EITF”) 07-5). Section 815-40-15 became effective for the Company on January 1, 2009 and as of that date the Warrants issued in the 2008 Unit Offering have been measured at fair value using a lattice model at each reporting period with gains and losses from the change in fair value of derivative liabilities recognized on the consolidated statement of income and comprehensive income.

Valuation of derivative liability

The Company’s 2008 warrants do not trade in an active securities market, as such, the Company developed a lattice model that values the derivative liability of the warrants based on a probability weighted discounted cash flow model. This model is based on future projections of the various potential outcomes. The features that were analyzed and incorporated into the model included the exercise feature and the full ratchet reset.

The fair value of the 2008 warrants treated as derivatives were computed using the following assumptions:

	December 31, 2010	December 31, 2009
Expected option life (year)	2.50		3.50
Expected volatility	159%		169%
Risk-free interest rate	1.02%		2.61%
Dividend yield	0.00%		0.00%

The risk-free interest rate is based on a yield curve of U.S treasury interest rates on the date of valuation based on the contractual life of the warrant remaining. Expected dividend yield is based on our dividend history and anticipated dividend policy. Expected volatility is based on historical volatility for our common stock. The Company currently has no reason to believe future volatility over the expected remaining life of these warrants is likely to differ materially from historical volatility. The expected life is based on the remaining term of the warrants.

Extinguishment of derivative warrant liability

During the three months ended March 31, 2010, certain holders of 2008 warrants to purchase 1,031,715 shares of the Company’s common stock reached agreements with the Company effective as of January 1, 2010, whereby the Company waived its right to offer or sell additional shares of its common stock below $5.00 per share in the future and the 2008 warrant holders waived their anti-dilution or commonly known as most favored nation clause, for which the Company reclassified $1,292,227 of the derivative warrant liability to additional paid-in capital.

Exercise of warrants

On January 30, 2009, the Company issued 5,000 shares of its common stock for cash at $5.00 per share and received a cash payment of $25,000 in connection with the exercise of the 2008 warrants for 5,000 shares with an exercise price of $5.00 per share by one (1) investor and 2008 warrants holder.

During the first quarter of 2010, the Company issued 1,324,346 shares of its common stock for cash at $5.00 per share and received cash of $6,621,730 in connection with the exercise of the warrants to purchase 1,324,346 shares with an exercise price of $5.00 per share to 50, 2008 warrant holders.  In addition, the Company issued 78,217 shares of its common stock in connection with the exercise of the 2008 warrants to purchase 167,740 shares with an exercise price of $5.00 per share on a cashless basis to 13, 2008 warrant holders.

F-26

During April 2010, four (4) 2008 warrant holders exercised their warrants to purchase 13,806 shares of the Company’s common stock at an exercise price of $5.00 per share resulting in cash proceeds of $69,030 to the Company.

Warrants outstanding

As of June 30, 2011 warrants to purchase 1,218,021 shares of Company common stock remain outstanding.

The table below summarizes the Company’s derivative warrant activity through June 30, 2011:

	2008 Warrant Activities											APIC			(Gain) Loss
	Derivative Shares			Non-derivative Shares		Total Warrant Shares			Fair Value of Derivative Warrants			Reclassification of Derivative Liability			Change in Fair Value of Derivative Liability
Derivative warrant at 12/31/2009		2,728,913			-		2,728,913		$	(3,417,974	)	$	-		$	166,025
Exercise of warrants		(5,000	)		-		(5,000	)		6,263			(6,263	)		-
Exercise of warrants		(1,324,346	)		-		(1,324,346	)		1,658,748			(1,658,748	)		-
Exercise of warrants – Cashless		(167,740	)		-		(167,740	)		210,095			(210,095	)		-
Total warrant exercised		(1,497,086	)		-		(1,497,086	)		1,875,106			(1,875,106	)		-
Extinguishment of warrant liability resulting from waiver of anti-dilution		(1,031,715	)		1,031,715		-			1,292,227			(1,292,227	)		-
Derivative warrants remaining		200,112			-		-			(250,641	)		-			-
Mark to market		-			-					(321,752	)		-			321,752
Derivative warrant at March 31, 2010		200,112			1,031,715		1,231,827			(572,393	)		-			321,752
Exercise of warrants in April 20, 2010		(13,806	)		-		(13,806	)		21,229			(21,229	)		-
Derivative warrants remaining		186,306			-		186,306			(551,164	)		-			-
Mark to market		-			-					427,875			-			(427,875	)
Derivative warrant at June 30, 2010		186,306			1,031,715		1,218,021			(123,289	)		-			(106,123	)
Mark to market		-			-					(13,211	)		-			13,211
Derivative warrant at September 30, 2010		186,306			1,031,715		1,218,021			(136,500	)		-			(92,912	)
Mark to market		-			-					(1643	)		-			1643
Derivative warrant at December 31, 2010		186,306			1,031,715		1,218,021			(138,143	)		-			(91,269	)
Mark to market		-			-					51,223			-			(51,223	)
Derivative warrant at March 31, 2011		186,306			1,031,715		1,218,021			(86,920	)		-			(51,223	)
Mark to market										76,897						(76,897	)
Derivative warrant at June 30, 2011		186,306			1,031,715		1,218,021			(10,023	)					(128,120	)

F-27

(ii) Warrants issued in April 2010

Description of warrants

In connection with the sale of 1,538,464 shares of its common stock at $6.50 per share or $10,000,016 in gross proceeds to nine (9) accredited and institutional investors on April 20, 2010, the Company issued five (5) year common stock purchase warrants to purchase an additional 1,538,464 shares of its common stock at $7.50 per share (“2010 Warrants”) exercisable commencing 181 days following the date of issuance.  At the closing of the private offering, the Company paid Rodman & Renshaw, LLC, a FINRA member firm that served as placement agent for the Company in the offering, (i) a fee of $500,000 as compensation for their services and (ii) five-year common stock purchase warrants to purchase 76,923 shares of the Company’s common stock at $7.50 per share exercisable commencing 181 days following the date of issuance, as well as a $15,000 non-accountable expense allowance to one of the nine (9) investors in the offering.

Warrants valuation and related assumptions

The 2010 warrants were valued with the following assumptions:

- The underlying NYSEAmex stock price $6.95 was used as the fair value of the common stock as of 4/20/10;

- The Company’s stock price would fluctuate with its projected volatility. The projected volatility curve for each valuation period was based on the historical volatility of 14 comparable companies in the metal/industrial metals industries: At April 20, 2010 one (1) through five (5) years were 76%, 134%, 155%, 167% and 182%, respectively.

- The Holder would exercise the warrants at maturity if the stock price was above the exercise price.

- Dilutive reset events projected to occur are based on no future projected capital needs;

- The Holder would exercise the warrants as they become exercisable at target prices of $11.25 for the 2010 Offering, and lowering such target as the warrants approaches maturity.

- 1,615,387 warrants have been issued on 4/20/10.

The fair value of the 2010 warrants, estimated on the date of issuance, was $2,483,938.

Derivative analysis

The warrants issued as part of the April 20, 2010 private placement were analyzed to determine the appropriate treatment under ASC 815-40. The warrants meet the provisions of EITF 07-5 (ASC 815-40) to be considered indexed to the Company’s own stock. In addition, the warrants meet all the criteria in EITF 00-19 (ASC 815-40) to be accounted for as equity.

Warrants outstanding

As of June 30, 2011 warrants to purchase 1,615,387 shares of its common stock remain outstanding.

F-28

(iii) Warrant activities

The table below summarizes the Company’s derivative warrant activities through June 30, 2011:

	Number of Warrant Shares			Exercise Price Range Per Share		Weighted Average Exercise Price		Fair Value at Date of Issuance		Aggregate Intrinsic Value
Balance, December 31, 2009		2,723,913		$	5.00	$	5.00	$	-	$	-
Granted		1,615,387			7.50		-		2,483,938		-
Canceled for cashless exercise		(89,523	)		- -		-		-		-
Exercised (Cashless)		(78,217	)		-		-		-		-
Exercised		(1,338,152	)		5.00		5.00		-		-
Expired		-			-		-		-		-
Balance, December 31, 2010		2,833,408		$	6.43	$	4.14	$	-	$	-
Granted		-			-		-		-		-
Canceled for cashless exercise		(-	)		- -		-		-		-
Exercised (Cashless)		(-	)		-		-		-		-
Exercised		(-	)		-		-		-		-
Expired		-			-		-		-		-
Balance, June 30, 2011		2,833,408		$	6.43	$	4.14	$	-	$	-
Earned and exercisable, June 30, 2011		2,833,408		$	6.43	$	4.14	$	-	$	-
Unvested, June 30, 2011		-		$	-	$	-	$	-	$	-

The following table summarizes information concerning outstanding and exercisable warrants as of June 30, 2011:

	Warrants Outstanding				Warrants Exercisable
Range of Exercise Prices	Number Outstanding	Average Remaining Contractual Life  (in years)		Weighted Average Exercise Price	Number Exercisable	Average Remaining Contractual Life (in years)		Weighted Average Exercise Price
$5.00	1,218,021	2.34	$	5.00	1,218,021	2.34	$	5.00
$7.50	1,615,387	4.06	$	7.50	1,615,387	4.06	$	7.50
$5.00 - $7.50	2,833,408	3.32	$	6.43	2,833,408	3.32	$	6.43

NOTE 15 – STOCKHOLDERS’ EQUITY

Sale of common stock

On April 20, 2010, the Company entered into a Securities Purchase Agreement with nine (9) accredited and institutional investors for the sale of 1,538,464 shares of its common stock at an offering price of $6.50 per share resulting in gross proceeds to the Company of $10,000,016.  At closing the Company issued the investors five (5) year common stock purchase warrants to purchase an additional 1,538,464 shares of its common stock at an exercise price of $7.50 per share.  The warrants are exercisable commencing 181 days after the date of issuance.  The private offering, which was made under an exemption from the registration requirements of the Securities Act of 1933 in reliance on exemptions provided by Section 4(2) of that act and Rule 506 of Regulation D.  At closing, the Company paid Rodman & Renshaw, LLC, a FINRA member firm that served as placement agent for the Company in the offering, (i) a fee of $500,000 as compensation for its services and (ii) issued the firm five (5) year common stock purchase warrants exercisable for 76,923 shares of the Company’s common stock at an exercise price of $7.50 per share which are exercisable commencing 181 days after the date of issuance, as well as a $15,000 non-accountable expense allowance to one (1) of the investors in the offering.  The Company intends to use the net proceeds from this offering for its working capital.

Issuance of common stock for services

On May 7, 2009, the Company issued 7,000 shares of its common stock to Hayden Communications as consideration for canceling an agreement to provide IR services.  These shares were valued at $1.50 per share for total consideration of $10,500 (the estimated fair value on the date of grant).

F-29

On February 5, 2010, the Company issued 80,000 shares of its common stock to China Direct Investments, Inc. as consideration for management and accounting consulting services for the period beginning January 1, 2010 through December 31, 2010.  There is no performance commitment at the date of the agreement therefore the company will use the date(s) at which performance is complete as the measurement date(s).  The services are earned and forfeitable on a ratable basis throughout each quarter during the year.  The 20,000 shares each earned for each quarter in 2010 were valued at $9.39, $2.90, $3.47 and $3.88 per share, or $187,800, $58,000, $69,400 and $77,600 in aggregate, which was recorded as consulting fees for the relevant quarter. In aggregate, $392,800 was recorded as consulting fee for the year ended December 31, 2010.

On April 30 and July 9, 2010, the Company issued 12,500 shares and 10,000 shares, or 22,500 shares in aggregate to Bespoke Growth Partners, Inc. as consulting fees for investor relations services rendered, valued at $3.49 per share for $78,525.

On June 11, 2010 the Company entered into a Guaranty Cooperation Agreement with Henan Chaoyang Steel Co., Ltd. (“Henan Chaoyang”), a Chinese limited liability company that was 85% owned by the Company’s then member of the Board of Director, Mr. Heping Ma.  Under the terms of the guaranty, Henan Chaoyang agreed to provide loan guarantees to Armet existing and pending bank lines of credit of up to 300 million RMB in aggregate (approximately $45,400,000) for five (5) years expiring June 30, 2016.  On September 16, 2010 Mr. Ma resigned from the Company’s Board of Directors.  As consideration for the guaranty, the Company issued a designee of Henan Chaoyang 500,000 shares of its common stock, which are earned and forfeitable on a ratable basis during the term of the agreement.

33,333 shares each earned for quarters ended September 30, 2010 and December 31, 2010 were valued at $3.47 and $3.88 per share, or $115,666 and $129,332 in aggregate, which was recorded as loan guarantee expense and included in the consolidated statements of operations and comprehensive income (loss) for the relevant periods. In aggregate, $244,998 was recorded as loan guarantee expense for the year ended December 31, 2010.

33,333 common shares each earned for quarter ended March 31, 2011 and June 30, 2011 were valued at $2.61 and $1.36 per share, or $86,996 and $45,333 in aggregate, which was recorded as loan guarantee expense and included in the consolidated statements of operations and comprehensive income (loss) for the relevant periods.

On November 19, 2010, the Company entered into an investor relations consulting agreement with HCI International Inc. expiring December 31, 2011.  Either party may terminate the agreement any time during the term of the contract.  Pursuant to the agreement the Company is required to pay the investor relation firm 3,600 shares of the Company’s restricted stock per month payable at the first of each month for the 12 month service period, or 43,200 shares in aggregate for 2011 investor relations services.  10,800 shares per quarter were valued at $1.36 per share, or $14,688 in aggregate and $2.69 per share, or $29,051 in aggregate and recorded as investor relations expense for the quarterly period ended March 31, 2011 and June 30, 2011, respectively.

Stock options

On June 27, 2008, the Company entered into a share purchase agreement (the “Share Purchase Agreement”) and consummated a share purchase (the “Share Purchase”) with Armco HK and Feng Gao, who owned 100% of the outstanding shares of Armco HK.  Under the Share Purchase Agreement, the Company purchased from Ms. Gao, the sole shareholder of Armco HK, 100% of the issued and outstanding shares of Armco HK capital stock for $6,890,000 by delivery of the Company’s purchase money promissory note (the “Share Purchase”).  In addition, the Company issued to Ms. Gao a stock option entitling Ms. Gao to purchase 5,300,000 shares of our common stock, par value $.001 per share (the “Common Stock”) at $1.30 per share expiring on December 31, 2008 and 2,000,000 shares at $5.00 per share expiring on June 27, 2010, vested immediately (the “Gao Option”).  On August 12, 2008, Ms. Gao exercised her option to purchase and the Company issued 5,300,000 Shares in exchange for the $6,890,000 note owed to Ms. Gao.  Accordingly, the 5,300,000 Shares issued to Ms. Gao represented approximately 69.7% of the issued and outstanding Shares of the Company giving effect to the cancellation of 7,694,000 Shares owned by Mr. Cox.

The fair value of the stock options issued in June 2008 under Share Purchase Agreement using the Black-Scholes Option Pricing Model was $0 at the date of grant.  For the interim periods ended March 31, 2010 and 2009, the Company did not grant any stock options.

On April 12, 2010, Mr. Kexuan Yao purchased the stock option to purchase 2,000,000 shares of the Company’s common stock at $5.00 per share on June 27, 2008 originally granted to and owned by Ms. Feng Gao pursuant to a share purchase agreement to consummate the reverse merger capital transaction with Armco HK.  In addition, on April 12, 2010 and June 25, 2010, Mr. Yao exercised part of the option and purchased 1,000,000 and 400,000 shares of the Company’s common stock at $5.00 per share resulting in net proceeds of $4,500,000, forgiveness of debt of $500,000 and $2,000,000 to the Company, respectively. The balance of the stock option to purchase the remaining 600,000 common shares expired at June 27, 2010.

Stock incentive plan

On October 26, 2009, the Board of Directors of the Company adopted the 2009 Stock Incentive Plan, whereby the Board of Directors authorized 1,200,000 shares of the Company’s common stock to be reserved for issuance (the “2009 Stock Incentive Plan”). The purpose of the 2009 Stock Incentive Plan is to advance the interests of the Company’s company by providing an incentive to attract, retain and motivate highly qualified and competent persons who are important to us and upon whose efforts and judgment the success of the company is largely dependent. Grants to be made under the Plan will be limited to the Company’s employees, including employees of the Company’s subsidiaries, the Company’s directors and consultants to the Company. The recipient of any grant under the Plan, and the amount and terms of a specific grant, will be determined by the board of directors.  Should any option granted or stock awarded under the Plan expire or become un-exercisable for any reason without having been exercised in full or fail to vest, the shares subject to the portion of the option not so exercised or lapsed will become available for subsequent stock or option grants.

F-30

On May 19, 2011, the Company’s Board of Directors adopted and approved the Amended and Restated 2009 Stock Incentive Plan, subject to stockholder approval at the Annual Meeting.  At the 2011 Annual Meeting of Stockholders (the “Annual Meeting”) of the Company held on July 9, 2011, the Company’s stockholders approved an amendment and restatement of the Company’s 2009 Stock Incentive Plan (the “Amended and Restated 2009 Stock Incentive Plan”).  The primary purpose for the Amended and Restated 2009 Stock Incentive Plan was to increase the number of shares of the Company’s common stock available for issuance thereunder by 1,000,000 shares to 2.200,000 shares of the Company’s common stock.

On October 26, 2009, the Company awarded 200,000 shares of its restricted common stock, par value $.001 per share, pursuant to the 2009 Stock Incentive Plan, to Mr. Kexuan Yao, the Company’s Chief Executive Officer.  The shares awarded to Mr. Yao will vest 66,667 shares on December 15, 2010, 66,667 shares on December 15, 2011 and 66,666 shares on December 15, 2012.  These shares were valued at $3.28 per share or $656,000 on the date of grant and were amortized over the vesting period.  In aggregate, $54,667 was recorded as stock based compensation for the interim period ended March 31, 2011 each.

On October 26, 2009, the Company agreed to pay Mr. William Thomson the sum of $20,000 and awarded 6,250 shares of the Company’s restricted common stock to Mr. William Thomson in conjunction with his appointment to the Company's board of directors.  The shares awarded to Mr. Thompson will vest 25% on March 31, 2010, 25% on June 30, 2010, 25% on September 30, 2010 and 25% on December 31, 2010.  The restricted stock vests only if Mr. Thomson is still a director of the Company on the vesting date (with limited exceptions), and the shares are eligible for the payment of dividends, if the Board of Directors was to declare dividends on the Company’s common stock.  These shares were valued at $3.28 per share or $20,500 on the date of grant and were amortized over the vesting period.  In aggregate, all of the $20,500 was earned and recorded as stock based compensation for the year ended December 31, 2010. The Company and Mr. William Thomson are in the process of entry into the new director service agreement for 2011.

On September 16, 2010, the Company agreed to pay Mr. Jinping Chan the sum of $20,000 and awarded 6,250 shares of the Company’s restricted common stock to Mr. Chan in conjunction with his appointment to the Company's board of directors.  The shares awarded to Mr. Chan will vest 50% on March 10, 2011 and 50% on September 10, 2011.  The restricted stock vests only if Mr. Chan is still a director of the Company on the vesting date (with limited exceptions), and the shares are eligible for the payment of dividends, if the Board of Directors was to declare dividends on the Company’s common stock. These shares were valued at $3.12 per share or $19,500 on the date of grant and were amortized over the vesting period.  In aggregate, $4,875 was recorded as stock based compensation for the three months ended March 31, 2011.

On October 5, 2010, the Company awarded a stock option to purchase 40,000 shares of the Company’s common stock exercisable at $5.00 per share to an employee in conjunction with his employment agreement as the Company's Director of Administration, vested upon grant.  The fair value of option granted, estimated on the date of grant, was $138,000, using the Black-Scholes option-pricing model with the following weighted-average assumptions:

Expected option life (year)	5.00
Expected volatility	187%
Risk-free interest rate	1.21%
Dividend yield	0.00%

The Company recorded the entire amount of $138,000 as stock based compensation expense on the date of grant.

On January 25, 2011, the Company issued 55,378 shares of its common shares to certain of its employees for their 2010 services of approximately $187,100 in lieu of cash, which was recorded as compensation expenses in 2010 and credited the same to the accrued expenses at December 31, 2010.

On March 29, 2011, the Company awarded 10,000 shares of the Company’s common stock to an employee for his 2011 employment service vesting on July 1, 2011. These shares were valued at $2.74 per share or $27,400 on the date of grant and are being amortized over the service period of one year in 2011. $6,850 was recorded as stock based compensation expense for the six months ended June 30, 2011.

F-31

The table below summarizes the Company’s Amended and Restated 2009 Stock Incentive Plan activities as of June 30, 2011:

	Number of Shares or Options		Fair Value at Date of Grant
Balance, December 31, 2009		206,250	$	676,500
Granted – shares		6,250		19,500
Canceled – shares		-		-
Granted – options		40,000		138,000
Canceled – options		-		-
Balance, December 31, 2010		252,500		834,000
Granted – shares		65,378		214,580
Canceled – shares		-		-
Granted – options		-		-
Canceled – options		-		-
Balance, June 30, 2011		317,878	$	1,048,580
Vested, June 30, 2011		211,319		605,365
Unvested, June 30, 2011		106,559	$	403,215

As of June 30, 2011, there were 1,882,122 shares of common stock remaining available for issuance under the Amended and Restated 2009 Stock Inceptive Plan.

NOTE 16 – OPERATING COST OF IDLE MANUFACTURING FACILITY

Armet’s manufacturing facility is idle from time to time depending upon market conditions.  Total operating costs of the idle manufacturing facility, including salary and wages, payroll tax and benefits, materials, depreciation and other operating costs of maintaining the manufacturing facility, were $899,786 for the interim period ended June 30, 2011.  There were no operating costs of the idle manufacturing facility for the interim period ended June 30, 2010 as Armet did not complete the construction of its manufacturing facility and commence operations until the end of September 2010.

NOTE 17 – COMMITMENTS AND CONTINGENCIES

Uncommitted trade credit facilities

The Company entered into uncommitted trade credit facilities with certain financial institutions.  Substantially all of the uncommitted trade credit facilities were guaranteed by Mr. Yao, the Company’s chairman, Chief Executive Officer and principal stockholder.  The uncommitted trade credit facilities at June 30, 2011 were as follows:

	Date of Expiration	Total Facilities		Facilities Used		Facilities Available
Armco HK
DBS (Hong Kong) Limited (i)	August 26, 2011	$	20,000,000	$	0.00	$	20,000,000
ING Bank, N.V. Hong Kong Branch (ii)	August 12, 2011		20,000,000		26,740,000		-
RZB (Beijing) Branch (iii)	October 31, 2011		15,000,000		765,000		14,235,000
Henan Armco
Guangdong Development Bank Zhengzhou Branch (iv)	June 17, 2012		10,830,046		2,936,768		7,893,278
China CITIC Bank Zhengzhou Branch (v)	March 15, 2012		7,735,747		0.00		7,735,747
China Minsheng Bank Zhengzhou Branch (vi)	October 13, 2011		3,094,299		2,128,364		965,935
Armet
Bank of China Lianyungang Branch (vii)	September 3, 2012		10,830,046		8,509,322		2,320,724
Bank of China Lianyungang Branch (viii)	October 29, 2011		3,094,299		773,575		2,320,724
Bank of Communications Lianyungang Branch (ix)	June 30, 2013		11,139,476		5,105,593		6,033,883
		$	101,723,913	$	51,710,602	$	61,505,291

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(i) On August 6, 2010, Armco HK entered into a Banking Facilities Agreement with DBS Bank (Hong Kong) Limited of $20,000,000 for issuance of commercial letters of credit in connection with the Company’s purchase of metal ore.  The Company pays interest at LIBOR or DBS Bank’s cost of funds plus 2.50% per annum on issued letters of credit in addition to an export bill collection commission equal to 1/8% of the first $50,000 and 1/16% of the balance and an opening commission of 1/4% on the first $50,000 and 1/16% of the balance for each issuance.  Amounts advanced under this facility are repaid from the proceeds of the sale of metal ore.  The lender may terminate the facility at anytime at its sole discretion. The facility is secured by the charge on cash deposit of the borrower, the borrower’s restricted pledged deposit in the minimum amount of 3% of the letter of credit amount, the Company’s letter of comfort and the guarantee of Mr. Kexuan Yao. 

(ii) On August 12, 2010, Armco HK obtained a $20,000,000 line of credit from ING Bank Hong Kong Branch for issuance of letters of credit to finance the purchase of metal ore along with a sub-limit facility for freight advance of $3,000,000.  The letters of credit require the Company to pledge cash equal to 5% of the letter of credit, subject to increase by the lender in the event of price fluctuations and market demand while the letter of credit remains open.  The Company pays interest at the lender’s cost of funds plus 250 basis points per annum on issued letters of credit in addition to an export bill collection commission equal to 1/4% of the first $50,000 and 1/16% of the balance for each issuance.  Amounts advanced under this line of credit are repaid from the proceeds of the sale of metal ore.  The lender may terminate the facility at anytime at its sole discretion. The facility is secured by the Company’s restricted cash deposit in the minimum amount of 5% of the letter of credit amount, the Company’s guarantee, the guarantee of Mr. Kexuan Yao and a security interest in the contract for the purchase of the ore for which the letter of credit has been issued and the contract for the sale of the ore. ING verbally approved the increase of trade credit facilities to $26,740,000 to facilitate one purchase on a temporary basis.

(iii) On July 23, 2010, Armco HK entered into Amendment No. 1 to the March 25, 2010 uncommitted Trade Finance Facility with RZB Austria Finance (Hong Kong) Limited.  The amendment provides for the issuance of $15,000,000 of commercial letters of credit in connection with the purchase of metal ore, an increase of $5,000,000 over the amounts provided for in the March 25, 2010 facility.  The Company pays interest at 200 basis points per annum plus the lender’s cost of funds per annum on issued letters of credit in addition to fees upon issuance of the letter of credit of 1/16% for issuance commissions, negotiation commissions, commission-in-lieu and collection commissions.  Amounts advanced under this facility are repaid from the proceeds of the sale of metal ore.  The lender may, however, terminate the facility at anytime or at its sole discretion upon the occurrence of any event which causes a material market disruption in respect of unusual movement in the level of funding costs to the lender or the unusual loss of liquidity in the funding market. The lender has the sole discretion to decide whether or not such event has occurred.  The facility is secured by restricted cash deposits held by the lender, the personal guarantee of Mr. Kexuan Yao, the Company’s guarantee, and a security interest in the contract for the purchase of the ore for which the letter of credit has been issued and the contract for the sale of the ore.

(iv) On June 18, 2011, Henan Armco obtained a RMB 70,000,000 (approximately $10,800,000) line of credit from Guangdong Development Bank Zhengzhou Branch for issuance of letters of credit to finance the purchase of metal ore.  The Company pays interest at 120% of the applicable base rate for lending published by the People’s Bank of China (“PBC”) at the time the loan is made on issued letters of credit.  The facility is secured by the guarantee provided by Mr. Kexuan Yao and Armet jointly and the pledge of movable assets provided by the borrower. Amounts advanced under this line of credit are repaid from the proceeds of the sale of metal ore. The term of the facility is one year.

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(v) On April 27, 2011, Henan Armco obtained a RMB 50,000,000 (approximately $7,700,000) line of credit from China CITIC Bank, Zhengzhou Branch, for issuance of letters of credit to finance the purchase of metal ore and scrap metal expiring one (1) year from the date of issuance. The letters of credit require the Company to pledge cash deposits equal to 20% of the letter of credit for letters of credit at sight, or 30% for term letters of credit.  Term letters of credit are limited to no more than 90 days. The interest rates are variable depending on the lender’s cost of funds at the time when the letter of credit is issued. The facility is guaranteed by Armet and Mr. Kexuan Yao, the Company’s Chairman and Chief Executive Officer.

(vi) On October 13, 2010, Henan Armco obtained a RMB 20,000,000 (approximately $3,000,000) line of credit from China Minsheng Bank, Zhengzhou Branch, for issuance of letters of credit to finance the purchase of metal ore and scrap metal expiring one (1) year from the date of issuance. The facility is guaranteed by Armet and Mr. Kexuan Yao, the Company’s Chairman and Chief Executive Officer.

(vii) On September 4, 2009, Armet entered into a line of credit facility (“Line of Credit”) in the amount of RMB 70,000,000 (approximately $10.7 million) from Bank of China, Lianyungang Branch expiring September 3, 2012, which can be drawn in the form of long-term debt or a bank acceptance payable.  The facility is to finance the construction of Armet’s metal recycling facility. Armet pays interest at 105% of the applicable base rate for lending published by the People’s Bank of China (“PBOC”) at the time the loan is drawn down, as adjusted annually. The line of credit facility is collateralized by Armet’s building, equipment and land use right and the guarantees provided by Mr. Kexuan Yao, Mr. Yi Chu, Henan Armco and Henan Chaoyang, respectively.

(viii) On October 29, 2010, Armet entered into a line of facility in the amount of RMB20,000,000 (approximately $3.0 million) from Bank of China, Lianyungang Branch for the purchase of raw materials. The term of the facility is 12 months with interest at 5.838% per annum. The facility is secured by the guarantees provided by Mr. Kexuan Yao, Mr. Yi Chu, Henan Armco and Henan Chaoyang, respectively.

(ix) On July 1, 2011, Armet obtained a RMB 72,000,000 (approximately $11.1 million) line of credit from Bank of Communications, Lianyungang Branch expiring two years from the date of issuance, for issuance of letters of credit in connection with the purchase of scrap metal. The letters of credit require Armet to pledge cash deposit equal to 20% of the letter of credit for letters of credit at sight, or 30% for other domestic letters of credit and for extended domestic letters of credit, the collateral of inventory equal to 166% of the letter of credit. The facility is secured by Armet inventories and guarantee provided by Mr. Kexuan Yao, the Company’s Chairman and Chief Executive Officer.

Loan guarantee

On June 11, 2010 the Company entered into a Guaranty Cooperation Agreement with Henan Chaoyang to provide additional liquidity to meet anticipated capital requirements of the recently launched Armet scrap metal recycling facility and the expansion of its metal ore trading business in the coming years.  Under the terms of this guaranty, Henan Chaoyang agreed to provide up to RMB 300 million (approximately $46,400,000) loan guarantees to the Company’s subsidiary, Armet, for five (5) years for the following approved bank loans and credit lines and pending application of bank loans and line of credits:

● Bank of China Lianyungang Branch’s project loan in the amount of RMB 90 million (approximately $13.4 million) which was guaranteed in 2009,

● Bank of Communications Lianyungang Branch loan in the amount of RMB 50 million (approximately $7.5 million) which was approved on June 10, 2010 and is in the process of closing,

● Bank of Jiangsu loan in the amount of RMB 30 million (approximately $4.5 million) which is pending lender approval, and

● Bank of China’s additional loan for working capital of RMB 130 million (approximately $19.4 million) which is pending lender approval.

Under the terms of the Guaranty Cooperation Agreement, the Company has the right to apply to other banks for credit lines at the same or lesser amounts if the pending applications are not approved, but the Company needs the consent of Henan Chaoyang to apply to other banks for credit lines.

As consideration for the guaranty, the Company issued to Xianjun Ma, a designee of Henan Chaoyang, 500,000 shares of its common stock.  The shares are earned ratably over the term of the agreement, and the unearned shares are forfeitable in the event of nonperformance by the guarantor.

F-34

Mr. Heping Ma, a former member of the Company’s Board of Directors, is the founder, Chairman and owns 85% equity interest of Henan Chaoyang.  On September 16, 2010, Mr. Ma resigned from the Company’s Board of Directors.  This transaction was approved by the members of Board of Directors of the Company who were independent in the matter in accordance with the Company’s Related Persons Transaction Policy.

Legal proceedings

The Company and certain of its officers and directors were named as parties to a lawsuit filed on September 16, 2010 in the U.S. District Court, District of Nevada (Case No.: 2:10-cv-01581-JCM-RJJ). The complaint, brought by Crawford Shaw, an alleged shareholder of the Company, sought unspecified money damages, against the Company and certain officers and directors of the Company relating primarily to an alleged omission regarding Mr. Kexuan Yao’s pledge of his personal stock.

On October 12, 2010, the Company filed a motion to dismiss the complaint filed by Mr. Shaw on grounds that, among other things, the Complaint failed to state a claim for relief. On January 24, 2011, United States District Judge Mahan granted the Company’s motion to dismiss the complaint against the Company without prejudice. On March 8, 2011, the Court dismissed the law suit against the Company’s officers and directors without prejudice on grounds that the plaintiff failed to serve the complaint.

Operating leases

(i) Operating lease for San Mateo office

On December 17, 2010, China Armco entered into a non-cancelable operating lease for office space that will expire on December 31, 2013.  Future minimum payments required under this non-cancelable operating lease were as follows:

Year ending December 31:
2011	$	21,867
2012		44,916
2013		46,098
	$	112,881

(ii) Operating lease for Armco Shanghai office

On July 16, 2010, Armco Shanghai entered into a non-cancelable operating lease for office space that will expire on July 15, 2012.  Future minimum payments required under this non-cancelable operating lease were as follows:

Year ending December 31:
2011	$	45,984
2012		48,698
	$	94,682

(iii) Operating lease of property, plant and equipment and facilities

On June 24, 2011, Armet entered into a non-cancelable operating lease agreement with an independent third party for property, plant, equipment and facilities that will expire one year from date of signing.  Armet is required to pay RMB 30 (equivalent to $4.64) per metric ton of scrap metal processed at this facility over the term of the lease.  The fee will be paid annually and necessary adjustment will be made at the end of term.

F-35

NOTE 18 – CONCENTRATIONS AND CREDIT RISK

Customers and credit concentrations

Customer concentrations for the interim periods ended June 30, 2011 and 2010 and credit concentrations at June 30, 2011 and 2010 are as follows:

	Net Sales for the Interim Period Ended						Accounts Receivable At
	June 30, 2011			June 30, 2010			June 30, 2011			June 30, 2010
Customer #206010 Lianyungang Jiaxin		-	%		32.1	%		-	%		61.0	%
Customer #113102 Taicangtaike		-	%		14.7	%		-	%		36.6	%
Customer #122023 Granton		-	%		10.4	%		-	%		-	%
Customer #1122024 Derby Materials		27.6	%		-	%		-	%		-	%
Customer #1122014 Citic Metal		-	%		10.2	%		15.5	%		-	%
Customer #1122028 Qingdao BaoSong Resources			%		-	%		21.7	%		-	%
Customer #302023Shangdong Yongjia		13.6	%		-	%		-	%		-	%
Customer #122002 Zhongji NingBo			%		-	%		39.8	%		-	%
Customer #102003 ZhongJin Renewable Resources		7.8	%		-	%		-	%		-	%
Customer 0101009 NingBo HangGang		16.4	%		-	%		-	%		-	%
Customer #122003 ZhongJi NingBo		8.3	%		-	%		-	%		-	%
									%
		73.7	%		67.4	%		77.0	%		97.6	%

A reduction in sales from or loss of such customers would have a material adverse effect on the Company’s results of operations and financial condition.

Vendor concentrations

Vendor purchase concentrations for the interim periods ended June 30, 2011 and 2010 and accounts payable concentration at June 30, 2011 and 2010 are as follows:

	Net Purchases for the Interim Period Ended						Accounts Payable At
	June 30, 2011			June 30, 2010			June 30, 2011			June 30, 2010
Vendor #302006 Anhuihuatai		-	%		27.8	%		-	%		46.10	%
Vendor #121015 Suizhou Huiyang		-	%		13.4	%		-	%		43.4	%
Vendor #010032 LianYunGang TongKe Trade		-	%		-	%		14.6	%		-	%
Vendor #010030 LinYi LiYuan		-	%		-	%		6.3	%		-	%
Vendor #204014 Mineracao		25.5	%		-	%		30.4	%		-	%
Vendor 202019 Bridge Group Finance		-	%		-	%		12.3	%		-	%
Vendor #301009 XinJiang BaGang		14.2	%		-	%		-	%		-	%
Vendor #204033 Oversea Enterprise Pte, Ltd.		-	%		26.0	%		-	%			%
Vendor #010001 Xie HongJian		8.0	%		-	%		-	%		-	%
Vendor #99081 Liang XiaoLei		7.7	%		-	%		-	%		-	%
Vendor #2202019 Smart Trading LLP		8.6	%		-	%		6.2	%		-	%
		64.0	%		67.2	%		69.8	%		89.5	%

F-36

Credit risk

Financial instruments that potentially subject the Company to significant concentration of credit risk consist primarily of cash and cash equivalents.

As of June 30, 2011, substantially all of the Company’s cash and cash equivalents were held by major financial institutions located in the PRC, none of which are insured.  However, the Company has not experienced losses on these accounts and management believes that the Company is not exposed to significant risks on such accounts.

Foreign currency risk

The Company is exposed to fluctuations in foreign currencies for transactions denominated in currencies other than RMB, the functional currency due to the fact the majority of the Company’s purchasing activities are transacted in foreign currencies.

The Company had no foreign currency hedges in place at June 30, 2011 or 2010 to reduce such exposure.

Interest risk

Substantially all of the Company’s operations are carried out in the PRC. The tight monetary policy currently instituted by the PRC government and increases in interest rate would have a material adverse effect on the Company’s results of operations and financial condition.

NOTE 19 - FOREIGN OPERATIONS

Operations

Substantially all of the Company’s operations are carried out and all of its assets 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.  The Company’s business may be influenced by changes in governmental policies with respect to laws and regulations, monetary policies, anti-inflationary measures, currency fluctuation and remittances and methods of taxation, among other things.

Dividends and Reserves

Under the laws of the PRC, net income after taxation can only be distributed as dividends after appropriation has been made for the following: (i) cumulative prior years’ losses, if any; (ii) allocations to the “Statutory Surplus Reserve” of at least 10% of net income after tax, as determined under PRC accounting rules and regulations, until the fund amounts to 50% of the Company’s registered capital; (iii) allocations of 5-10% of income after tax, as determined under PRC accounting rules and regulations, to the Company’s “Statutory Common Welfare Fund”, which is established for the purpose of providing employee facilities and other collective benefits to employees in PRC; and (iv) allocations to any discretionary surplus reserve, if approved by stockholders.

As of June 30, 2011, the Company had no Statutory Surplus Reserve and the Statutory Common Welfare Fund established and segregated in retained earnings.

NOTE 20 – SUBSEQUENT EVENTS

The Company has evaluated all events that occurred after the balance sheet date through the date when the financial statements were issued.  The Management of the Company determined that there were no reportable subsequent events to be disclosed.

F-37

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

The following discussion should be read in conjunction with the information contained in our unaudited consolidated financial statements and the notes thereto appearing elsewhere herein and in conjunction with the Management’s Discussion and Analysis set forth in our Annual Report on Form 10-K, as amended, for the year ended December 31, 2010 (the “Form 10-K”).

We are on a calendar year; as such the three month period ended June 30, 2011 is referred to as our “second quarter” and the six month period ended June 30, 2011 is referred to as the “first six months of fiscal 2011.” The past year ended December 31, 2010 is referred to as “2010,” the current year ending December 31, 2011 is referred to as “2011,” and the coming year ending December 31, 2012 is referred to as “2012.”

The unaudited interim consolidated financial statements furnished in this Report reflect all adjustments (consisting of normal recurring accruals) which are, in the opinion of management, necessary to a fair statement of the results for the interim periods presented.  Interim results are not necessarily indicative of the results for the full year.  These unaudited interim consolidated financial statements should be read in conjunction with the consolidated financial statements of the Company for the year ended December 31, 2010 and notes thereto contained in our Annual Report on Form 10-K filed with the SEC on March 31, 2011.

OVERVIEW OF OUR PERFORMANCE AND OPERATIONS

Our Business and Recent Developments

We import, sell and distribute to the metal refinery industry in the People’s Republic of China (the “PRC” or “China”) a variety of metal ore, including iron, chrome, nickel, copper and manganese ore, as well as non-ferrous metals and coal.  We obtain these raw materials from global suppliers in Brazil, India, Oman, Turkey, Nigeria, Indonesia, and the Philippines and distribute them in the PRC.  We also recycle scrap metal used by steel mills in the production of recycled steel.   

 Domestic steel production in the PRC slowed down in the second quarter of 2011. A multiple-tier government policy and external market factors had a mixed impact on the steel mill operations as well as the iron and other metal ores market.  These market factors include a tightened Chinese domestic monetary policy, a series of real estate control policies implemented by the Chinese government, frequently raised Bank reserve requirements by the China central bank, increased loan interests by the China central bank, unprecedented strong earthquakes and large tsunamis in Japan, falling steel prices in the domestic market in the PRC, and a high supply of iron ore inventory at the ports.  The demand and actual importation of iron ore decreased overall in the second quarter compared to the first quarter of 2011. This adversely affected our metal ore trading business in the second quarter. Consequently, we experienced a significant decline in metal ore sales across the board, especially iron ore. The decreased demand and lower price of metal ores in the PRC spot market resulted in a significant slowing in our metal ore trading business; thus, net revenue from our trading business decreased significantly as compared to both the second quarter of 2010 and the first quarter of 2011.  Despite the decrease in our metal ore trading revenue, our overall revenue improved from the second quarter of 2010 due to an increase in net revenue from our scrap metal recycling business.

             We continue to refine our business model in response to unpredictable fluctuations in market prices.  We seek to secure longer term supply contracts in response to known opportunities rather than sell goods purchased in the spot market.  Where possible, we structure transaction-specific terms with our customers in order to better manage risk and ensure an acceptable profit margin.  While this process may limit certain trading opportunities, we believe that it will enhance our competitive position as the metal ore market prices recover.  Additionally, in the first six months of fiscal 2011 we added six new metal ore trading customers in the Jiangsu province of the PRC.  These customers, along with our growing base of customers throughout China, will help us meet our goal of obtaining a strong position in the metal ore trading market.

We formally commenced the operation of our scrap metal recycling facility in the Banqiao Industrial Zone of Lianyungang Economic Development Zone in the Jiangsu province of the PRC (the “Facility”) late in the third quarter of 2010.  As a result, no comparisons can be made with respect to prior comparable periods for the year ended December 31, 2010.  The Facility recycles automobiles, machinery, building materials, dismantled ships and various other scrap metals.  We sell and distribute the recycled scrap metal to the metal refinery industry in the PRC utilizing our existing network of metal ore customers while continuing to seek new customers.

During the second quarter of 2011, our net revenue in the scrap metal recycling business increased significantly to $22.1 million from $6.3 million in the first quarter.  Our production increased by 51% to 36,322 metric tons (“MT”) from 18,535 MT in the first quarter.  While we continue to increase our recycling revenue, we have not reached full capacity at the Facility primarily due to cash flow issues and market conditions, including the lack of availability of raw materials.  During the second quarter our supply of scrap metal was adversely affected by reduced scrap metal collection by agricultural workers, who are important local suppliers of scrap metal, due to the harvest season. Consequently, for the second quarter of 2011, our scrap metal business sold approximately 47,662 MT of scrap metals, generating approximately $22.1 million of revenue and $0.6 million of gross profit.

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We continue to believe that our recycling business will become a strong growth driver for our company as natural resources continue to be depleted and larger amounts of unprocessed scrap metal become available as a result of increases in consumer demand for products made from steel that eventually are recycled.  We also believe the profit margin of our recycling business will gradually stabilize and could further increase as we gain more experience in operating our Facility, marketing our products and establishing our reputation and presence in the recycled scrap metal industry.

We have developed a strategy to expand our sources of raw material acquisition and to establish a supply chain network to increase and stabilize the availability of raw materials for our recycling operation. In furtherance of this strategy, in June 2011 we signed a lease agreement to manage, operate and control a scrap recycling facility in the area.  This facility is capable of recycling scrap metals and will increase our control over the local supply of recycled and raw materials.

We invested a total of approximately $35.3 million in the aggregate to acquire land use rights and to construct and purchase equipment for the Facility.  These capital expenditures were funded from a portion of the net proceeds we received from sales of securities and debt and vendor financing.  During the second quarter of 2011, we continued to build on our achievements from the prior year in our continuing efforts to secure financing for our business.  We maintain nine bank facilities, which provide for the issuance of commercial lines of credit for letters of credit in the aggregate amount of $101.7 million with an availability of $61.5 million at June 30, 2011. Three of the bank facilities worth $29.6 million of the Company’s $101.7 million aggregate amount were newly obtained or renewed during the second quarter of 2011.  These bank facilities improve our ability to finance our continued expansion.

Our Performance

For the three and six months ended June 30, 2011, our net revenues increased approximately 82% and 215%, respectively, over the comparable periods in 2010. Our gross profit margin increased for the three and six months ended June 30, 2011 to 4% and 6%, respectively compared to 1% and 3% during the comparable prior year periods. The margin increase is attributable to increased prices of metal ores coupled with the addition of revenue from our scrap metals recycling operation in the 2011 periods, which was not in operation during the comparable periods in 2010. We incurred a net loss of $1.3 million and $0.7 million for the three and six months ended June 30, 2011, respectively, compared to our net loss of $0.3 million and $0.2 million over the comparable periods in 2010.  This net loss is further discussed under our “Results of Operations” section.

Our Outlook

Our performance during the second quarter of 2011 showed significantly increased sales with a higher gross margin in comparison to the same period in 2010. We believe our new recycling operation has the potential to substantially improve our overall performance in the second half of 2011 and into 2012 if we can better manage our raw material supply and obtain sufficient liquidity.  Additionally, we believe our efforts to obtain consistent supply sources through our entry into an operating lease with a local recycling facility and our efforts in Brazil will help us attain better gross margins in metals trading in the coming years.

Metal Ore Trading.  The price surge of metal ores that began in late 2010 lost momentum in the second quarter of 2011.  The Chinese government’s measures to prevent the real estate sector from overheating and to implement a tight monetary policy are likely to continue to moderate metal ore prices in the near term. On the other hand, metal ore prices are likely to be positively affected by demand from the construction and infrastructure sectors.  For example, the Chinese government’s investment programme in social housing is a key, non-seasonal driver of metal demand. The Government’s goal is to build ten million low-cost housing units this year with the bulk of the actual construction biased towards the second six months. While the price and demand trends are somewhat negative as we move into the second half of the year, we believe the strong demand from the construction and infrastructure sectors will limit the metal ore price downside.

Scrap Metal Recycling. We believe our scrap metal recycling operation can provide increased revenue and profitability in the second half of 2011 and into 2012.  In the second quarter our metric tons of processed scrap metals doubled as compared to first quarter of 2011. Further, we anticipate a steady ramp-up towards more production at the Facility and improved profitability of the operation in the coming quarters.  We anticipate that our recycling operation will be the largest driver of revenue in 2011 and will remain so for the foreseeable future.  We intend to devote a significant amount of our resources towards this operation and we will continue to pursue our strategy to create a network of raw material suppliers and expand our market share as opportunities arise.

Overall we believe our business is well positioned to grow in the coming quarters, but will require sufficient liquidity to support that growth.

RESULTS OF OPERATIONS

The table below summarizes the consolidated operating results for the three and six months ended June 30, 2011 and 2010.

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		For the Three Months Ended June 30,										For the Six Months Ended June 30,
		2011					2010					2011				2010
Revenues	$	30,968,138				$	16,999,602				$	80,652,790			$	25,576,172
Cost of revenues		29,618,739		96	%		16,802,757		99	%		76,134,622	94	%		24,820,408		97	%
Gross profit		1,349,399		4	%		196,845		1	%		4,518,168	6	%		755,764		3	%
Total operating expenses		2,072,567		7	%		1,010,514		6	%		3,839,015	5	%		1,924,091		8	%
Operating (loss) income		(723,168)	)	(2)	%		(813,669	)	(5)	%		679,153	1	%		(1,168,327	)	(5)	%

Net Revenues

Net revenues for the three and six months ended June 30, 2011, were $31.0 million and $80.7 million, respectively, representing an increase of $13.97 million and $55.07 million over the comparable periods in 2010.  The increase in net revenues for the second quarter is mainly due to an $18.2 million increase in sales of scrap metals, a $2.6 million increase in sales of chromium ore, and a $1.9 million increase in sales of manganese ore, partially offset by a $6.8 million decrease in sales of iron ore. The increase in net revenues for the six month period ended June 30, 2011 is primarily due to a $24.7 million increase in sales of scrap metals, a $16.8 million increase in sales of iron ore, an $11.0 million increase in sales of pellet ore, and a $2.2 million increase in sales of manganese ore.  The type of products we buy and sell are subject to change and are dependent upon availability and the demands of our customers.

Revenue for the six month period increased significantly compared to the same period of 2010 primarily due to increased sales in our scrap metal recycling business, which was not formally operating in the same period of 2010, and increased sales in our metal ore trading business in the first quarter of 2011. The revenue in our metal ore trading business for the second quarter of 2011 was adversely affected by weaker demand, lack of raw material supply and softer spot market prices in China as the Chinese government enacted fiscal and monetary policies in an effort to control inflation and prevent the real estate industry from overheating.

Cost of Goods Sold

Cost of goods sold in the second quarter of 2011 was $29.6 million, representing an increase of $12.8 million and a gross profit margin of 4.4%, compared to $16.8 million and a gross profit margin of 1.2%, in the same period in 2010.  Cost of goods sold in the first quarter of 2011 was $46.5 million, representing an increase of $38.5 million, a gross profit margin of 6.4%, compared to $24.8 million and a gross profit margin of 3.0%, in the same period in 2010.  This profit margin increase was primarily due to improvement in profit margin in sales of iron ore and magnesium ore compared to prior period. The gross margin for our scrap metal recycling business was 3.9% for the six month period, for which there is no comparison as we did not commence operations at our recycling facility until the third quarter of 2010.

Total Operating Expenses

Operating expenses for the three and six months ended June 30, 2011 were $2.1 million and $3.8 million, representing increases of $1.1 million and $1.9 million, compared to the three and six months ended June 30, 2010, respectively.

For the three months ended June 30, 2011, the increase in operating expenses was primarily due to an increase in professional fees of $0.33 million, including legal fees, audit fees, investor relations, website design and SEC filing services, an increase in general and administrative expenses of $0.42 resulting from increased activities in production, operations and corporate governance, and an increase in operating costs of $0.43 million for the Facility.  These increases were partially offset by reduced selling expenses of $0.11 million.

For the six months ended June 30, 2011, the increase in operating expenses was primarily due to an increase in general and administrative expenses of $0.91 million resulting from increased activities of production and operation at our China subsidiaries ($0.78 million increase, including the Facility of $0.32 million, newly established Armco Shanghai of $0.28 million, Hongkong Armco of $0.11 million and Henan Armco of $0.07 million), an increase in management activities at our U.S. headquarters resulting in a $0.13 million increase, an increase in operating costs of $0.90 million for Armet idle manufacturing facility which was not optional nor such cost during the same period of 2010, and an increase in professional fees of $0.29 million due to the efforts to improve corporate governance, financial reporting and investor relations.  These increases were partially offset by reduced selling expenses of $0.18 million mainly due to decreases in port charges and lower warehousing expenses as a result of faster sales of inventory as compared to prior period.

3

Other (Income) expense

Total other expense for the three and six months ended June 30, 2011 were $0.5 million and $1.2 million, respectively. During the three and six months ended June 30, 2010, we had other income of $0.6 million and $1.1 million, respectively.

For the three months ended June 30, 2011, interest expenses increased $0.4 million over the comparative period in 2010, mainly due to increases in use of borrowings in the second quarter. During the second quarter, we accounted for a gain in the fair value of a derivative liability of $0.08 million mainly due to decreased number of outstanding liability warrants and lower stock price at June 30, 2011 compared to March 31, 2011. We also accounted for a $0.1 million expense in foreign currency transaction gain.   

For the six months ended June 30, 2011, total other expenses increased $2.3 million, compared to the same period in 2010, mainly due to an increase in interest expense of $0.96 million, a lack of a gain from vendor price adjustment of $0.96 million in the first quarter of 2010, an increase in other expenses associated with the operation of China subsidiaries of $0.47 million and an increase in loan guarantee costs of $0.1 million.

Income tax (benefit) expense

Income tax (benefit) expenses for the three and six months ended June 30, 2011 was $0.07 million and $0.24 million, respectively. In the comparative periods in 2010, income tax (benefit) expense was $(0.01) million and $0.1 million, respectively.  Our income tax (benefit) expense was derived mainly from operational results at our Hong Kong subsidiary applying an effective tax rate of 16.5%.

Net income (loss)

For the three and six months ended June 30, 2011, our net loss amounted to $1.3 million and $0.7 million, respectively, comparable to a net loss totaling $0.25 million and $0.19 million, respectively for the comparable 2010 periods. The increase in net loss was due to decreased other income (decrease $1.1 million or down 193% and $2.3 million or 206% for the three and six month periods, respectively), coupled with significantly increased operating expenses (up 105% and 100% for the three and six month periods, respectively), and partially offset by increased revenues (up 82% and 215% for the three and six month periods, respectively) and gross margin (up 3 percentage points for both the three and six month periods).

Comprehensive Income (Loss)

During the three and six months ended June 30, 2011, our comprehensive loss amounted to $1.23 million and $1.96 million, respectively, compared to comprehensive loss of $0.15 million and $0.09 million in the comparative periods in 2010. Comprehensive income (loss) consists of our net income and other comprehensive income, including change in unrealized loss of marketable securities and foreign currency translation gain (loss).  The functional currency of four of our subsidiaries operating in the PRC is the Chinese Yuan or RMB. The financial statements of our subsidiaries are translated to U.S. dollars using the exchange rate prevailing as of the date of the balance sheet for assets and liabilities, and average exchange rates (for the period) for revenues, costs, and expenses. Net gains and losses resulting from foreign exchange transactions are included in the consolidated statements of operations.  As a result of these translations, we reported a foreign currency translation gain of $.89 million the first six months of 2011, comparable to a gain of $.10 million for the same period in 2010. We also had a $0.5 million and $2.1 million loss in change in unrealized loss of marketable securities for the three and six months ended June 30, 2011, respectively. Collectively, these non-cash losses and gains had the effect of decreasing our reported comprehensive income in both periods.

LIQUIDITY AND CAPITAL RESOURCES

Liquidity is the ability of a company to generate adequate amounts of cash to meet its needs for cash.

4

At June 30, 2011 our working capital was $10.2 million, as compared to $12.2 million at December 31, 2010. Our cash balance at June 30, 2011 totaled $1.8 million, a decrease of $1.3 million as compared to $3.1 million at December 31, 2010.

As of June 30, 2011, we had invested a total of approximately $35.3 million for the acquisition of land use rights, construction and equipment purchases for the Facility. We expect to expand the production capacity at the Facility in the future and to build or acquire additional facilities in the future, depending on market conditions.  We have not set a timeframe for this expansion.

Moreover, we have not yet determined how we plan to finance this future expansion if we determine to proceed with it. Unless we can obtain additional financing on terms we deem favorable to us, we will be unable to complete any such expansion or construct additional facilities in the future, and there can be no assurance that we will be successful in obtaining any such additional financing, or that such financing would be on terms deemed to be desirable or favorable to us.  Furthermore, in the event we do obtain such financing, there can be no assurance that such investment will result in enhanced operating performance or produce significant revenues and related profits in the future.

In addition, we will continue to need to fund future capital expenditures for our existing operations, to service our debt and to purchase the raw materials required in our recycling operations.  We have historically financed our cash needs primarily through the sales of our common stock and warrants, internally generated funds, debt financing and advances from our Chairman.  We collect cash from our customers based on our sales to them and their respective payment terms.

We believe our working capital is sufficient for our operations for the next 12 months.  We have bank facilities which provide for cash borrowings or the issuance of commercial letters of credit that we require in our metal ore trading business in the aggregate amount of $101.7 million, as more fully described below.  Approximately $61.5 million was available under these facilities at June 30, 2011.

Substantially all of our cash reserves are held in the form of RMB in bank accounts at financial institutions located in the PRC. Cash held in banks in the PRC is not insured.  As described under "Risk Factors" in our Annual Report on Form 10-K, the Chinese regulatory authorities impose a number of restrictions regarding RMB conversions and restrictions on foreign investments.  Accordingly, our cash on deposit in banks in the PRC is not readily deployable by us for purposes outside of China.

On August 6, 2010, Armco HK entered into a Banking Facilities Agreement with DBS Bank (Hong Kong) Limited of $20,000,000 for issuance of commercial letters of credit in connection with the Company’s purchase of metal ore.  The Company pays interest at LIBOR or DBS Bank’s cost of funds plus 2.50% per annum on issued letters of credit in addition to an export bill collection commission equal to 1/8% of the first $50,000 and 1/16% of the balance and an opening commission of 1/4% on the first $50,000 and 1/16% of the balance for each issuance.  Amounts advanced under this facility are repaid from the proceeds of the sale of metal ore.  The lender may terminate the facility at anytime at its sole discretion. The facility is secured by the charge on cash deposit of the borrower, the borrower’s restricted pledged deposit in the minimum amount of 3% of the letter of credit amount, the Company’s letter of comfort and the personal guarantee of Mr. Kexuan Yao, our Chairman and Chief Executive Officer. At June 30, 2011, the balance outstanding under this facility was $0.

On August 12, 2010, Armco HK obtained a $20,000,000 line of credit from ING Bank Hong Kong Branch for issuance of letters of credit to finance the purchase of metal ore along with a sub-limit facility for freight advance of $3,000,000.  The letters of credit require the Company to pledge cash equal to 5% of the letter of credit, subject to increase by the lender in the event of price fluctuations and market demand while the letter of credit remains open.  The Company pays interest at the lender’s cost of funds plus 250 basis points per annum on issued letters of credit in addition to an export bill collection commission equal to 1/4% of the first $50,000 and 1/16% of the balance for each issuance.  Amounts advanced under this line of credit are repaid from the proceeds of the sale of metal ore.  The lender may terminate the facility at anytime at its sole discretion. The facility is secured by the Company’s restricted cash deposit in the minimum amount of 5% of the letter of credit amount, the Company’s guarantee, the personal guarantee of Mr. Kexuan Yao and a security interest in the contract for the purchase of the ore for which the letter of credit has been issued and the contract for the sale of the ore. ING verbally approved the increase of trade credit facilities to $26,740,000 to facilitate one purchase on a temporary basis. At June 30, 2011, the balance outstanding under this facility was $26,740,000.

On July 23, 2010, Armco HK entered into Amendment No. 1 to the March 25, 2010 uncommitted Trade Finance Facility with RZB Austria Finance (Hong Kong) Limited.  The amendment provides for the issuance of $15,000,000 of commercial letters of credit in connection with the purchase of metal ore, an increase of $5,000,000 over the amounts provided for in the March 25, 2010 facility.  The Company pays interest at 200 basis points per annum plus the lender’s cost of funds per annum on issued letters of credit in addition to fees upon issuance of the letter of credit of 1/16% for issuance commissions, negotiation commissions, commission-in-lieu and collection commissions.  Amounts advanced under this facility are repaid from the proceeds of the sale of metal ore.  The lender may, however, terminate the facility at anytime or at its sole discretion upon the occurrence of any event which causes a material market disruption in respect of unusual movement in the level of funding costs to the lender or the unusual loss of liquidity in the funding market. The lender has the sole discretion to decide whether or not such event has occurred.  The facility is secured by restricted cash deposits held by the lender, the personal guarantee of Mr. Kexuan Yao, the Company’s guarantee, and a security interest in the contract for the purchase of the ore for which the letter of credit has been issued and the contract for the sale of the ore. At June 30, 2011, the balance outstanding under this facility was $765,000.

5

On June 18, 2011, Henan Armco obtained a RMB 70,000,000 (approximately $10,800,000) line of credit from Guangdong Development Bank Zhengzhou Branch for issuance of letters of credit to finance the purchase of metal ore.  The Company pays interest at 120% of the applicable base rate for lending published by the People’s Bank of China (“PBC”) at the time the loan is made on issued letters of credit.  The facility is secured by the guarantee provided by Mr. Kexuan Yao and Armet jointly and the pledge of movable assets provided by the borrower. Amounts advanced under this line of credit are repaid from the proceeds of the sale of metal ore. The term of the facility is one year. At June 30, 2011, the balance outstanding under this facility was $2,589,448. Loan payable of $1,799,373 with principal under this facility was due and paid on July 27, 2011.

On April 27, 2011, Henan Armco obtained a RMB 50,000,000 (approximately $7,700,000) line of credit from China CITIC Bank, Zhengzhou Branch, for issuance of letters of credit to finance the purchase of metal ore and scrap metal expiring one year from the date of issuance. The letters of credit require the Company to pledge cash deposits between 20% and 30% of the drawn amounts. Term letters of credit are limited to no more than 90 days. The interest rates are variable depending on the LIBOR and the lender’s cost of funds at the time when a letter of credit is issued. The facility is guaranteed by Armet and Mr. Kexuan Yao. At June 30, 2011, the balance outstanding under this facility was $0.

On October 13, 2010, Henan Armco obtained a RMB 20,000,000 (approximately $3,094,299) line of credit from China Minsheng Bank, Zhengzhou Branch, for issuance of letters of credit to finance the purchase of metal ore and scrap metal expiring one year from the date of issuance. The facility is guaranteed by Armet and Mr. Kexuan Yao, the Company’s Chairman and Chief Executive Officer. At June 30, 2011, the balance outstanding under this facility was $2,128,364. Loan payable of $1,149,174 with principal and interest under this facility was due and paid on July 26, 2011.

On September 4, 2009, Armet entered into a line of credit facility (“Line of Credit”) in the amount of RMB 70,000,000 (approximately $10.8 million) from Bank of China, Lianyungang Branch expiring September 3, 2012, which can be drawn in the form of long-term debt or a bank acceptance payable.  The facility is to finance the construction of Armet’s metal recycling facility. Armet pays interest at 105% of the applicable base rate for lending published by the People’s Bank of China at the time the loan is drawn down, as adjusted annually. Interest is paid quarterly.  The line of credit facility is collateralized by Armet’s building, equipment and land use right and the guarantees provided by Mr. Kexuan Yao and his wife, Henan Armco and Henan Chaoyang, respectively.  As of June 30, 2011, the balance outstanding under our Line of Credit was $8.5 million.  The remaining principal payments of RMB 30 million (equivalent to U.S. $4.6 million) and RMB 25 million (equivalent to U.S. $3.9 million) are due on August 25, 2011 and August 25, 2012, respectively.

On October 29, 2010, Armet entered into a line of credit facility in the amount of RMB 20,000,000 (approximately $3,094,299) from Bank of China, Lianyungang Branch for the purchase of raw materials. The term of the facility is 12 months with interest at 5.838% per annum. The facility is secured by the guarantees provided by Mr. Kexuan Yao and his wife, Henan Armco and Henan Chaoyang, respectively. At June 30, 2011, the balance outstanding under this facility was approximately $773,575.

On July 1, 2011, Armet obtained a RMB 72,000,000 (approximately $11.1 million) line of credit from Bank of Communications, Lianyungang Branch expiring two year from the date of issuance, for issuance of letters of credit in connection with the purchase of scrap metal. The letters of credit require Armet to pledge cash deposit equal to 20% of the letter of credit for letters of credit at sight, or 30% for other domestic letters of credit and for extended domestic letters of credit, the collateral of inventory equal to 166% of the letter of credit. The facility is secured by Armet inventories and the personal guaranty provided by Mr. Kexuan Yao, the Company’s Chairman and Chief Executive Officer. As of June 30, 2011, the balance outstanding under this facility was $5,105,593.

The following table provides certain selected balance sheet comparisons as of June 30, 2011 and December 31, 2010.

	June 30, 2011		December 31, 2010		Increase (decrease)			%
Cash	$	1,825,255	$	3,097,917	$	(1,272,662	)		-41.1	%
Pledged deposits		12,114,281		12,643,671		(529,390	)		-4.2	%
Marketable securities		1,380,015		2,890,380		(1,510,365	)		-52.3	%
Bank acceptance notes receivable		154,715		0		154,715			n/a
Accounts receivable, net		337,302		19,115,019		(18,777,717	)		-98.2	%
Inventories		13,669,273		10,439,831		3,229,442			30.9	%
Advance on purchases		11,530,060		6,509,846		5,020,214			77.1	%
Prepaid corporate income taxes		459,950		0		459,950			n/a
Prepayments and other current assets		1,558,343		4,729,935		(3,171,592	)		-67.1	%
Total Current Assets		43,029,194		59,426,599		(16,397,405	)		-27.6	%
Loan payable		8,827,715		24,765,820		(15,938,105	)		-64.4	%
Banker's acceptance note payable		6,188,598		4,174,355		2,014,243			48.3	%
Current maturities of capital lease obligation		730,334		727,756		2,578			0.4	%
Current maturities of long-term debt		4,641,448		4,537,342		104,106			2.3	%
Accounts payable		2,114,391		3,435,528		(1,321,137	)		-38.5	%
Advances from Chairman and CEO		726,634		799,394		(72,760	)		-9.1	%
Customer deposits		8,498,165		1,345,304		7,152,861			531.7	%
Corporate income tax payable		134,381		1,091,038		(956,657	)		-87.7	%
Accrued expenses and other current liabilities		994,901		6,316,568		(5,321,667	)		-84.2	%
Total Current Liabilities		32,856,567		47,193,105		-14336538			-30.4	%

6

Our current assets at June 30, 2011 were $43 million, a decrease of $16.4 million, or 28%, from December 31, 2010. This overall decrease reflects a decrease of $18.8 million in accounts receivable, a decrease of $3.2 million in prepayments and other current assets, a decrease of $1.5 million in marketable securities, a decrease of $1.3 million in cash, and a decrease of $0.5 million in pledged deposits, partially offset by an increase of $5.0 million in advance on purchases, $3.2 million in inventories, $0.5 million in prepaid corporate income taxes, and $0.15 million in bank acceptance notes receivable.

Our accounts receivable decreased $18.8 million at June 30, 2011 from December 31, 2010, mainly due to collections of sales made near the end of prior year and our pre-sale contract arrangement.

Our prepayments and other current assets decreased $3.2 million at June 30, 2011 compared to December 31, 2010 primarily due to receipt of raw materials we prepaid for our recycling operation at Armet.

Marketable securities decreased $1.5 million at June 30, 2011 compared to December 31, 2010 due to the temporary decrease in the market value of our securities.

Inventories increased $3.2 million at June 30, 2011 compared to December 31, 2010, primarily as a result of the higher inventory needed at Armet to increase scrap metals production and the temporary increase in our metal ores inventory for trading due to a slowdown in iron ore trading.

Advance on purchases increased $5 million at June 30, 2011 compared to December 31, 2010, due to our commitments to build up our inventory for our scrap metal recycling business and an advance payment made on a land leveling project for a piece of real estate that will be available for our future expansion or for storage of materials and products..

At June 30, 2011, our total current liabilities decreased $14.3 million, or 30%, from December 31, 2010, which reflected a decrease in loans payable, accrued expenses and other current liabilities, accounts payable, corporate income tax payable and advances received from our Chairman and CEO, partially offset by an increase in customer deposits, banker's acceptance notes payable, and current maturities of long-term debt.

Loans payable under our letter of credit facilities decreased $16.0 million at June 30, 2011 compared to December 31, 2010 due to the repayment of short-term borrowings in the second quarter of 2011. We used collections of accounts receivable to repay these short-term borrowings.

Accrued expenses and other current liabilities decreased $5.3 million at June 30, 2011 compared to December 31, 2010 due to timing difference of shipments and payment of our payables. Accrued expenses consist of accrued expenses and other payables related to shipping fees.

Accounts payable decreased $1.3 million at June 30, 2011 compared to December 31, 2010 primarily due to the repayment of outstanding balance owed to our suppliers during the second quarter.

Corporate income tax payable decreased $1.0 million at June 30, 2011 compared to December 31, 2010 mainly due to tax payment made during the first six months of 2011.

Customer deposits increased $7.1 million at June 30, 2011 compared to December 31, 2010 due to timing of customer orders and amounts that we require for deposits. We recognize customer deposit as revenue when the goods have been delivered and the risk of loss has transferred to the customer either at the port of origin or port of destination based on the shipping terms we agree to with our customer. The increase in customer deposits also partially resulted from our implementation of pre-selling strategy to speed our fund turnover.

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Banker's acceptance note payable increased $2.0 million at June 30, 2011 compared to December 31, 2010 primarily due to an increase in short-term borrowing used in raw materials acquisition.

Statement of Cash Flows

For the first six months of 2011, our net decrease in cash totaled $1.3 million, and was comprised of $13.9 million generated by operating activities, offset by $14.7 million used in financing activities and $0.5 million used in investing activities.

For the first six months 2010, our net increase in cash totaled $2.4 million, and was comprised of $12.1 million generated by operating activities and $5.4 million provided by financing activities, offset by $17.7 million cash used in investing activities.

Cash flows from Operating Activities

For the first six months of 2011 cash generated by operations of $13.9 million was mainly comprised of a decrease in accounts receivable of $18.9 million, an increase in accrued expenses and other current liabilities of $5.3 million, a decrease of prepayments and other current assets of $2.8 million, and an increase in customer deposits of $7.1 million. These cash inflows were partially offset by an increase in inventory of $3.0 million, a decrease in accounts payable of $1.4 million, a decrease in taxes payable of $0.96 million, an increase in advance on purchases of $4.9 million and a decrease in customer deposits of $1.2 million.

For the first six months of 2010 cash generated by operations of $12.1 million was mainly comprised of a decrease in accounts receivable of $16.4 million, an increase in accounts payable of $3.1 million and a decrease of prepayments and other current assets of $2.7 million. These cash inflows were partially offset by an increase in inventory of $3.3 million, a decrease in taxes payable of $1.5 million, an increase in advance on purchases of $1.9 million and a decrease in customer deposits of $1.2 million.

Cash flows from Investing Activities

For the six months ended June 30, 2011 cash used in investing activities of $0.5 million was due to purchases of property and equipments of $1.3 million and payment made toward pledged deposits of $26.2 million, partially offset by proceeds received from the release of pledge deposits of $27.1 million

For the six months ended June 30, 2010 cash used in investing activities of $15.1 million was due to purchases of property and equipments of $10.6 million, investment in marketable securities of $3.7 million, and payment made toward pledged deposits of $3.9 million, partially offset by proceeds received from the release of pledged deposits of $3.1 million.

Cash provided by Financing Activities

For the six months ended June 30, 2011 cash used in financing activities of $14.7 million was mainly due to the repayment of loans payable of $61.9 million and repayment of capital lease obligation of $0.4 million, partially offset by proceeds from loans payable of $45.7 million and banker's acceptance notes payable of $1.9 million.

For the six months ended June 30, 2010 cash provided by financing activities of $5.4 million was mainly due to sale of common stock and warrants of $9.1 million, proceeds from exercise of warrants and options of $13.7 million, and proceeds from long term loans of $1.5 million, partially offset by repayment of loans payable of $17.0 million, and repayment of long term debt of $2.2 million.

Off Balance Sheet Arrangements

Under SEC regulations, we are required to disclose our off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, such as changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors. An off-balance sheet arrangement means a transaction, agreement or contractual arrangement to which any entity that is not consolidated with us is a party, under which we have:

- Any obligation under certain guarantee contracts;

- Any retained or contingent interest in assets transferred to an unconsolidated entity or similar arrangement that serves as credit, liquidity or market risk support to that entity for such assets;

- Any obligation under a contract that would be accounted for as a derivative instrument, except that it is both indexed to our stock and classified in stockholder’s equity in our statement of financial position; and

- Any obligation arising out of a material variable interest held by us in an unconsolidated entity that provides financing, liquidity, market risk or credit risk support to us, or engages in leasing, hedging or research and development services with us.

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We do not have any off-balance sheet arrangements that we are required to disclose pursuant to these regulations. In the ordinary course of business, we enter into operating lease commitments, purchase commitments and other contractual obligations. These transactions are recognized in our financial statements in accordance with the generally accepted accounting principles in the United States.

Contractual Obligations and Commitments.  At June 30, 2011, our long-term debt and financial obligations and commitments by due dates were as follows:

	Payments due by period
Contractual obligations	Total		Less than 1 year		1-3 years		3-5 years		More than 5 years
Banker's acceptance notes payable (1)		6,188,598		6,188,598
Long-Term Debt Obligations(2)		8,509,321		4,641,448		3,867,873				-
Short-Term Loans Payable (3)		8,827,715		8,827,715
Capital Lease Obligations  (4)		1,932,539		730,334		1,202,205		-		-
Operating Lease Obligations (5)		207,563		67,851		139,712		-		-
Total		25,665,736		20,455,946		5,209,790				-

(1)	See Note 10 – Banker's acceptance notes payable in our unaudited interim consolidated financial statements included in this report.
(2)	See Note 13 – Long-Term Debt in our unaudited interim consolidated financial statements included in this report.
(3)	See Note 9 – Loans Payable in our unaudited interim consolidated financial statements included in this report.
(4)	See Note 12 – Capital lease obligation in our unaudited interim consolidated financial statements included in this report.
(5)	See Note 17 – Operating lease in our unaudited interim consolidated financial statements included in this report.

Critical Accounting Policies

The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. To the extent that there are material differences between these estimates and actual results, our financial condition or results of operations will be affected. We refer to accounting estimates of this type as critical accounting policies and estimates, which we discuss further below.

 Fair value of financial instruments

We follow paragraph 825-10-50-10 of the FASB Accounting Standards Codification for disclosures about fair value of its financial instruments and has adopted paragraph 820-10-35-37 of the FASB Accounting Standards Codification (“Paragraph 820-10-35-37”) to measure the fair value of its financial instruments. Paragraph 820-10-35-37 establishes a framework for measuring fair value in accounting principles generally accepted in the United States of America (U.S. GAAP), and expands disclosures about fair value measurements. To increase consistency and comparability in fair value measurements and related disclosures, Paragraph 820-10-35-37 establishes a fair value hierarchy which prioritizes the inputs to valuation techniques used to measure fair value into three (3) broad levels.  The three (3) levels of fair value hierarchy defined by Paragraph 820-10-35-37 are described below:

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Level 1	Quoted market prices available in active markets for identical assets or liabilities as of the reporting date.
Level 2	Pricing inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reporting date.
Level 3	Pricing inputs that are generally observable inputs and not corroborated by market data.

Financial assets are considered Level 3 when their fair values are determined using pricing models, discounted cash flow methodologies or similar techniques and at least one significant model assumption or input is unobservable.  Level 3 financial liabilities consist of the derivative warrant issued in July 2008 for which there is no current market for these securities such that the determination of fair value requires significant judgment or estimation.  We valued the automatic conditional conversion, re-pricing/down-round, change of control; default and follow-on offering provisions using a lattice model, with the assistance of a valuation specialist, for which management understands the methodologies. These models incorporate transaction details such as our stock price, contractual terms, maturity, risk free rates, as well as assumptions about future financings, volatility, and holder behavior as of the date of issuance and each balance sheet date.

 The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities and the lowest priority to unobservable inputs.  If the inputs used to measure the financial assets and liabilities fall within more than one level described above, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument.

The carrying amounts of our financial assets and liabilities, such as cash, pledged deposits, accounts receivable, advance on purchases, prepayments and other current assets, accounts payable, customer deposits, corporate income tax payable, accrued expenses and other current liabilities approximate their fair values because of the short maturity of these instruments.  Our loans payable, banker’s acceptance notes payable, capital lease obligation, and long-term debt approximate the fair value of such instruments based upon management’s best estimate of interest rates that would be available to the Company for similar financial arrangements at June 30, 2011 and 2010.

We uses Level 1 of the fair value hierarchy to measure the fair value of the marketable securities and mark the available for sale marketable securities at fair value in the statement of financial position at each balance sheet date and report the unrealized holding gains and losses for available-for-sale securities in other comprehensive income (loss) until realized.

We uses Level 3 of the fair value hierarchy to measure the fair value of the derivative liabilities and revalue its derivative warrant liability at every reporting period and recognize gains or losses in the consolidated statements of operations and comprehensive income (loss) that are attributable to the change in the fair value of the derivative warrant liability.

Fair value of financial assets and liabilities measured on a recurring basis

Financial assets and liabilities measured at fair value on a recurring basis are summarized below and disclosed on the consolidated balance sheets:

			Fair Value Measurement Using
	Carrying Value		Level 1		Level 2		Level 3		Total
Marketable securities, available for sale	$	1,380,015	$	1,380,015	$	-	$	-	$	1,380,015
Derivative warrant liabilities	$	10,023	$	-	$	-	$	10,023	$	10,023

The table below provides a summary of the changes in fair value, including net transfers in and/or out, of all financial assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the interim period ended June 30, 2011:

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	Fair Value Measurement Using Level 3 Inputs
	Derivative warrants			Total
Balance, December 31, 2010	$	138,143		$	138,143
Total gains or losses (realized/unrealized)
Included in net (income) loss		(128,120	)		(128,120	)
Included in other comprehensive income		-			-
Purchases, issuances and settlements		-			-
Transfers in and/or out of Level 3		-			-
Balance, June 30, 2011	$	10,023		$	10,023

We have no other assets or liabilities measured at fair value on a recurring basis or a non-recurring basis, consequently, we did not have any fair value adjustments for assets and liabilities measured at fair value at June 30, 2011 or December 31, 2010; no gains or losses are reported in the consolidated statement of income and comprehensive income (loss) that are attributable to the change in unrealized gains or losses relating to those assets and liabilities still held at the reporting date for the interim period ended June 30, 2011 or 2010.

Fair value of non-financial assets or liabilities measured on a recurring basis

The Company identifies potentially excess and slow-moving inventories by evaluating turn rates, inventory levels and other factors.  Excess quantities are identified through evaluation of inventory aging, review of inventory turns and historical sales experiences. The Company provides the lower of cost or market reserves for such identified excess and slow-moving inventories. The Company establishes a reserve for inventory shrinkage, if any, based on the historical results of physical inventory cycle counts.

Carrying value, recoverability and impairment of long-lived assets

We have adopted paragraph 360-10-35-17 of the FASB Accounting Standards Codification for its long-lived assets. Our long-lived assets, which include property, plant and equipment, and land use right are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.

We assess the recoverability of long-lived assets by comparing the projected undiscounted net cash flows associated with the related long-lived asset or group of long-lived assets over their remaining estimated useful lives against their respective carrying amounts. Impairment, if any, is based on the excess of the carrying amount over the fair value of those assets.  Fair value is generally determined using the asset’s expected future discounted cash flows or market value, if readily determinable.  If long-lived assets are determined to be recoverable, but the newly determined remaining estimated useful lives are shorter than originally estimated, the net book values of the long-lived assets are depreciated over the newly determined remaining estimated useful lives.

We determined that there were no impairments of long-lived assets as of June 30, 2011 or December 31, 2010.

Marketable securities, available for sale

The Company follows Paragraphs 320-10-35-18 through 33 to assess whether an investment is impaired in each reporting period.  An investment is impaired if the fair value of the investment is less than its cost. Impairment indicators include, but are not limited to the following: a. a significant deterioration in the earnings performance, credit rating, asset quality, or business prospects of the investee; b. a significant adverse change in the regulatory, economic, or technological environment of the investee; c. a significant adverse change in the general market condition of either the geographic area or the industry in which the investee operates; d. a bona fide offer to purchase (whether solicited or unsolicited), an offer by the investee to sell, or a completed auction process for the same or similar security for an amount less than the cost of the investment; e. factors that raise significant concerns about the investee's ability to continue as a going concern, such as negative cash flows from operations, working capital deficiencies, or noncompliance with statutory capital requirements or debt covenants. If the fair value of an investment is less than its cost basis at the balance sheet date of the reporting period for which impairment is assessed, the impairment is either temporary or other than temporary. Pursuant to Paragraph 320-10-45-8A, in periods in which an entity determines that a security’s decline in fair value below its cost basis is other than temporary, the entity shall recognize and present the total other-than-temporary impairment in the statement of earnings with an offset for the amount of the total other-than-temporary impairment that is recognized in other comprehensive income, in accordance with paragraph 320-10-35-34D, if any. Pursuant to Paragraph 320-10-45-9A, an entity shall separately present, in the financial statement in which the components of accumulated other comprehensive income are reported, amounts recognized therein related to held-to-maturity and available-for-sale debt securities for which a portion of an other-than-temporary impairment has been recognized in earnings.

11

The Company values marketable securities using Australia quoted market prices on Apollo Mineral stock. At June 30, 2011, the estimated fair value of investment in Apollo Minerals was $2.1 million less than its original costs.  The Company intends to hold these shares and the management of the Company concluded the decline in the fair value was temporary and recorded the unrealized loss of marketable securities of $2,109,512 to other comprehensive income (loss) on the accompanying consolidated balance sheet at June 30, 2011 and a gain from foreign exchange rate change of $92,869 in other income.

Derivative warrant liability

The Company evaluates its convertible debt, options, warrants or other contracts, if any, to determine if those contracts or embedded components of those contracts qualify as derivatives to be separately accounted for in accordance with paragraph 810-10-05-4 and paragraph 815-40-25 of the FASB Accounting Standards Codification.  The result of this accounting treatment is that the fair value of the embedded derivative is marked-to-market each balance sheet date and recorded as either an asset or a liability.  In the event that the fair value is recorded as a liability, the change in fair value is recorded in the Statement of Operations and Comprehensive Income (loss) as other income or expense.  Upon conversion, exercise or cancellation of a derivative instrument, the instrument is marked to fair value at the date of conversion, exercise or cancellation and then that the related fair value is reclassified to equity.

We value the automatic conditional conversion, re-pricing/down-round, change of control; default and follow-on offering provisions using a lattice model, with the assistance of a valuation specialist, for which management understands the methodologies. These models incorporate transaction details such as our stock price, contractual terms, maturity, risk free rates, as well as assumptions about future financings, volatility, and holder behavior as of the date of issuance and each balance sheet date.

We measured the fair value of the remaining derivative warrant liability at $10,023 at June 30, 2011 and recognized a gain of $76,897 on change in the fair value of the derivative warrants to purchase 186,306 shares of Company common stock for the six months then ended.

Revenue recognition

The Company applies paragraph 605-10-S99-1 of the FASB Accounting Standards Codification for revenue recognition.  The Company recognizes revenue when it is realized or realizable and earned.  The Company considers revenue realized or realizable and earned when all of the following criteria are met: (i) persuasive evidence of an arrangement exists, (ii) the product has been shipped or the services have been rendered to the customer, (iii) the sales price is fixed or determinable, and (iv) collectability is reasonably assured.  The Company derives its revenues from sales contracts with customers with revenues being generated upon the shipment of metal ore pursuant to.  Persuasive evidence of an arrangement is demonstrated via sales invoice or contract; product delivery is evidenced by warehouse shipping log as well as a signed bill of lading from the vessel or rail company and title transfers upon shipment, based on free on board (“FOB”) warehouse terms; the sales price to the customer is fixed upon acceptance of the signed purchase order or contract and there is no separate sales rebate, discount, or volume incentive.  When the Company recognizes revenue, no provisions are made for returns because, historically, there have been very few sales returns and adjustments that have impacted the ultimate collection of revenues.

Equity instruments issued to parties other than employees for acquiring goods or services

The Company accounts for equity instruments issued to parties other than employees for acquiring goods or services under guidance of section 505-50-30 of the FASB Accounting Standards Codification (“Section 505-50-30”).

Pursuant to Section 505-50-30, all transactions in which goods or services are the consideration received for the issuance of equity instruments are accounted for based on the fair value of the consideration received or the fair value of the equity instrument issued, whichever is more reliably measurable.  The measurement date used to determine the fair value of the equity instrument issued is the earlier of the date on which the performance is complete or the date on which it is probable that performance will occur.

Pursuant to Paragraph 505-50-30-S99-1, if the Company receives a right to receive future services in exchange for unvested, forfeitable equity instruments, those equity instruments are treated as unissued for accounting purposes until the future services are received (that is, the instruments are not considered issued until they vest). Consequently, there would be no recognition at the measurement date and no entry should be recorded.

Use of estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period.  Management bases its estimates on historical experience and on various assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.

12

The Company’s significant estimates include allowance for doubtful accounts; foreign currency; the fair value of financial instruments; normal production capacity, inventory valuation and obsolescence; the carrying value and recoverability of long-lived assets, including the values assigned to and estimated useful lives of property, plant and equipment, and land use rights; revenue recognized or recognizable; sales returns and allowances; valued added tax and income tax provision.  Those significant accounting estimates or assumptions bear the risk of change due to the fact that there are uncertainties attached to those estimates or assumptions, and certain estimates or assumptions are difficult to measure or value.

Useful Lives of Long-lived Assets

We depreciate long-lived assets over their estimated useful lives. Identifiable long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. We assess the recoverability of our long-lived assets by comparing the projected undiscounted net cash flows associated with the related long-lived asset or group of long-lived assets over their remaining estimated useful lives against their respective carrying amounts. Impairment, if any, is based on the excess of the carrying amount over the fair value of those assets.  Fair value is generally determined using the asset’s expected future discounted cash flows or market value, if readily determinable.  If long-lived assets are determined to be recoverable, but the newly determined remaining estimated useful lives are shorter than originally estimated, the net book values of the long-lived assets are depreciated over the newly determined remaining estimated useful lives.  Our estimates of future cash flows attributable to our long-lived assets require significant judgment based on our historical and anticipated results and are subject to many factors. Different assumptions and judgments could materially affect estimated future cash flows relating to our long-lived assets which could trigger impairment. No impairments of long-lived assets were identified during the interim period presented.

Impairment of Marketable Securities

At each balance sheet date, we measure our marketable securities and review for impairment. If we conclude that any of these investments are impaired, we determine whether such impairment is other-than-temporary. Factors we consider to make such determination include the duration and severity of the impairment, the reason for the decline in value, the potential recovery period, and our intent to sell, or whether it is more likely than not that we will be required to sell, the investment before recovery. If any impairment is considered other-than-temporary, we will write down the asset to its fair value and take a corresponding charge to our Consolidated Statements of Income.

At June 30, 2011, we valued our marketable securities using Australia quoted market prices on Apollo Mineral stock. At June 30, 2011, the estimated fair value of investment in Apollo Minerals was $2.1 million less than its original costs. As the Company has no intent to sell these shares and it is more likely than not that the Company will not be required to sell these shares prior to recovery of its entire cost basis. The Company concluded the decline in the fair value was temporary and recorded the unrealized loss to other comprehensive income (loss) on the accompanying Consolidated Balance Sheet at June 31, 2011. As of June 31, 2011, the Company reported a $$2,109,512 change in unrealized loss on marketable securities as other comprehensive income (loss) and $92,869 gain from foreign exchange rate change in other income.

Valuation of derivative instruments

We developed a lattice model that values the derivative liability of the warrants based on a probability weighted discounted cash flow model. This model is based on future projections of the various potential outcomes. The features that were analyzed and incorporated into the model included the exercise feature and the full ratchet reset.

This model requires various highly judgmental assumptions including expected volatility and expected term. If any of the assumptions used in this model changes significantly, fair value of derivative instruments may differ materially in the future from that recorded in the current period.

Share-Based Compensation

We issue certain equity instruments, such as options, warrants to either employees or third parties other-than employees to obtain goods or services or in connection with equity financing.  We estimate the award’s fair value at the grant date as calculated by the Black-Scholes option pricing model and recognize as expense over the requisite service period. The Black-Scholes model requires various highly judgmental assumptions including expected volatility and expected term. If any of the assumptions used in the Black-Scholes model changes significantly, share-based compensation expense may differ materially in the future from that recorded in the current period.

Recently Issued Accounting Pronouncements

There are no recently issued accounting standards that are expected to have a material effect on our financial condition, results of operations or cash flows.

13

Cautionary Note Regarding Forward-Looking Information and Factors That May Affect Future Results

This report contains forward-looking statements. The Securities and Exchange Commission encourages companies to disclose forward-looking information so that investors can better understand a company’s future prospects and make informed investment decisions. This Quarterly Report on Form 10-Q and other written and oral statements that we make from time to time contain such forward-looking statements that set out anticipated results based on management’s plans and assumptions regarding future events or performance. We have tried, wherever possible, to identify such statements by using words such as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe,” “will” and similar expressions in connection with any discussion of future operating or financial performance. In particular, these include statements relating to future actions, future performance or results of current and anticipated sales efforts, expenses, the outcome of contingencies, such as legal proceedings, and financial results. A list of factors that could cause our actual results of operations and financial condition to differ materially is set forth below, and these factors are discussed in greater detail under Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2010:

o We operate in cyclical industries and we experience volatile demand for our products.

o Our ability to operate our scrap metal recycling facility efficiently and profitably.

o Our ability to obtain sufficient capital to fund a potential expansion of our scrap metal recycling facility.

o Our ability to establish adequate management, legal and financial controls in the United States and the PRC.

o The availability to us of supplies of metal ore and scrap metal upon favorable terms.

o The availability of electricity to operate our scrap metal recycling facility.

o Fluctuations in raw material prices may affect our operating results as we may not be able to pass on cost increases to    customers.

o The lack various legal protections in certain agreements to which we are a party which are customarily contained in similar   contracts prepared in the United States and which are material to our operations.

o Our dependence on our key management personnel.

o Our potential inability to meet the filing and internal control reporting requirements imposed by the SEC.

o The effect of changes resulting from the political and economic policies of the Chinese government on our assets and operations located in the PRC.

o The limitation on our ability to receive and use our revenues effectively as a result of restrictions on currency exchange in the PRC.

o The impact on future inflation in China on economic activity in China.

o Our ability to enforce our rights due to policies regarding the regulation of foreign investments in the PRC.

o The restrictions imposed under regulations relating to offshore investment activities by Chinese residents and the increased administrative burden we face and the creation of regulatory uncertainties that may limit or adversely affect our ability to complete any business combinations with our PRC-based subsidiaries.

o Our ability to comply with the United States Foreign Corrupt Practices Act which could subject us to penalties and other adverse consequences.

o The provisions of our articles of incorporation and bylaws which may delay or prevent a takeover which may not be in the best interests of our shareholders.

o Our controlling stockholders may take actions that conflict with your interests.

 We caution that the factors described herein and other factors could cause our actual results of operations and financial condition to differ materially from those expressed in any forward-looking statements we make and that investors should not place undue reliance on any such forward-looking statements. Further, any forward-looking statement speaks only as of the date on which such statement is made, and we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of anticipated or unanticipated events or circumstances. New factors emerge from time to time, and it is not possible for us to predict all of such factors. Further, we cannot assess the impact of each such factor on our results of operations or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Not applicable for a smaller reporting company.

Item 4. Controls and Procedures.

14

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) that are designed to ensure that information required to be disclosed by us in reports that we file under the Exchange Act is recorded, processed, summarized and reported as specified in the SEC’s rules and forms and that such information required to be disclosed by us in reports that we file under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer, or CEO, and our Chief Financial Officer, or CFO, to allow timely decisions regarding required disclosure.  Management, with the participation of our CEO and CFO, performed an evaluation of the effectiveness of our disclosure controls and procedures as of June 30, 2011.  Based on that evaluation, we have identified material weaknesses in our internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f)).  These weaknesses involve insufficiently qualified accounting and other finance personnel with an appropriate level of U.S. GAAP knowledge and experience.  The general experience of our accounting and finance personnel and the experience of our Audit Committee Financial Expert are described in more detail below.  Solely as a result of these material weaknesses, our management, including our CEO and CFO, concluded that our disclosure controls and procedures were not effective as of June 30, 2011.

General Experience of Company Accounting and Finance Personnel

The people who are primarily responsible for preparing and supervising the preparation of the Company’s financial statements and evaluating the effectiveness of internal controls, all of whom are our employees, have responsibilities and qualifications as set forth below:

o The CFO, who has served in this role since 2008, and is responsible for overseeing all of our accounting, financial reporting and internal control functions.  From 2005 through 2008, he served as the accounting manager of Armco & Metawise and Henan & Armco.  From 1996 to 2005, our CFO worked in the accounting department of Zhengzhou Forging Co., Ltd.  Our CFO obtained a bachelors degree in accounting from Zhengzhou University in 1996.

o The Chief Accountant, who has served in this role since 2009, and obtained a bachelors degree in accounting from Henan Institute of Finance in 2005.  The Chief Accountant supervises the accounting, financial reporting and internal control functions.  Prior to joining our Company, the Chief Accountant spent eleven years as the financial manager of another PRC industrial company.

o The Henan Armco Finance Manager is responsible for the accounting and internal control functions for Henan Armco.  This individual served as an accountant for Henan Armco from 2003 to 2010 prior to being named the Finance Manager, and studied accounting at Henan Taxation Advanced Vocational College from 1999 to 2001.  Prior to joining our Company, this individual was responsible for financial accounting and reporting at another Chinese industrial company from 2001 to 2003.

o The Armet Finance Manager has been responsible for the accounting and internal control functions for our Armet subsidiary since 2007, and obtained an associates degree in accounting from Suzhou University in 1996.

The above-mentioned individuals supervise an additional seven accounting staff members who are responsible for recording our business and financial transactions in our accounting records and ensure that all disbursements are properly authorized, as well as performing other tasks normally associated with accounting and financial controls.

Experience of Audit Committee Financial Expert

As previously disclosed, William Thomson serves as our audit committee financial expert. Through Mr. Thomson’s experience as a chief financial officer, audit committee member in a number of public companies, auditor for Peat Marwick Mitchell & Co. and educational background, he has acquired an understanding of U.S. GAAP and internal control over financial reporting that we believe meets the standards of an “audit committee financial expert.”

Mr. Thomson received his Bachelor of Commerce from Dalhousie University in 1961 and received his Chartered Accountant designation from the Institute of Chartered Accountants of Nova Scotia in 1963.  He was a supervising auditor at Peat Marwick Mitchell & Co. from 1961 to 1966.  Mr. Thomson served as vice president of finance for Clairtone Sound Corp. Ltd. from 1968 to 1970.  He served as chief financial officer of Gage Educational Publishing Ltd. from 1971 to 1973, of Upper Lakes Shipping Ltd. from 1973 to 1981, and of Bendinat Inc. (Spain) from 1985 to 1988.

Mr. Thomson currently serves on the boards of directors of Score Media, Inc., Asia Bio-Chem Group Co. and Chile mining Technologies, Inc., in addition to our company.  He has served on a total of 13 boards of public companies, beginning in 1983.  Of these 13 companies, Mr. Thomson has served on the audit committee for six and was the audit committee chair of each of these six companies.  He is currently the audit committee chair of each of the four boards on which he serves.

15

Remediation Plan

As a result of management’s audit of our internal controls, we are considering the costs and benefits associated with remediating our control deficiencies.  We are devoting significant resources to remediate, improve and document our disclosure controls and procedures and internal controls and procedures, including our recent engagement of a CPA consultant who has U.S. GAAP knowledge to assist in the preparation of our U.S. GAAP financial statements.  We are currently considering the following remediation options, or some combination thereof: (i) hiring additional personnel with sufficient U.S. GAAP experience and (ii) implementing ongoing training in U.S. GAAP requirements for our CFO and accounting and other finance personnel.  Our Audit Committee and Board of Directors recently approved the hiring of a professional services firm that has expertise in accounting and U.S. GAAP matters with publicly-traded companies.  No such firm has been engaged at this time, but we have identified several potential candidates and are in the process of interviewing them.

Changes in Internal Control

There were no changes in our internal control over financial reporting identified in connection with the evaluation of our controls performed during the quarter ended June 30, 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings.

Certain legal proceedings in which we are involved are discussed in Note 17 – “Commitments and Contingencies” to our notes to unaudited consolidated financial statements for the three-month period ended June 30, 2011, which is incorporated by reference.

Item 1A. Risk Factors

AS A COMPANY ACTIVE IN THE U.S. SECURITIES MARKET AND WITH OPERATIONS BASED IN CHINA, WE MAY BE SUBJECT TO HEIGHTENED SCRUITINY BY THE U.S. SECURITIES AND EXCHANGE COMMISSION RELATING TO OUR SECURITIES LAW COMPLIANCE, OUR FINANCIAL REPORTING AND/OR OUR COMPLIANCE WITH THE FCPA.

In recent months, the Securities and Exchange Commission has investigated several Chinese companies that have entered the U.S. securities market through reverse mergers into publicly traded U.S. companies for, among other things, accounting irregularities in financial reporting and compliance with the FCPA.  Given this heightened scrutiny of Chinese companies with a presence in the U.S. securities market that the Securities and Exchange Commission appears to have implemented, we may also be subject to such heightened scrutiny, including formal investigation by the U.S. Securities and Exchange Commission or other regulatory authority.  While we have not received any notice that we are under investigation for our U.S. securities law compliance, financial reporting or FCPA compliance, there can be no assurance that we will not be under such investigation in the future.  Any such investigation could divert substantial time and focus of our management team from operating our business, which could materially adversely affect our business, financial condition and results of operations.  If any investigation results were to result in a finding that we are not in compliance with the U.S. securities laws or the FCPA, or that our financial reporting lacks sufficient internal controls, our business, financial condition and results of operations would likely be materially adversely affected, and we may also be subject to significant penalties, which could include the delisting of our common stock from the NYSE Amex Stock Exchange.

Additional risk factors describing the major risks to our business can be found under Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2010.  Other than the risk factor included above, there has been no material change in our risk factors from those previously discussed in the Annual Report on Form 10-K.

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

None

Item 3. Defaults Upon Senior Securities.

None.

Item 4. (Removed and Reserved).

Item 5. Other Information.

16

Item 6. Exhibits

 No.                                Description

31.1 Rule 13a-14(a)/ 15d-14(a) Certification of Chief Executive Officer*

31.2 Rule 13a-14(a)/ 15d-14(a) Certification of Chief Financial Officer*

32 Section 1350 Certification of Chief Executive Officer and the Chief Financial Officer*

101 Financial statements from the quarterly report on Form 10-Q of China Armco, Inc. for the quarter ended June 30, 2011, filed on August 15, 2011, formatted in XBRL: (i) the Unaudited Condensed Consolidated Balance Sheets, (ii) the Unaudited Condensed Consolidated Statements of Income, (iii) the Unaudited Condensed Consolidated Statements of Cash Flows and (iv) the Notes to Unaudited Condensed Consolidated Financial Statements tagged as blocks of text.*

* Filed herewith

17

SIGNATURES

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

	China Armco Metals, Inc.
Date: August 15, 2011	By:	/s/ Kexuan Yao
		Kexuan Yao
		CEO and Chairman
		(Principal executive officer)

Date: August 15, 2011	By:	/s/ Fengtao Wen
		Fengtao Wen
		Chief Financial Officer
		(Principal financial and accounting officer)

EX-31.1

Exhibit 31.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

PURSUANT TO RULES 13A-14 AND 15D-14

OF THE SECURITIES EXCHANGE ACT OF 1934

I, Kexuan Yao, certify that:

1. I have reviewed this quarterly report on Form 10-Q for the period ended June 30, 2011 of China Armco Metals, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15-d-15(f)) for the registrant and have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. 

August 15, 2011	/s/ Kexuan Yao
	Kexuan Yao  Chief Executive Officer  (Principal executive officer)

EX-31.2

Exhibit 31.2 

CERTIFICATION OF CHIEF FINANCIAL OFFICER

PURSUANT TO RULES 13A-14 AND 15D-14

OF THE SECURITIES EXCHANGE ACT OF 1934

I, Fengtao Wen, certify that:

1. I have reviewed this quarterly report on Form 10-Q for the period ended June 30, 2011 of China Armco Metals, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15-d-15(f)) for the registrant and have:

c. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

d. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

e. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

f. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

g. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

h. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

August 15, 2011	/s/ Fengtao Wen
	Fengtao Wen  Chief Financial Officer  (Principal financial and accounting officer)

EX-32

Exhibit 32

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT

TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the quarterly report of China Armco Metals, Inc. (the "Company") on Form 10-Q for the period ended June 30, 2011 as filed with the Securities and Exchange Commission (the "Report"), I, Kexuan Yao, Chairman and Chief Executive Officer of the Company, and Fengtao Wen, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. SS. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of our knowledge:

1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.  

August 15, 2011	/s/ Kexuan Yao
	Kexuan Yao  CEO and Chairman  (Principal executive officer)

August 15, 2011	/s/ Fengtao Wen
	Fengtao Wen  Chief Financial Officer  (Principal financial and accounting officer)

A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

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Consolidated Balance Sheets (Parentheticals) (USD $)	Jun. 30, 2011	Dec. 31, 2010
Preferred stock par value (in Dollars per share)	$ 0.001	$ 0.001
Preferred stock, shares authorized	1,000,000	1,000,000
Preferred stock, shares issued	0	0
Preferred stock, shares outstanding	0	0
Common stock, par value (in Dollars per share)	$ 0.001	$ 0.001
Common stock, shares authorized	74,000,000	74,000,000
Common stock, shares issued	14,994,592	14,840,948
Common stock, shares outstanding	14,994,592	14,840,948

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Consolidated Statements of Operations and Comprehensive Income (Loss) (USD $)	3 Months Ended		6 Months Ended
	Jun. 30, 2011	Jun. 30, 2010	Jun. 30, 2011	Jun. 30, 2010
NET REVENUES	$ 30,968,138	$ 16,999,602	$ 80,652,790	$ 25,576,172
COST OF GOODS SOLD	29,618,739	16,802,757	76,134,622	24,820,408
GROSS PROFIT	1,349,399	196,845	4,518,168	755,764
OPERATING EXPENSES:
Selling expenses	270,524	379,392	542,048	722,097
Professional fees	500,640	175,365	628,805	339,922
General and administrative expenses	872,967	455,757	1,768,376	862,072
Operating cost of Armet idle manufacturing facility	428,436		899,786
Total operating expenses	2,072,567	1,010,514	3,839,015	1,924,091
LOSS FROM OPERATIONS	(723,168)	(813,669)	679,153	(1,168,327)
OTHER (INCOME) EXPENSE:
Interest income	(25,050)	(5,631)	(29,384)	(5,856)
Interest expense	409,175		963,428	85,115
Foreign currency transaction gain	90,997		(92,869)
Gain from vendor price adjustment				(963,259)
Change in fair value of derivative liability	(76,897)	(427,881)	(128,120)	(106,127)
Loan guarantee expense	45,333	31,583	134,999	31,583
Other (income) expense	66,789	(149,647)	323,281	(147,247)
Total other (income) expense	510,347	(551,576)	1,171,335	(1,105,791)
LOSS BEFORE INCOME TAXES	(1,233,515)	(262,093)	(492,182)	(62,536)
INCOME TAXES	67,708	(14,461)	242,871	131,872
LOSS FROM OPERATIONS	(1,301,223)	(247,632)	(735,053)	(194,408)
NET LOSS	(1,301,223)	(247,632)	(735,053)	(194,408)
OTHER COMPREHENSIVE INCOME (LOSS):
Change in unrealized loss of marketable securities	(514,848)		(2,109,512)
Foreign currency translation gain (loss)	588,014	99,109	886,612	103,048
COMPREHENSIVE INCOME (LOSS)	$ (1,228,057)	$ (148,523)	$ (1,957,953)	$ (91,360)
NET LOSS PER COMMON SHARE - BASIC AND DILUTED:
Net loss per common share - basic and diluted (in Dollars per share)	$ (0.08)	$ (0.02)	$ (0.05)	$ (0.01)
Weighted Average Common Shares Outstanding - basic and diluted (in Shares)	15,352,020	13,900,753	15,336,338	13,900,753

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Note 16 - Operating Cost of Idle Manufacturing Facility

6 Months Ended

Jun. 30, 2011

Other Income and Other Expense Disclosure [Text Block]

NOTE 16 – OPERATING COST OF IDLE MANUFACTURING FACILITY

Armet’s manufacturing facility is idle from time to time depending upon market conditions.  Total operating costs of the idle manufacturing facility, including salary and wages, payroll tax and benefits, materials, depreciation and other operating costs of maintaining the manufacturing facility, were $899,786 for the interim period ended June 30, 2011.  There were no operating costs of the idle manufacturing facility for the interim period ended June 30, 2010 as Armet did not complete the construction of its manufacturing facility and commence operations until the end of September 2010.

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Document And Entity Information	6 Months Ended
	Jun. 30, 2011	Aug. 11, 2011
Document and Entity Information [Abstract]
Entity Registrant Name	China Armco Metals, Inc.
Document Type	10-Q
Current Fiscal Year End Date	--12-31
Entity Common Stock, Shares Outstanding		15,232,173
Amendment Flag	false
Entity Central Index Key	0001410711
Entity Current Reporting Status	Yes
Entity Voluntary Filers	No
Entity Filer Category	Smaller Reporting Company
Entity Well-known Seasoned Issuer	No
Document Period End Date	Jun. 30, 2011
Document Fiscal Year Focus	2011
Document Fiscal Period Focus	Q2

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Note 19 - Foreign Operations

6 Months Ended

Jun. 30, 2011

Foreign Operations [Text Block]

NOTE 19 - FOREIGN OPERATIONS

Operations

Substantially all of the Company’s operations are carried out and all of its assets 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.  The Company’s business may be influenced by changes in governmental policies with respect to laws and regulations, monetary policies, anti-inflationary measures, currency fluctuation and remittances and methods of taxation, among other things.

Dividends and Reserves

Under the laws of the PRC, net income after taxation can only be distributed as dividends after appropriation has been made for the following: (i) cumulative prior years’ losses, if any; (ii) allocations to the “Statutory Surplus Reserve” of at least 10% of net income after tax, as determined under PRC accounting rules and regulations, until the fund amounts to 50% of the Company’s registered capital; (iii) allocations of 5-10% of income after tax, as determined under PRC accounting rules and regulations, to the Company’s “Statutory Common Welfare Fund”, which is established for the purpose of providing employee facilities and other collective benefits to employees in PRC; and (iv) allocations to any discretionary surplus reserve, if approved by stockholders.

As of June 30, 2011, the Company had no Statutory Surplus Reserve and the Statutory Common Welfare Fund established and segregated in retained earnings.

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Note 5 - Accounts Receivable

6 Months Ended

Jun. 30, 2011

Loans, Notes, Trade and Other Receivables Disclosure [Text Block]

NOTE 5 – ACCOUNTS RECEIVABLE

Accounts receivable at June 30, 2011 and December 31, 2010 consisted of the following:

	June 30, 2011			December 31, 2010
Accounts receivable	$	337,302		$	19,115,019
Allowance for doubtful accounts		(-	)		(-	)
	$	337,302		$	19,115,019

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Note 20 - Subsequent Events

6 Months Ended

Jun. 30, 2011

Subsequent Events [Text Block]

NOTE 20 – SUBSEQUENT EVENTS

The Company has evaluated all events that occurred after the balance sheet date through the date when the financial statements were issued.  The Management of the Company determined that there were no reportable subsequent events to be disclosed.

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Note 18 - Concentrations and Credit Risk

6 Months Ended

Jun. 30, 2011

Concentration Risk Disclosure [Text Block]

NOTE 18 – CONCENTRATIONS AND CREDIT RISK

Customers and credit concentrations

Customer concentrations for the interim periods ended June 30, 2011 and 2010 and credit concentrations at June 30, 2011 and 2010 are as follows:

	Net Sales for the Interim Period Ended						Accounts Receivable At
	June 30, 2011			June 30, 2010			June 30, 2011			June 30, 2010
Customer #206010 Lianyungang Jiaxin		-	%		32.1	%		-	%		61.0	%
Customer #113102 Taicangtaike		-	%		14.7	%		-	%		36.6	%
Customer #122023 Granton		-	%		10.4	%		-	%		-	%
Customer #1122024 Derby Materials		27.6	%		-	%		-	%		-	%
Customer #1122014 Citic Metal		-	%		10.2	%		15.5	%		-	%
Customer #1122028 Qingdao BaoSong Resources			%		-	%		21.7	%		-	%
Customer #302023Shangdong Yongjia		13.6	%		-	%		-	%		-	%
Customer #122002 Zhongji NingBo			%		-	%		39.8	%		-	%
Customer #102003 ZhongJin Renewable Resources		7.8	%		-	%		-	%		-	%
Customer 0101009 NingBo HangGang		16.4	%		-	%		-	%		-	%
Customer #122003 ZhongJi NingBo		8.3	%		-	%		-	%		-	%
									%
		73.7	%		67.4	%		77.0	%		97.6	%

A reduction in sales from or loss of such customers would have a material adverse effect on the Company’s results of operations and financial condition.

Vendor concentrations

Vendor purchase concentrations for the interim periods ended June 30, 2011 and 2010 and accounts payable concentration at June 30, 2011 and 2010 are as follows:

	Net Purchases for the Interim Period Ended						Accounts Payable At
	June 30, 2011			June 30, 2010			June 30, 2011			June 30, 2010
Vendor #302006 Anhuihuatai		-	%		27.8	%		-	%		46.10	%
Vendor #121015 Suizhou Huiyang		-	%		13.4	%		-	%		43.4	%
Vendor #010032 LianYunGang TongKe Trade		-	%		-	%		14.6	%		-	%
Vendor #010030 LinYi LiYuan		-	%		-	%		6.3	%		-	%
Vendor #204014 Mineracao		25.5	%		-	%		30.4	%		-	%
Vendor 202019 Bridge Group Finance		-	%		-	%		12.3	%		-	%
Vendor #301009 XinJiang BaGang		14.2	%		-	%		-	%		-	%
Vendor #204033 Oversea Enterprise Pte, Ltd.		-	%		26.0	%		-	%			%
Vendor #010001 Xie HongJian		8.0	%		-	%		-	%		-	%
Vendor #99081 Liang XiaoLei		7.7	%		-	%		-	%		-	%
Vendor #2202019 Smart Trading LLP		8.6	%		-	%		6.2	%		-	%
		64.0	%		67.2	%		69.8	%		89.5	%

Credit risk

Financial instruments that potentially subject the Company to significant concentration of credit risk consist primarily of cash and cash equivalents.

As of June 30, 2011, substantially all of the Company’s cash and cash equivalents were held by major financial institutions located in the PRC, none of which are insured.  However, the Company has not experienced losses on these accounts and management believes that the Company is not exposed to significant risks on such accounts.

Foreign currency risk

The Company is exposed to fluctuations in foreign currencies for transactions denominated in currencies other than RMB, the functional currency due to the fact the majority of the Company’s purchasing activities are transacted in foreign currencies.

The Company had no foreign currency hedges in place at June 30, 2011 or 2010 to reduce such exposure.

Interest risk

Substantially all of the Company’s operations are carried out in the PRC. The tight monetary policy currently instituted by the PRC government and increases in interest rate would have a material adverse effect on the Company’s results of operations and financial condition.

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Note 10 - Banker's Acceptance Notes Payable

6 Months Ended

Jun. 30, 2011

Short-term Debt [Text Block]

NOTE 10 – BANKER’S ACCEPTANCE NOTES PAYABLE

Banker’s acceptance notes payable at June 30, 2011 and December 31, 2010, consisted of the following:

	June 30, 2011		December 31, 2010
Armet
Banker’s acceptance notes payable maturing and payable from September 17, 2011 through November 3, 2011	$	6,188,598	$	4,174,355
	$	6,188,598	$	4,174,355

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Note 1 - Organization and Operations

6 Months Ended

Jun. 30, 2011

Organization, Consolidation and Presentation of Financial Statements Disclosure [Text Block]

NOTE 1 – ORGANIZATION AND OPERATIONS

Cox Distributing was founded as an unincorporated business in January 1984 and was incorporated as Cox Distributing, Inc., a C corporation in the State of Nevada on April 6, 2007 at which time 9,100,000 shares of common stock were issued to the founder in exchange for the existing unincorporated business.  No value was given to the stock issued by the newly formed corporation.  Therefore, the shares were recorded to reflect the $.001 par value and paid in capital was recorded as a negative amount ($9,100).   On June 27, 2008, the Company amended its Articles of Incorporation, and changed its name to China Armco Metals, Inc. (“Armco Metals” or the “Company”) upon the acquisition of Armco Metals International Limited (formerly “Armco HK (H.K) Limited” or “Armco HK”) and Subsidiaries.  The Company engages in, through its wholly owned subsidiaries in China, and Armco HK, import, export and distribution of ferrous and non-ferrous ores and metals, and processing and distribution of scrap steel.

Merger of Armco Metal International Limited and Subsidiaries (“Armco HK”)

On June 27, 2008, the Company entered into a share purchase agreement (the “Share Purchase Agreement”) and consummated a share purchase (the “Share Purchase”) with Armco HK and Feng Gao, who owned 100% of the issued and outstanding shares of Armco HK.  In connection with the acquisition, the Company purchased from the Armco HK Shareholder 100% of the issued and outstanding shares of Armco HK’s capital stock for $6,890,000 by delivery of the Company’s purchase money promissory note.  In addition, the Company issued to Ms. Gao a stock option entitling Ms. Gao to purchase a total of 5,300,000 shares of the Company’s common stock, par value $.001 per share (the “Common Stock”) at $1.30 per share expiring on September 30, 2008 and 2,000,000 shares at $5.00 per share expiring on September 30, 2010 (the “Gao Option”).  On August 12, 2008, Ms. Gao exercised her option to purchase and the Company issued 5,300,000 shares of its common stock in exchange for the $6,890,000 note owed to Ms. Gao.  The shares issued represented approximately 69.7% of the issued and outstanding common stock immediately after the consummation of the Share Purchase and exercise of the option to purchase 5,300,000 shares of the Company’s common stock at $1.30 per share.  As a result of the ownership interests of the former shareholders of Armco HK, for financial statement reporting purposes, the merger between the Company and Armco HK has been treated as a reverse acquisition with Armco HK deemed the accounting acquirer and the Company deemed the accounting acquiree under the purchase method of accounting in accordance with section 805-10-55 of the FASB Accounting Standards Codification. The reverse merger is deemed a capital transaction and the net assets of Armco HK (the accounting acquirer) are carried forward to the Company (the legal acquirer and the reporting entity) at their carrying value before the combination.  The acquisition process utilizes the capital structure of the Company and the assets and liabilities of Armco HK which are recorded at historical cost.  The equity of the Company is the historical equity of Armco HK retroactively restated to reflect the number of shares issued by the Company in the transaction.

Armco & Metawise (H.K) Limited was incorporated on July 13, 2001 under the laws of the Hong Kong Special Administrative Region (“HK SAR”) of the People’s Republic of China (“PRC”).  On March 22, 2011, Armco & Metawise (H.K) Limited amended its Memorandum and Articles of Association, and changed its name to Armco Metal International Limited (“Armco HK”).  Armco HK engages in the import, export and distribution of ferrous and non-ferrous ore and metals.

On January 9, 2007, Armco HK formed Armet (Lianyungang) Renewable Resources Co, Ltd. (“Armet”), a wholly-owned foreign enterprise (“WOFE”) subsidiary in the City of Lianyungang, Jiangsu Province, PRC.  On December 1, 2008, Armco HK transferred its 100% equity interest in Armet to China Armco Metals, Inc.  Armet engages in the processing and distribution of scrap metal.

Henan Armco and Metawise Trading Co., Ltd. (“Henan”) was incorporated on June 6, 2002 in the City of Zhengzhou, Henan Province, PRC.  Henan engages in the import, export and distribution of ferrous and non-ferrous ores and metals.

Merger of Henan with Armet, Companies under Common Control

On December 28, 2007, Armco HK entered into a Share Transfer Agreement with Armet, whereby Amrco HK transferred to Armet all of its equity interest in Henan, a company under common control of Armco HK.  The acquisition of Henan has been recorded on the purchase method of accounting at historical amounts as Armet and Henan were under common control since June 2002.  The consolidated financial statements have been presented as if the acquisition of Henan had occurred as of the first date of the first period presented.

Formation of Armco (Lianyungang) Holdings, Inc.

On June 4, 2009, the Company formed Armco (Lianyungang) Holdings, Inc. (“Lianyungang Armco”), a WOFE subsidiary in the City of Lianyungang, Jiangsu Province, PRC.  Lianyungang intends to engage in marketing and distribution of the recycled scrap steel.

Formation of Armco Metals (Shanghai) Holdings, Ltd.

On July 16, 2010, the Company formed Armco Metals (Shanghai) Holdings. Ltd. (“Armco Shanghai”) as a WOFE subsidiary in Shanghai, China. Armco Shanghai serves as the headquarters for the Company’s China operations and oversees the activities of the Company in financing and international trading.

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Note 7 - Property, Plant and Equipment

6 Months Ended

Jun. 30, 2011

Property, Plant and Equipment Disclosure [Text Block]

NOTE 7 – PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment, stated at cost, less accumulated depreciation at June 30, 2011 and December 31, 2010 consisted of the following:

	Estimated Useful Life (Years)	June 30, 2011			December 31, 2010
Buildings and leasehold improvements (i)	20	$	21,979,895		$	21,426,672
Construction in progress			-			32,682
Machinery and equipment	7		13,299,762			11,954,005
Vehicles	5		1,146,937			1,034,961
Office equipment	5-8		247,156			185,319
			36,673,750			34,633,339
Less accumulated depreciation (ii)			(2,099,639	)		(761,515	)
		$	34,574,111		$	33,872,124

(i)Capitalized interest

For the interim periods ended June 30, 2011 and 2010, the Company capitalized $0 and $257,020 of interest to fixed assets, respectively.

(ii)           Depreciation and amortization expense

Depreciation and amortization expense for the interim periods ended June 30, 2011 and 2010 was $1,322,537, and $ 60,757 respectively.

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Note 12 - Capital Lease Obligation

6 Months Ended

Jun. 30, 2011

Capital Leases in Financial Statements of Lessee Disclosure [Text Block]

NOTE 12 – CAPITAL LEASE OBLIGATION

Capital lease obligation at June 30, 2011 and December 31, 2010 consisted of the following:

	June 30, 2011			December 31, 2010
Armet
Capital lease obligation to a financing company for a term of three (3) years, collateralized by all of Armet’s machinery and equipment, with interest at 11.8% per annum, with principal and interest due and payable in monthly installment of RMB497,897 (approximately $75,304) on the 23rd of each month.	$	1,932,539		$	2,268,671
Less current maturities		(730,334	)		(727,756	)
CAPITAL LEASE OBLIGATION, net of current maturities	$	1,202,205		$	1,540,915

The future minimum payments under this capital lease obligation at June 30, 2011 were as follows:

Year ending December 31:
2011 (remainder of the year)	$	464,953
2012		929,476
2013		852,020
Total capital lease obligation payments		2,246,449
Less amounts representing interest		(313,910	)
Present value of total future capital lease obligation payments		1,932,539
Less current maturities of capital lease obligation		(730,334	)
Capital lease obligation, net of current maturities	$	1,202,205

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Note 8 - Land Use Right

6 Months Ended

Jun. 30, 2011

Intangible Assets Disclosure [Text Block]

NOTE 8 – LAND USE RIGHT

Land use right, stated at cost, less accumulated amortization at June 30, 2011 and December 31, 2010, consisted of the following:

	June 30, 2011			December 31, 2010
Land use right	$	2,391,940		$	2,338,289
Accumulated amortization		(181,784	)		(153,965	)
	$	2,210,156		$	2,184,324

Amortization expense

Amortization expense for the interim periods ended June 30, 2011 and 2010 was $24,287 and $23,056 respectively.

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Note 6 - Inventories

6 Months Ended

Jun. 30, 2011

Inventory Disclosure [Text Block]

NOTE 6 – INVENTORIES

Inventories at June 30, 2011 and December 31, 2010 consisted of the following:

	June 30, 2011			December 31, 2010
Raw materials	$	4,784,903	*	$	1,925,159	*
Finished goods		8,884,370	*		4,719,339	*
Purchased merchandise for resale		-			3,795,333
	$	13,669,273		$	10,439,831

* Armet’s raw materials and finished goods are collateralized for loans from the Bank of Communications Lianyungang Branch.

Raw materials consisted of scrap metals to be processed and finished goods are comprised of all of the processed scrap metal at Armet.  Due to the short duration time for the processing of its scrap metal, there was no material work-in-process inventory at June 30, 2011 or December 31, 2010. Armet’s raw materials at June 30, 2011 represented approximately one month production usage.

Purchased merchandise for sale is comprised of all of the metal ores to be resold through the distribution business at Armco HK and Henan, all of which were sold and delivered to the customers. There was no balance of purchased merchandise for sale as of June 30, 2011.

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Consolidated Statement of Stockholders' Equity (Parentheticals) (Common Stock [Member], USD $)	12 Months Ended
	Dec. 31, 2010	Jun. 30, 2011
Issuance of common stock upon exercise of warrants	$ 5.00
Issuance of common stock upon exercise of warrants to purchase common shares, exercise price	$ 5.00
Reclassification of derivative liability to additional paid-in capital associated with the exercise of warrants to purchase of common stock, shares (in Dollars)	$ 13,806
Sale of common stock and warrant, price per share	$ 6.50
Issuance of restricted stock, value granted	$ 3.28
Issuance of common stock, value granted		$ 3.38
Number OfShares [Member]
Warrants to purchase common shares (in Shares)	1,031,715
Number OfShares [Member]
Warrants to purchase common shares (in Shares)	167,740

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Note 2 - Summary of Significant Accounting Policies

6 Months Ended

Jun. 30, 2011

Significant Accounting Policies [Text Block]

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of presentation - unaudited interim financial information

The accompanying unaudited interim consolidated financial statements and related notes have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information, and with the rules and regulations of the United States Securities and Exchange Commission (“SEC”) to Form 10-Q and Article 8 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements.  The unaudited interim financial statements furnished reflect all adjustments (consisting of normal recurring accruals) which are, in the opinion of management, necessary to a fair statement of the results for the interim periods presented.  Interim results are not necessarily indicative of the results for the full year.  These unaudited interim consolidated financial statements should be read in conjunction with the consolidated financial statements of the Company for the year ended December 31, 2010 and notes thereto contained in the Company’s Annual Report on Form 10-K filed with the SEC on March 31, 2011.

Principles of consolidation

The consolidated financial statements include all accounts of Armco Metals, Armco HK, Armet, Henan Armco and Lianyungang Armco as of June 30, 2011 and 2010 and for the interim periods then ended; all accounts of Armco Shanghai as of June 30, 2011 and 2010, for the interim period ended June 30, 2011 and for the period from June 16, 2010 (inception) through June 30, 2010.  All inter-company balances and transactions have been eliminated.

Reclassification

Certain amounts in the prior period financial statements have been reclassified to conform to the current period presentation.   These reclassifications had no effect on reported losses.

Use of estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period.  Management bases its estimates on historical experience and on various assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.

The Company’s significant estimates include allowance for doubtful accounts; foreign currency; the fair value of financial instruments; normal production capacity, inventory valuation and obsolescence; the carrying value and recoverability of long-lived assets, including the values assigned to and estimated useful lives of property, plant and equipment, and land use rights; revenue recognized or recognizable; sales returns and allowances; valued added tax and income tax provision.  Those significant accounting estimates or assumptions bear the risk of change due to the fact that there are uncertainties attached to those estimates or assumptions, and certain estimates or assumptions are difficult to measure or value.

Management regularly reviews its estimates utilizing currently available information, changes in facts and circumstances, historical experience and reasonable assumptions. After such reviews, and if deemed appropriate, those estimates are adjusted accordingly. Actual results could differ from those estimates.

Fair value of financial instruments

The Company follows paragraph 825-10-50-10 of the FASB Accounting Standards Codification for disclosures about fair value of its financial instruments and has adopted paragraph 820-10-35-37 of the FASB Accounting Standards Codification (“Paragraph 820-10-35-37”) to measure the fair value of its financial instruments. Paragraph 820-10-35-37 establishes a framework for measuring fair value in accounting principles generally accepted in the United States of America (U.S. GAAP), and expands disclosures about fair value measurements. To increase consistency and comparability in fair value measurements and related disclosures, Paragraph 820-10-35-37 establishes a fair value hierarchy which prioritizes the inputs to valuation techniques used to measure fair value into three (3) broad levels.  The three (3) levels of fair value hierarchy defined by Paragraph 820-10-35-37 are described below:

Level 1	Quoted market prices available in active markets for identical assets or liabilities as of the reporting date.
Level 2	Pricing inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reporting date.
Level 3	Pricing inputs that are generally observable inputs and not corroborated by market data.

Financial assets are considered Level 3 when their fair values are determined using pricing models, discounted cash flow methodologies or similar techniques and at least one significant model assumption or input is unobservable.  Level 3 financial liabilities consist of the derivative warrant issued in July 2008 for which there is no current market for these securities such that the determination of fair value requires significant judgment or estimation.  The Company valued the automatic conditional conversion, re-pricing/down-round, change of control; default and follow-on offering provisions using a lattice model, with the assistance of a valuation specialist, for which management understands the methodologies. These models incorporate transaction details such as Company stock price, contractual terms, maturity, risk free rates, as well as assumptions about future financings, volatility, and holder behavior as of the date of issuance and each balance sheet date.

The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities and the lowest priority to unobservable inputs.  If the inputs used to measure the financial assets and liabilities fall within more than one level described above, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument.

The carrying amounts of the Company’s financial assets and liabilities, such as cash, pledged deposits, accounts receivable, advance on purchases, prepayments and other current assets, accounts payable, customer deposits, corporate income tax payable, accrued expenses and other current liabilities approximate their fair values because of the short maturity of these instruments.

The Company’s loans payable, banker’s acceptance notes payable, capital lease obligation, and long-term debt approximate the fair value of such instruments based upon management’s best estimate of interest rates that would be available to the Company for similar financial arrangements at June 30, 2011 and 2010.

Transactions involving related parties cannot be presumed to be carried out on an arm's-length basis, as the requisite conditions of competitive, free-market dealings may not exist. Representations about transactions with related parties, if made, shall not imply that the related party transactions were consummated on terms equivalent to those that prevail in arm's-length transactions unless such representations can be substantiated.

It is not however, practical to determine the fair value of advances from stockholders due to their related party nature.

Fair value of financial assets and liabilities measured on a recurring basis

The Company uses Level 1 of the fair value hierarchy to measure the fair value of the marketable securities and marks the available for sale marketable securities at fair value in the statement of financial position at each balance sheet date and reports the unrealized holding gains and losses for available-for-sale securities in other comprehensive income (loss) until realized.

The Company uses Level 3 of the fair value hierarchy to measure the fair value of the derivative liabilities and revalues its derivative warrant liability at every reporting period and recognizes gains or losses in the consolidated statements of operations and comprehensive income (loss) that are attributable to the change in the fair value of the derivative warrant liability.

Financial assets and liabilities measured at fair value on a recurring basis are summarized below and disclosed on the consolidated balance sheets:

			Fair Value Measurement Using
	Carrying Value		Level 1		Level 2		Level 3		Total
Marketable securities, available for sale	$	1,380,015	$	1,380,015	$	-	$	-	$	1,380,015
Derivative warrant liabilities	$	10,023	$	-	$	-	$	10,023	$	10,023

The table below provides a summary of the changes in fair value, including net transfers in and/or out, of all financial assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the interim period ended June 30, 2011:

	Fair Value Measurement Using Level 3 Inputs
		Derivative warrants			Total
Balance, December 31, 2010		$	138,143		$	138,143
Total gains or losses (realized/unrealized)
included in net loss			(128,120	)		(128,120	)
Included in other comprehensive income			-			-
Purchases, issuances and settlements			-			-
Transfers in and/or out of Level 3			-			-
Balance, June 30, 2011		$	10,023		$	10,023

The Company has no other assets or liabilities measured at fair value on a recurring basis or a non-recurring basis; consequently, the Company did not have any fair value adjustments for assets and liabilities measured at fair value at June 30, 2011 or December 31, 2010; no gains or losses are reported in the consolidated statement of income and comprehensive income (loss) that are attributable to the change in unrealized gains or losses relating to those assets and liabilities still held at the reporting date for the interim period ended June 30, 2011 or 2010.

Fair value of non-financial assets or liabilities measured on a recurring basis

The Company identifies potentially excess and slow-moving inventories by evaluating turn rates, inventory levels and other factors.  Excess quantities are identified through evaluation of inventory aging, review of inventory turns and historical sales experiences. The Company provides lower of cost or market reserves for such identified excess and slow-moving inventories. The Company establishes a reserve for inventory shrinkage, if any, based on the historical results of physical inventory cycle counts.

Carrying value, recoverability and impairment of long-lived assets

The Company has adopted paragraph 360-10-35-17 of the FASB Accounting Standards Codification for its long-lived assets. The Company’s long-lived assets, which include property, plant and equipment and land use rights are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.

The Company assesses the recoverability of its long-lived assets by comparing the projected undiscounted net cash flows associated with the related long-lived asset or group of long-lived assets over their remaining estimated useful lives against their respective carrying amounts. Impairment, if any, is based on the excess of the carrying amount over the fair value of those assets.  Fair value is generally determined using the asset’s expected future discounted cash flows or market value, if readily determinable.  If long-lived assets are determined to be recoverable, but the newly determined remaining estimated useful lives are shorter than originally estimated, the net book values of the long-lived assets are depreciated over the newly determined remaining estimated useful lives.

The Company considers the following to be some examples of important indicators that may trigger an impairment review: (i) significant under-performance or losses of assets relative to expected historical or projected future operating results; (ii) significant changes in the manner or use of assets or in the Company’s overall strategy with respect to the manner or use of the acquired assets or changes in the Company’s overall business strategy; (iii) significant negative industry or economic trends; (iv) increased competitive pressures; (v) a significant decline in the Company’s stock price for a sustained period of time; and (vi) regulatory changes.  The Company evaluates acquired assets for potential impairment indicators at least annually and more frequently upon the occurrence of such events.

The key assumptions used in management’s estimates of projected cash flow deal largely with forecasts of sales levels, gross margins, and operating costs of the manufacturing facilities.  These forecasts are typically based on historical trends and take into account recent developments as well as management’s plans and intentions.  Any difficulty in manufacturing or sourcing raw materials on a cost effective basis would significantly impact the projected future cash flows of the Company’s manufacturing facilities and potentially lead to an impairment charge for long-lived assets.  Other factors, such as increased competition or a decrease in the desirability of the Company’s products, could lead to lower projected sales levels, which would adversely impact cash flows.  A significant change in cash flows in the future could result in an impairment of long lived assets.

The impairment charges, if any, is included in operating expenses in the accompanying consolidated statements of income and comprehensive income (loss).

Cash equivalents

The Company considers all highly liquid investments with maturities of three months or less at the time of purchase to be cash equivalents.

Pledged deposits

Pledged deposits consist of amounts held in financial institutions for (i) outstanding letters of credit and (ii) open banker’s acceptance notes payable maturing between three (3) to nine (9) months from the date of issuance.

The Company uses letters of credit in connection with its purchases of ferrous and non-ferrous ores and metals, and scrap metal for processing and distribution.  The issuing financial institutions of those letters of credit require the Company to deposit and pledge certain percentage of the maximum amount stipulated under those letters of the credit as collateral.  The pledged deposits are either released to the Company in the event of vendors' non-performance or to be released to the Company as part of the payment toward the letters of credit when vendors delivers the goods under those letters of credit on or before maturity date.

The Company satisfies certain accounts payable, through banker’s acceptance notes issued by financial institutions to certain of the Company’s vendors.  The issuing financial institutions of those banker’s acceptance notes require the Company to deposit and pledge certain percentage of the amount stipulated under those banker’s acceptance notes as collateral.  The pledged deposits are released to the Company as part of the payment toward banker’s acceptance notes upon maturity.

The Management of the Company believes it is appropriate to classify such amounts as current assets as those letters of credit are of a short term nature, three (3) to nine (9) months in length from the date of issuance.

Marketable securities, available for sale

The Company accounts for marketable securities, available for sale, in accordance with sub-topic 320-10 of the FASB Accounting Standards Codification (“Sub-topic 320-10”).

Pursuant to Paragraph 320-10-35-1, investments in debt securities that are classified as available for sale and equity securities that have readily determinable fair values that are classified as available for sale shall be measured subsequently at fair value in the consolidated balance sheets at each balance sheet date. Unrealized holding gains and losses for available-for-sale securities (including those classified as current assets) shall be excluded from earnings and reported in other comprehensive income until realized except an available-for-sale security that is designated as being hedged in a fair value hedge, from which all or a portion of the unrealized holding gain and loss of shall be recognized in earnings during the period of the hedge, pursuant to paragraphs 815-25-35-1 through 35-4.

The Company follows Paragraphs 320-10-35-18 through 33 and assess whether an investment is impaired in each reporting period.  An investment is impaired if the fair value of the investment is less than its cost. Impairment indicators include, but are not limited to the following: a. a significant deterioration in the earnings performance, credit rating, asset quality, or business prospects of the investee; b. a significant adverse change in the regulatory, economic, or technological environment of the investee; c. a significant adverse change in the general market condition of either the geographic area or the industry in which the investee operates; d. a bona fide offer to purchase (whether solicited or unsolicited), an offer by the investee to sell, or a completed auction process for the same or similar security for an amount less than the cost of the investment; e. factors that raise significant concerns about the investee's ability to continue as a going concern, such as negative cash flows from operations, working capital deficiencies, or noncompliance with statutory capital requirements or debt covenants. If the fair value of an investment is less than its cost basis at the balance sheet date of the reporting period for which impairment is assessed, the impairment is either temporary or other than temporary. Pursuant to Paragraph 320-10-45-8A, in periods in which an entity determines that a security’s decline in fair value below its cost basis is other than temporary, the entity shall recognize and present the total other-than-temporary impairment in the statement of earnings with an offset for the amount of the total other-than-temporary impairment that is recognized in other comprehensive income, in accordance with paragraph 320-10-35-34D, if any. Pursuant to Paragraph 320-10-45-9A, An entity shall separately present, in the financial statement in which the components of accumulated other comprehensive income are reported, amounts recognized therein related to held-to-maturity and available-for-sale debt securities for which a portion of an other-than-temporary impairment has been recognized in earnings.

Accounts receivable

Accounts receivable are recorded at the invoiced amount, net of an allowance for doubtful accounts.  The Company follows paragraph 310-10-50-9 of the FASB Accounting Standards Codification to estimate the allowance for doubtful accounts.  The Company performs on-going credit evaluations of its customers and adjusts credit limits based upon payment history and the customer’s current credit worthiness, as determined by the review of their current credit information; and determines the allowance for doubtful accounts based on historical write-off experience, customer specific facts and economic conditions.

Outstanding account balances are reviewed individually for collectability.  The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in the Company’s existing accounts receivable. Bad debt expense is included in general and administrative expenses, if any.  Pursuant to paragraph 310-10-50-2 of the FASB Accounting Standards Codification account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote.  The Company has adopted paragraph 310-10-50-6 of the FASB Accounting Standards Codification and determine when receivables are past due or delinquent based on how recently payments have been received.

The Company does not have any off-balance-sheet credit exposure to its customers.

Advance on purchases

Advance on purchases primarily represent amounts paid to vendors for future delivery of products ranging from three (3) months to nine (9) months, all of which were fully or partially refundable depending upon the terms and conditions of the purchase agreements.

Inventories

The Company values inventories, consisting of raw materials, packaging material and finished goods, at the lower of cost or market.  Cost is determined on the first-in and first-out (“FIFO”) method for raw materials and packaging materials and the weighted average cost method for finished goods. Cost of finished goods comprises direct labor, direct materials, direct production cost and an allocated portion of production overhead. The Company reduces inventories for the diminution of value, resulting from product obsolescence, damage or other issues affecting marketability, equal to the difference between the cost of the inventory and its estimated market value.  Factors utilized in the determination of estimated market value include (i) current sales data and historical return rates, (ii) estimates of future demand, (iii) competitive pricing pressures, (iv) new product introductions, (v) product expiration dates, and (vi) component and packaging obsolescence.

The Company follows paragraph 330-10-30-3 of the FASB Accounting Standards Codification for the allocation of production costs and charges to inventories.  The Company allocates fixed production overhead to inventories based on the normal capacity of the production facilities expected to be achieved over a number of periods or seasons under normal circumstances, taking into account the loss of capacity resulting from planned maintenance.  Judgment is required to determine when a production level is abnormally low (that is, outside the range of expected variation in production).  Factors that might be anticipated to cause an abnormally low production level include significantly reduced demand, labor and materials shortages, and unplanned facility or equipment down time.  The actual level of production may be used if it approximates normal capacity.  In periods of abnormally high production, the amount of fixed overhead allocated to each unit of production is decreased so that inventories are not measured above cost.  The amount of fixed overhead allocated to each unit of production is not increased as a consequence of abnormally low production or idle plant and  unallocated overheads of underutilized or idle capacity of the production facilities are recognized as period costs in the period in which they are incurred rather than as a portion of the inventory cost.

The Company evaluates its current level of inventories considering historical sales and other factors and, based on this evaluation, classify inventory markdowns in the income statement as a component of cost of goods sold pursuant to Paragraph 420-10-S99 of the FASB Accounting Standards Codification to adjust inventories to net realizable value. These markdowns are estimates, which could vary significantly from actual requirements if future economic conditions, customer demand or competition differ from expectations. Other significant estimates include the allocation of variable and fixed production overheads. While variable production overheads are allocated to each unit of production on the basis of actual use of production facilities, the allocation of fixed production overhead to the costs of conversion is based on the normal capacity of the Company’s production facilities, and recognizes abnormal idle facility expenses as current period charges. Certain costs, including categories of indirect materials, indirect labor and other indirect manufacturing costs which are included in the overhead pools are estimated. The management of the Company determines its normal capacity based upon the amount of operating hours of the manufacturing machinery and equipment in a reporting period.

Property, plant and equipment

Property, plant and equipment are recorded at cost.  Expenditures for major additions and betterments are capitalized.  Maintenance and repairs are charged to operations as incurred.  Depreciation of property, plant and equipment is computed by the straight-line method (after taking into account their respective estimated residual values) over the assets estimated useful lives ranging from five (5) years to twenty (20) years.  Upon sale or retirement of property, plant and equipment, the related cost and accumulated depreciation are removed from the accounts and any gain or loss is reflected in the consolidated statements of income and comprehensive income.  Leasehold improvements, if any, are amortized on a straight-line basis over the term of the lease or the estimated useful lives, whichever is shorter.  Upon becoming fully amortized, the related cost and accumulated amortization are removed from the accounts.

Land use right

Land use right represents the cost to obtain the right to use a 32 acre parcel of land in the City of Lianyungang, Jiangsu Province, PRC.  Land use right is carried at cost and amortized on a straight-line basis over the life of the right of fifty (50) years.  Upon becoming fully amortized, the related cost and accumulated amortization are removed from the accounts.

Banker’s acceptance notes payable

The Company satisfies certain accounts payable, through the issuance of banker’s acceptance notes issued by financial institutions to certain of the Company’s vendors.  These notes are usually of a short term nature, three (3) to nine (9) months in length.  They are non-interest bearing,  are due upon maturity, and are paid by the Company’s banks directly to the vendors upon presentation on the date of maturity and the Company is obliged to repay the note in full to the financial institutions.  In the event of insufficient funds to repay these notes, the Company's bank will convert them to loans on demand with interest at a predetermined rate per annum payable monthly.

Customer deposits

Customer deposits primarily represent amounts received from customers for future delivery of products, all of which were fully or partially refundable depending upon the terms and conditions of the sales agreements.

Leases

Lease agreements are evaluated to determine whether they are capital leases or operating leases in accordance with paragraph 840-10-25-1 of the FASB Accounting Standards Codification (“Paragraph 840-10-25-1”).  When substantially all of the risks and benefits of property ownership have been transferred to the Company, as determined by the test criteria in Paragraph 840-10-25-1, the lease then qualifies as a capital lease.  Capital lease assets are depreciated on a straight line method, over the capital lease assets estimated useful lives consistent with the Company’s normal depreciation policy for tangible fixed assets.  Interest charges are expensed over the period of the lease in relation to the carrying value of the capital lease obligation.

Rent expense for operating leases, which may include free rent or fixed escalation amounts in addition to minimum lease payments, is recognized on a straight-line basis over the duration of each lease term.

Derivative instruments and hedging activities

The Company accounts for derivative instruments and hedging activities in accordance with paragraph 810-10-05-4 of the FASB Accounting Standards Codification (“Paragraph 810-10-05-4”). Paragraph 810-10-05-4 requires companies to recognize all derivative instruments as either assets or liabilities in the balance sheet at fair value.  The accounting for changes in the fair value of a derivative instrument depends upon: (i) whether the derivative has been designated and qualifies as part of a hedging relationship, and (ii) the type of hedging relationship.  For those derivative instruments that are designated and qualify as hedging instruments, a company must designate the hedging instrument based upon the exposure being hedged as either a fair value hedge, cash flow hedge or hedge of a net investment in a foreign operation.

From time to time, the Company employs foreign currency forward contracts to convert unforeseeable foreign currency exchange rates to fixed foreign currency exchange rates.  The Company does not use derivatives for speculation or trading purposes.  Changes in the fair value of derivatives are recorded each period in current earnings or through other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and the type of hedge transaction.  The ineffective portion of all hedges is recognized in current earnings.  The Company has sales and purchase commitments denominated in foreign currencies.  Foreign currency forward contracts are used to hedge against the risk of change in the fair value of these commitments attributable to fluctuations in exchange rates (“Fair Value Hedges”).  Changes in the fair value of the derivative instrument are generally offset in the income statement by changes in the fair value of the item being hedged.

The Company did not employ foreign currency forward contracts to convert unforeseeable foreign currency exchange rates to fixed foreign currency exchange rates in 2011 or 2010.

Derivative warrant liability

The Company evaluates its convertible debt, options, warrants or other contracts, if any, to determine if those contracts or embedded components of those contracts qualify as derivatives to be separately accounted for in accordance with paragraph 810-10-05-4 and paragraph 815-40-25 of the FASB Accounting Standards Codification.  The result of this accounting treatment is that the fair value of the embedded derivative is marked-to-market each balance sheet date and recorded as either an asset or a liability.  In the event that the fair value is recorded as a liability, the change in fair value is recorded in the Statement of Operations and Comprehensive Income (loss) as other income or expense.  Upon conversion, exercise or cancellation of a derivative instrument, the instrument is marked to fair value at the date of conversion, exercise or cancellation and then that the related fair value is reclassified to equity.

In circumstances where the embedded conversion option in a convertible instrument is required to be bifurcated and there are also other embedded derivative instruments in the convertible instrument that are required to be bifurcated, the bifurcated derivative instruments are accounted for as a single, compound derivative instrument.

The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is re-assessed at the end of each reporting period.  Equity instruments that are initially classified as equity that become subject to reclassification are reclassified to liability at the fair value of the instrument on the reclassification date.  Derivative instrument liabilities will be classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument is expected within 12 months of the balance sheet date.

On January 1, 2009, the Company adopted Section 815-40-15 of the FASB Accounting Standards Codification (“Section 815-40-15”)to determine whether an instrument (or an embedded feature) is indexed to the Company’s own stock.  Section 815-40-15 provides that an entity should use a two-step approach to evaluate whether an equity-linked financial instrument (or embedded feature) is indexed to its own stock, including evaluating the instrument’s contingent exercise and settlement provisions.   The adoption of Section 815-40-15 has affected the accounting for (i) certain freestanding warrants that contain exercise price adjustment features and (ii) convertible bonds issued by foreign subsidiaries with a strike price denominated in a foreign currency.

The Company initially classified the warrants to purchase 2,728,913 shares of its common stock issued in connection with its July 2008 offering of common stock as additional paid-in capital upon issuance of the warrants.  Upon the adoption of Section 815-40-15 on January 1, 2009, these warrants are no longer deemed to be indexed to the Company’s own stock and were reclassified from equity to a derivative liability with a fair value of $3,251,949 effective as of January 1, 2009.  The reclassification entry included a cumulative adjustment to retained earnings of $1,845,455 and a reduction of additional paid-in capital of $5,097,404, the amount originally classified as additional paid-in capital upon issuance of the warrants on July 31, 2008.

On January 30, 2009, the Company issued 5,000 shares of its common stock for cash at $5.00 per share and received a cash payment of $25,000 in connection with the exercise of the warrant to purchase 5,000 shares with an exercise price of $5.00 per share by one investor and warrant holder.

During the three months ended March 31, 2010, warrants to purchase 1,324,346 shares of the Company’s common stock were exercised for cash at $5.00 per share and warrants to purchase 167,740 shares of the Company’s common stock were exercised on a cashless basis, for which the Company issued 1,324,346 and 78,217 shares of its common stock to the warrant holders and reclassified $1,665,011 and $210,095 of the derivative liability to additional paid-in capital, respectively.  In addition, during the three months ended March 31, 2010, certain holders of warrants to purchase 1,031,715 shares of its common stock reached agreements with the Company, effective as of January 1, 2010, whereby the Company waived its right to offer or sell additional shares of its common stock below $5.00 per share in the future and the warrant holders waived their anti-dilution or commonly known as a most favored nation clause, for which the Company reclassified $1,292,227 of the derivative liability to additional paid-in capital.

During April 2010, four (4) warrant holders exercised their warrants to purchase 13,806 shares of Company common stock at $5.00 per share resulting in cash proceeds of $69,030 to the Company, for which the Company issued 13,806 shares of its common stock to the warrant holders and reclassified $21,229 of the derivative liability to additional paid-in capital.

The Company valued the fair value of the remaining derivative warrant liability at $10,023 at June 30, 2011 and recognized a gain of $128,120 on change in the fair value of the derivative warrants to purchase 186,306 shares of Company common stock for the six months then ended.

Related parties

The Company follows subtopic 850-10 of the FASB Accounting Standards Codification for the identification of related parties and disclosure of related party transactions.

Pursuant to Section 850-10-20 the related parties include a. affiliates of the Company; b.  entities for which investments in their equity securities would be required, absent the election of the fair value option under the Fair Value Option Subsection of Section 825–10–15, to be accounted for by the equity method by the investing entity; c.  trusts for the benefit of employees, such as pension and profit-sharing trusts that are managed by or under the trusteeship of management; d.  principal owners of the Company; e.  management of the Company; f.  other parties with which the Company may deal if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests; and g.  other parties that can significantly influence the management or operating policies of the transacting parties or that have an ownership interest in one of the transacting parties and can significantly influence the other to an extent that one or more of the transacting parties might be prevented from fully pursuing its own separate interests.

The financial statements shall include disclosures of material related party transactions, other than compensation arrangements, expense allowances, and other similar items in the ordinary course of business. However, disclosure of transactions that are eliminated in the preparation of consolidated or combined financial statements is not required in those statements. The disclosures shall include:  a. the nature of the relationship(s) involved ; b. a description of the transactions, including transactions to which no amounts or nominal amounts were ascribed, for each of the periods for which income statements are presented, and such other information deemed necessary to an understanding of the effects of the transactions on the financial statements; c. the dollar amounts of transactions for each of the periods for which income statements are presented and the effects of any change in the method of establishing the terms from that used in the preceding period; and d. amounts due from or to related parties as of the date of each balance sheet presented and, if not otherwise apparent, the terms and manner of settlement.

Commitment and contingencies

The Company follows subtopic 450-20 of the FASB Accounting Standards Codification to report accounting for contingencies. Certain conditions may exist as of the date the consolidated financial statements are issued, which may result in a loss to the Company but which will only be resolved when one or more future events occur or fail to occur.  The Company assesses such contingent liabilities, and such assessment inherently involves an exercise of judgment.  In assessing loss contingencies related to legal proceedings that are pending against the Company or unasserted claims that may result in such proceedings, the Company evaluates the perceived merits of any legal proceedings or unasserted claims as well as the perceived merits of the amount of relief sought or expected to be sought therein.

If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated liability would be accrued in the Company’s consolidated financial statements.  If the assessment indicates that a potential material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, and an estimate of the range of possible losses, if determinable and material, would be disclosed.

Loss contingencies considered remote are generally not disclosed unless they involve guarantees, in which case the guarantees would be disclosed.  Management does not believe, based upon information available at this time, that these matters will have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows. However, there is no assurance that such matters will not materially and adversely affect the Company’s business, financial position, and results of operations or cash flows.

Revenue recognition

The Company applies paragraph 605-10-S99-1 of the FASB Accounting Standards Codification for revenue recognition.  The Company recognizes revenue when it is realized or realizable and earned.  The Company considers revenue realized or realizable and earned when all of the following criteria are met: (i) persuasive evidence of an arrangement exists, (ii) the product has been shipped or the services have been rendered to the customer, (iii) the sales price is fixed or determinable, and (iv) collectability is reasonably assured.  In addition to the aforementioned general policy, the following are the specific revenue recognition policies for each major category of revenue:

(i) Import, export and distribution of ferrous and non-ferrous ore, metals and processed scrap metal:  The Company derives its revenues from sales contracts with customers with revenues being generated upon the shipment of metal ore pursuant to.  Persuasive evidence of an arrangement is demonstrated via sales invoice or contract; product delivery is evidenced by warehouse shipping log as well as a signed bill of lading from the vessel or rail company and title transfers upon shipment, based on free on board (“FOB”) warehouse terms; the sales price to the customer is fixed upon acceptance of the signed purchase order or contract and there is no separate sales rebate, discount, or volume incentive.  When the Company recognizes revenue, no provisions are made for returns because, historically, there have been very few sales returns and adjustments that have impacted the ultimate collection of revenues.

(ii) Import and export agent services:  Form time to time, the Company provides import and export agent services to certain of its customers. Revenue from import and export agent services is recognized as the services are provided.  The import and export agent services are considered provided when the goods to be imported or exported by the customer are delivered to the designated port specified by the service contract.  The Company follows paragraph 605-45-45-15 to paragraph 605-45-45-18 of the FASB Accounting Standards Codification for revenue recognition to report revenue net for its import and export agent services since (1) the Company’s supplier is the primary obligor in the arrangement, (2) the amount the Company earns is fixed, and (3) the Company’s supplier has credit risk.  The Company did not provide any import and export agent services for the interim period ended March 31, 2011 or 2010.

Net sales of products represent the invoiced value of goods, net of value added taxes (“VAT”).  The Company is subject to VAT which is levied on the majority of the Company’s products at the rate of 13% on the invoiced value of sales prior to December 31, 2008 and 17% on the invoiced value of sales as of January 1, 2009 and forward.  Sales or Output VAT is borne by customers in addition to the invoiced value of sales and Purchase or Input VAT is borne by the Company in addition to the invoiced value of purchases to the extent not refunded for export sales.

Shipping and handling costs

The Company accounts for shipping and handling fees in accordance with paragraph 605-45-45-19 of the FASB Accounting Standards Codification.  While amounts charged to customers for shipping products are included in revenues, the related costs are classified in cost of goods sold as incurred.

Foreign currency transactions

The Company applies the guidelines as set out in Section 830-20-35 of the FASB Accounting Standards Codification (“Section 830-20-35”) for foreign currency transactions.  Pursuant to Section 830-20-35 of the FASB Accounting Standards Codification, foreign currency transactions are transactions denominated in currencies other than U.S. Dollar, the Company’s reporting currency or Chinese Yuan or Reminbi, the Company’s Chinese operating subsidiaries' functional currency.  Foreign currency transactions may produce receivables or payables that are fixed in terms of the amount of foreign currency that will be received or paid.  A change in exchange rates between the functional currency and the currency in which a transaction is denominated increases or decreases the expected amount of functional currency cash flows upon settlement of the transaction. That increase or decrease in expected functional currency cash flows is a foreign currency transaction gain or lossthat generally shall be included in determining net income for the period in which the exchange rate changes. Likewise, a transaction gain or loss (measured from the transaction dateor the most recent intervening balance sheet date, whichever is later) realized upon settlement of a foreign currency transaction generally shall be included in determining net income for the period in which the transaction is settled. The exceptions to this requirement for inclusion in net income of transaction gains and losses pertain to certain intercompany transactions and to transactions that are designated as, and effective as, economic hedges of net investments and foreign currency commitments.  Pursuant to Section 830-20-25 of the FASB Accounting Standards Codification, the following shall apply to all foreign currency transactions of an enterprise and its investees: (a) at the date the transaction is recognized, each asset, liability, revenue, expense, gain, or loss arising from the transaction shall be measured and recorded in the functional currency of the recording entity by use of the exchange rate in effect at that date as defined in section 830-10-20 of the FASB Accounting Standards Codification; and (b) at each balance sheet date, recorded balances that are denominated in currencies other than the functional currency or reporting currency of the recording entity shall be adjusted to reflect the current exchange rate.

Stock-based compensation for obtaining employee services

The Company accounts for its stock based compensation in which the Company obtains employee services in share-based payment transactions under the recognition and measurement principles of the fair value recognition provisions of section 718-10-30 of the FASB Accounting Standards Codification. Pursuant to paragraph 718-10-30-6 of the FASB Accounting Standards Codification, all transactions in which goods or services are the consideration received for the issuance of equity instruments are accounted for based on the fair value of the consideration received or the fair value of the equity instrument issued, whichever is more reliably measurable.  The measurement date used to determine the fair value of the equity instrument issued is the earlier of the date on which the performance is complete or the date on which it is probable that performance will occur.

The fair value of each option award is estimated on the date of grant using a Black-Scholes option-pricing valuation model.  The ranges of assumptions for inputs are as follows:

● The Company uses historical data to estimate employee termination behavior.  The expected life of options granted is derived from paragraph 718-10-S99-1 of the FASB Accounting Standards Codification and represents the period of time the options are expected to be outstanding.

● The expected volatility is based on a combination of the historical volatility of the comparable companies’ stock over the contractual life of the options.

● The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods within the contractual life of the option.

● The expected dividend yield is based on the Company’s current dividend yield as the best estimate of projected dividend yield for periods within the contractual life of the option.

The Company’s policy is to recognize compensation cost for awards with only service conditions and a graded vesting schedule on a straight-line basis over the requisite service period for the entire award.

Equity instruments issued to parties other than employees for acquiring goods or services

The Company accounts for equity instruments issued to parties other than employees for acquiring goods or services under guidance of section 505-50-30 of the FASB Accounting Standards Codification (“Section 505-50-30”).

Pursuant to Section 505-50-30, all transactions in which goods or services are the consideration received for the issuance of equity instruments are accounted for based on the fair value of the consideration received or the fair value of the equity instrument issued, whichever is more reliably measurable.  The measurement date used to determine the fair value of the equity instrument issued is the earlier of the date on which the performance is complete or the date on which it is probable that performance will occur.

Pursuant to Paragraph 505-50-30-S99-1, if the Company receives a right to receive future services in exchange for unvested, forfeitable equity instruments, those equity instruments are treated as unissued for accounting purposes until the future services are received (that is, the instruments are not considered issued until they vest). Consequently, there would be no recognition at the measurement date and no entry should be recorded.

Income taxes

The Company accounts for income taxes under Section 740-10-30 of the FASB Accounting Standards Codification, which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns.  Under this method, deferred tax assets and liabilities are based on the differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse.  Deferred tax assets are reduced by a valuation allowance to the extent management concludes it is more likely than not that the assets will not be realized.  Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.  The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the Consolidated Statements of Income and Comprehensive Income in the period that includes the enactment date.

The Company adopted section 740-10-25 of the FASB Accounting Standards Codification (“Section 740-10-25”). Section 740-10-25 addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements.  Under Section 740-10-25, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position.  The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty (50) percent likelihood of being realized upon ultimate settlement.  Section 740-10-25 also provides guidance on de-recognition, classification, interest and penalties on income taxes, accounting in interim periods and requires increased disclosures.

The estimated future tax effects of temporary differences between the tax basis of assets and liabilities are reported in the accompanying consolidated balance sheets, as well as tax credit carry-backs and carry-forwards. The Company periodically reviews the recoverability of deferred tax assets recorded on its consolidated balance sheets and provides valuation allowances as management deems necessary.

Management makes judgments as to the interpretation of the tax laws that might be challenged upon an audit and cause changes to previous estimates of tax liability. In addition, the Company operates within multiple taxing jurisdictions and is subject to audit in these jurisdictions. In management’s opinion, adequate provisions for income taxes have been made for all years. If actual taxable income by tax jurisdiction varies from estimates, additional allowances or reversals of reserves may be necessary.

Foreign currency translation

The Company follows Section 830-10-45 of the FASB Accounting Standards Codification (“Section 830-10-45”) for foreign currency translation to translate the financial statements of the foreign subsidiary from the functional currency, generally the local currency, into U.S. Dollars.  Section 830-10-45 sets out the guidance relating to how a reporting entity determines the functional currency of a foreign entity (including of a foreign entity in a highly inflationary economy), re-measures the books of record (if necessary), and characterizes transaction gains and losses. Pursuant to Section 830-10-45, The assets, liabilities, and operations of a foreign entity shall be measured using the functional currency of that entity. An entity’s functional currency is the currency of the primary economic environment in which the entity operates; normally, that is the currency of the environment, or local currency, in which an entity primarily generates and expends cash.

The functional currency of each foreign subsidiary is determined based on management’s judgment and involves consideration of all relevant economic facts and circumstances affecting the subsidiary. Generally, the currency in which the subsidiary transacts a majority of its transactions, including billings, financing, payroll and other expenditures, would be considered the functional currency, but any dependency upon the parent and the nature of the subsidiary’s operations must also be considered.  If a subsidiary’s functional currency is deemed to be the local currency, then any gain or loss associated with the translation of that subsidiary’s financial statements is included in accumulated other comprehensive income. However, if the functional currency is deemed to be the U.S. Dollar, then any gain or loss associated with the re-measurement of these financial statements from the local currency to the functional currency would be included in the consolidated statements of income and comprehensive income (loss). If the Company disposes of foreign subsidiaries, then any cumulative translation gains or losses would be recorded into the consolidated statements of income and comprehensive income (loss).  If the Company determines that there has been a change in the functional currency of a subsidiary to the U.S. Dollar, any translation gains or losses arising after the date of change would be included within the statement of income and comprehensive income (loss).

Based on an assessment of the factors discussed above, the management of the Company determined the relevant subsidiary’s local currency to be the functional currency for its foreign subsidiary.

The financial records of the Company's Chinese operating subsidiaries are maintained in their local currency, the Renminbi (“RMB”), which is the functional currency.  Assets and liabilities are translated from the local currency into the reporting currency, U.S. dollars, at the exchange rate prevailing at the balance sheet date.  Revenues and expenses are translated at weighted average exchange rates for the period to approximate translation at the exchange rates prevailing at the dates those elements are recognized in the consolidated financial statements.  Foreign currencytranslation gain (loss) resulting from the process of translating the local currency financial statements into U.S. dollars are included in determining accumulated other comprehensive income in the consolidated statement of stockholders’ equity.

RMB is not a fully convertible currency.  All foreign exchange transactions involving RMB must take place either through the People’s Bank of China (the “PBOC”) or other institutions authorized to buy and sell foreign exchange.  The exchange rate adopted for the foreign exchange transactions are the rates of exchange quoted by the PBOC.  Commencing July 21, 2005, China adopted a managed floating exchange rate regime based on market demand and supply with reference to a basket of currencies.  The exchange rate of the US dollar against the RMB was adjusted from approximately RMB 8.28 per U.S. dollar to approximately RMB 8.11 per U.S. dollar on July 21, 2005.  Since then, the PBOC administers and regulates the exchange rate of the U.S. dollar against the RMB taking into account demand and supply of RMB, as well as domestic and foreign economic and financial conditions.

Unless otherwise noted, the rate presented below per U.S. $1.00 was the midpoint of the interbank rate as quoted by OANDA Corporation (www.oanda.com) contained in its consolidated financial statements.  Management believes that the difference between RMB vs. U.S. dollar exchange rate quoted by the PBOC and RMB vs. U.S. dollar exchange rate reported by OANDA Corporation were immaterial.  Translations do not imply that the RMB amounts actually represent, or have been or could be converted into, equivalent amounts in U.S. dollars.  Translation of amounts from RMB into U.S. dollars has been made at the following exchange rates for the respective periods:

	June 30, 2011		December 31, 2010		June 30, 2010		December 31, 2009
Balance sheet		6.4635		6.6118		6.8086		6.8372
Statement of income and comprehensive income (loss)		6.5399		6.7788		6.8347		6.8409

Net gains and losses resulting from foreign exchange transactions, if any, are included in the Company’s Consolidated Statements of Operations and Comprehensive Income (Loss).

The foreign currency translation gain (loss) was $886,612 and $103,048 and the effect of exchange rate changes on cash flows were ($17,356) and $17,899 for the interim period ended June 30, 2011 and 2010, respectively.

Comprehensive income (loss)

The Company has applied section 220-10-45 of the FASB Accounting Standards Codification. This statement establishes rules for the reporting of comprehensive income and its components.  Comprehensive income (loss), for the Company, consists of net income, change in unrealized loss of marketable securities and foreign currency translation adjustments and is presented in the Company’s Consolidated Statements of Operations and Comprehensive Income (Loss) and Stockholders’ Equity.

Net income (loss) per common share

Net income (loss) per common share is computed pursuant to section 260-10-45 of the FASB Accounting Standards Codification.   Basic net income (loss) per common share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the period.  Diluted net income (loss) per common share is computed by dividing net income (loss) by the weighted average number of shares of common stock and potentially outstanding shares of common stock during the period to reflect the potential dilution that could occur from common shares issuable through stock options and warrants.

The following table shows the potentially outstanding dilutive common shares excluded from the diluted net income (loss) per common share calculation for the interim period ended June 30, 2011 and 2010 as they were anti-dilutive:

	Number of potentially outstanding dilutive common shares
	For the Interim Period Ended June 30, 2011		For the Interim Period Ended June 30, 2010
Warrants issued on August 1, 2008 in connection with the Company’s August 1, 2008 equity financing inclusive of non-derivative warrants to purchase 1,031,715 shares and derivative warrants to purchase 186,306 shares at $5.00 per share expiring five (5) years from date of issuance		1,218,021		1,218,021
Warrants issued on April 20, 2010 in connection with the Company’s April 20, 2010 equity financing inclusive of warrants to purchase 1,538,464 shares to the investors and warrants to purchase 76,923 shares to the placement agent at $7.50 per share expiring five (5) years from date of issuance		1,615,387		1,615,387
Options issued on October 5, 2010 to an employee to purchase 40,000 common shares exercisable at $5.00 per share expiring five (5) years from the date of issuance		40,000		-
Total potentially outstanding dilutive common shares		2,873,408		2,843,408

Cash flows reporting

The Company adopted paragraph 230-10-45-24 of the FASB Accounting Standards Codification for cash flows reporting, classifies cash receipts and payments according to whether they stem from operating, investing, or financing activities and provides definitions of each category, and uses the indirect or reconciliation method (“Indirect method”) as defined by paragraph 230-10-45-25 of the FASB Accounting Standards Codification to report net cash flow from operating activities by adjusting net income to reconcile it to net cash flow from operating activities by removing the effects of (a) all deferrals of past operating cash receipts and payments and all accruals of expected future operating cash receipts and payments and (b) all items that are included in net income that do not affect operating cash receipts and payments.  The Company reports the reporting currency equivalent of foreign currency cash flows, using the current exchange rate at the time of the cash flows and the effect of exchange rate changes on cash held in foreign currencies is reported as a separate item in the reconciliation of beginning and ending balances of cash and cash equivalents and separately provides information about investing and financing activities not resulting in cash receipts or payments in the period pursuant to paragraph 830-230-45-1 of the FASB Accounting Standards Codification.

Subsequent events

The Company follows the guidance in Section 855-10-50 of the FASB Accounting Standards Codification for the disclosure of subsequent events. The Company will evaluate subsequent events through the date when the financial statements are issued.  Pursuant to ASU 2010-09 of the FASB Accounting Standards Codification, the Company as an SEC filer considers its financial statements issued when they are widely distributed to users, such as through filing them on EDGAR.

Recently issued accounting pronouncements

In January 2010, the FASB issued the FASB Accounting Standards Update No. 2010-06 “Fair Value Measurements and Disclosures (Topic 820) Improving Disclosures about Fair Value Measurements”, which provides amendments to Subtopic 820-10 that requires new disclosures as follows:

1. Transfers in and out of Levels 1 and 2. A reporting entity should disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers.

2. Activity in Level 3 fair value measurements. In the reconciliation for fair value measurements using significant unobservable inputs (Level 3), a reporting entity should present separately information about purchases, sales, issuances, and settlements (that is, on a gross basis rather than as one net number).

This Update provides amendments to Subtopic 820-10 that clarifies existing disclosures as follows:

1. Level of disaggregation. A reporting entity should provide fair value measurement disclosures for each class of assets and liabilities. A class is often a subset of assets or liabilities within a line item in the statement of financial position. A reporting entity needs to use judgment in determining the appropriate classes of assets and liabilities.

2. Disclosures about inputs and valuation techniques. A reporting entity should provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements. Those disclosures are required for fair value measurements that fall in either Level 2 or Level 3.

This Update also includes conforming amendments to the guidance on employers' disclosures about postretirement benefit plan assets (Subtopic 715-20). The conforming amendments to Subtopic 715-20 change the terminology from major categories of assets to classes of assets and provide a cross reference to the guidance in Subtopic 820-10 on how to determine appropriate classes to present fair value disclosures. The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years.

In December 2010, the FASB issued the FASB Accounting Standards Update No. 2010-28 “Intangibles—Goodwill and Other (Topic 350): When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts” (“ASU 2010-28”).Under ASU 2010-28, if the carrying amount of a reporting unit is zero or negative, an entity must assess whether it is more likely than not that goodwill impairment exists. To make that determination, an entity should consider whether there are adverse qualitative factors that could impact the amount of goodwill, including those listed in ASC 350-20-35-30. As a result of the new guidance, an entity can no longer assert that a reporting unit is not required to perform the second step of the goodwill impairment test because the carrying amount of the reporting unit is zero or negative, despite the existence of qualitative factors that indicate goodwill is more likely than not impaired. ASU 2010-28 is effective for public entities for fiscal years, and for interim periods within those years, beginning after December 15, 2010, with early adoption prohibited.

In December 2010, the FASB issued the FASB Accounting Standards Update No. 2010-29 “Business Combinations (Topic 805): Disclosure of Supplementary Pro Forma Information for Business Combinations” (“ASU 2010-29”). ASU 2010-29 specifies that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The amendments in this Update also expand the supplemental pro forma disclosures under Topic 805 to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. The amended guidance is effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. Early adoption is permitted.

Management does not believe that any other recently issued, but not yet effective accounting pronouncements, if adopted, would have a material effect on the accompanying consolidated financial statements.

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Note 3 - Pledged Deposits

6 Months Ended

Jun. 30, 2011

Other Deposit Asset Related Text

NOTE 3 – PLEDGED DEPOSITS

Pledged deposits consist of amounts held in financial institutions for (i) outstanding letters of credit and (ii) open banker’s acceptance notes payable maturing between three (3) to nine (9) months from the date of issuance.  Pledged deposits at June 30, 2011 and December 31, 2010 consisted of the following:

	June 30, 2011		December 31, 2010
Armco HK
Letters of credit (i)	$	1,048,402	$	427,553
Armet
Bank acceptance notes payable (ii)		3,867,873		1,906,684
Deposit for release of collateralized finished goods for shipment (iii)		4,771,409		7,135,727
Henan Armco
Letters of credit (iv)		2,426,597		3,174,70769
	$	12,114,281	$	12,643,671

(i) $824,578 has been released to ArmcoHK and the remaining balance of $223,824 is to be released to the Company as part of the payment toward outstanding letters of credit when those letters of credit mature, ranging from August 19, 2011 through September 28, 2011.

(ii) $2,320,724 is to be released to the Company when the related banker’s acceptance note payable matures on September 17, 2011, $1,547,179 is to be released to the Company when the related banker’s acceptance note payable matures on November 3, 2011.

(iii) $632,784 is to be released to the Company for release of collateralized finished goods for shipment and future payment of loan; $773,575 is to be released to the Company for release of collateralized finished goods for shipment and payment of loan on August 15, 2011; $1,547,149 is to be released to the Company for release of collateralized finished goods for shipment and payment of loan on September 15, 2011; $1,817,901 is to be released to the Company for release of collateralized finished goods for shipment and payment of loan on September 30, 2011

(iv) $635,603 was released to the Company as part of the payment toward fulfilled letters of credit and the remaining balance of $1,790,995 is to be released to the Company as part of the payment toward outstanding letters of credit when those letters of credit mature, ranging from May 10, 2011 through October 10, 2011.

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Note 11 - Related Party Transactions

6 Months Ended

Jun. 30, 2011

Related Party Transactions Disclosure [Text Block]

NOTE 11 – RELATED PARTY TRANSACTIONS

Advances from stockholder

Advances from stockholder at June 30, 2011 and December 31, 2010 consisted of the following:

	June 30, 2011		December 31, 2010
Advances from chairman, chief executive officer and stockholder	$	726,634	$	799,394
	$	726,634	$	799,394

The advances bear no interest and are due on demand.

Operating lease from Chairman, CEO and Stockholder

On January 1, 2006, Henan entered into a non-cancellable operating lease for its 176.37 square meter commercial office space in the City of Zhengzhou, Henan Province, PRC from the Chairman, Chief Executive Officer and significant stockholder of the Company for RMB10,000 per month, which expired on December 31, 2008 and has been extended through December 31, 2011.  Total lease payments for the interim periods ended June 30, 2011 and 2010 amounted to RMB60,000 (equivalent to $9,174 and $8,779).  Future minimum lease payments required under the non-cancelable operating lease are RMB60,000 per year (equivalent to $9,283) for 2011.

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Note 4 - Marketable Securities, Available for Sale

6 Months Ended

Jun. 30, 2011

Marketable Securities [Text Block]

NOTE 4 – MARKETABLE SECURITIES, AVAILABLE FOR SALE

On June 8, 2010, China Armco Metals, Inc. (the “Company”) entered into a Subscription Agreement (the “Subscription Agreement”) with Apollo Minerals Limited (“Apollo Minerals”), an Australian iron ore exploration company listed on the Australian Securities Exchange (ASX: AON).  Under the terms of the Subscription Agreement, the Company agreed to acquire up to a 19.9% stake in Apollo for US $3,396,658 in cash. On July 19, 2010 Apollo Minerals issued 29,250,000 shares of its common stock to the Company.  Pursuant to the Subscription Agreement, the Company received a seat on Apollo Minerals’ Board of Directors in July 2010.  The board representation continues as long as the Company maintains a minimum 12% stake in Apollo Minerals.

The Company will have the right to name one member to Apollo Mineral’s board of directors for as long as it maintains at least a 12% stake in Apollo Minerals.  Apollo Minerals intends to use the cash infusion to advance its exploration activities, to carry out processing option studies and to evaluate opportunities to access local infrastructure and other project opportunities.

Apollo Minerals also issued to the Company, five (5) year options to purchase an additional 5 million shares of common stock at $0.25 (approximately $0.20) per share, half of which will vest on the first anniversary of the initial issuance with the balance vesting on the second anniversary of the initial issuance.  The options may only be exercised in order for the Company to maintain its 19.9% stake should Apollo Minerals issue additional common shares in the future.

The Company values marketable securities using Australia quoted market prices on Apollo Mineral stock. At June 30, 2011, the estimated fair value of investment in Apollo Minerals was $2 million less than its original costs.  The Company intends to hold these shares and the management of the Company concluded the decline in the fair value was temporary and recorded the unrealized loss of marketable securities of $2,109,512 to other comprehensive income (loss) on the accompanying consolidated balance sheet at June 30, 2011 and a gain from foreign exchange rate change of $92,869 in other income for the interim period then ended.

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Note 14 - Derivative Instruments and Fair Value of Financial Instruments

6 Months Ended

Jun. 30, 2011

Derivatives and Fair Value [Text Block]

NOTE 14 – DERIVATIVE INSTRUMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS

(i) Warrants issued in 2008

Description of warrants

In connection with the four (4) rounds of private placements from July 25, 2008 through August 8, 2008 (the “2008 Unit Offering”), the Company issued (i) warrants for 2,486,649 shares to the investors and (ii) warrants for 242,264 shares to the brokers, or 2,728,913 shares in aggregate (“2008 Warrants”) with an exercise price of $5.00 per share and an expiration date of August 31, 2013, all of which have been earned upon issuance.  The fair value of 2008 warrants, estimated on the date of grant, was $5,097,404, which was originally recorded as additional paid-in capital, using the Black-Scholes option-pricing model with the following weighted-average assumptions:

Expected option life (year)	5.00
Expected volatility	89.00%
Risk-free interest rate	3.23%
Dividend yield	0.00%

The remaining balance of the net proceeds of $1,523,277 has been assigned to Common stock.

Derivative analysis

The exercise price of 2008 warrants and the number of shares issuable upon exercise is subject to reset adjustment in the event of stock splits, stock dividends, recapitalization, most favored nation clause and similar corporate events.  Pursuant to the most favored nation provision of the 2008 Unit Offering, if the Company issues any common stock or securities other than the excepted issuances,  to any person or entity at a purchase or exercise price per share less than the share purchase price of the 2008 Unit Offering without the consent of the subscriber holding purchased shares, warrants or warrant shares of the 2008 Unit Offering, then the subscriber shall have the right to apply the lowest such purchase price or exercise price of the offering or sale of such new securities to the purchase price of the purchased shares then held by the subscriber (and, if necessary, the Company will issue additional shares), the reset adjustments are also referred to as full reset adjustments.

Because these warrants have full reset adjustments tied to future issuances of equity securities by the Company, they are subject to derivative liability treatment under Section 815-40-15 of the FASB Accounting Standard Codification (“Section 815-40-15”) (formerly FASB Emerging Issues Task Force (“EITF”) 07-5). Section 815-40-15 became effective for the Company on January 1, 2009 and as of that date the Warrants issued in the 2008 Unit Offering have been measured at fair value using a lattice model at each reporting period with gains and losses from the change in fair value of derivative liabilities recognized on the consolidated statement of income and comprehensive income.

Valuation of derivative liability

The Company’s 2008 warrants do not trade in an active securities market, as such, the Company developed a lattice model that values the derivative liability of the warrants based on a probability weighted discounted cash flow model. This model is based on future projections of the various potential outcomes. The features that were analyzed and incorporated into the model included the exercise feature and the full ratchet reset.

The fair value of the 2008 warrants treated as derivatives were computed using the following assumptions:

	December 31, 2010	December 31, 2009
Expected option life (year)	2.50		3.50
Expected volatility	159%		169%
Risk-free interest rate	1.02%		2.61%
Dividend yield	0.00%		0.00%

The risk-free interest rate is based on a yield curve of U.S treasury interest rates on the date of valuation based on the contractual life of the warrant remaining. Expected dividend yield is based on our dividend history and anticipated dividend policy. Expected volatility is based on historical volatility for our common stock. The Company currently has no reason to believe future volatility over the expected remaining life of these warrants is likely to differ materially from historical volatility. The expected life is based on the remaining term of the warrants.

Extinguishment of derivative warrant liability

During the three months ended March 31, 2010, certain holders of 2008 warrants to purchase 1,031,715 shares of the Company’s common stock reached agreements with the Company effective as of January 1, 2010, whereby the Company waived its right to offer or sell additional shares of its common stock below $5.00 per share in the future and the 2008 warrant holders waived their anti-dilution or commonly known as most favored nation clause, for which the Company reclassified $1,292,227 of the derivative warrant liability to additional paid-in capital.

Exercise of warrants

On January 30, 2009, the Company issued 5,000 shares of its common stock for cash at $5.00 per share and received a cash payment of $25,000 in connection with the exercise of the 2008 warrants for 5,000 shares with an exercise price of $5.00 per share by one (1) investor and 2008 warrants holder.

During the first quarter of 2010, the Company issued 1,324,346 shares of its common stock for cash at $5.00 per share and received cash of $6,621,730 in connection with the exercise of the warrants to purchase 1,324,346 shares with an exercise price of $5.00 per share to 50, 2008 warrant holders.  In addition, the Company issued 78,217 shares of its common stock in connection with the exercise of the 2008 warrants to purchase 167,740 shares with an exercise price of $5.00 per share on a cashless basis to 13, 2008 warrant holders.

During April 2010, four (4) 2008 warrant holders exercised their warrants to purchase 13,806 shares of the Company’s common stock at an exercise price of $5.00 per share resulting in cash proceeds of $69,030 to the Company.

Warrants outstanding

As of June 30, 2011 warrants to purchase 1,218,021 shares of Company common stock remain outstanding.

The table below summarizes the Company’s derivative warrant activity through June 30, 2011:

	2008 Warrant Activities											APIC			(Gain) Loss
	Derivative Shares			Non-derivative Shares		Total Warrant Shares			Fair Value of Derivative Warrants			Reclassification of Derivative Liability			Change in Fair Value of Derivative Liability
Derivative warrant at 12/31/2009		2,728,913			-		2,728,913		$	(3,417,974	)	$	-		$	166,025
Exercise of warrants		(5,000	)		-		(5,000	)		6,263			(6,263	)		-
Exercise of warrants		(1,324,346	)		-		(1,324,346	)		1,658,748			(1,658,748	)		-
Exercise of warrants – Cashless		(167,740	)		-		(167,740	)		210,095			(210,095	)		-
Total warrant exercised		(1,497,086	)		-		(1,497,086	)		1,875,106			(1,875,106	)		-
Extinguishment of warrant liability resulting from waiver of anti-dilution		(1,031,715	)		1,031,715		-			1,292,227			(1,292,227	)		-
Derivative warrants remaining		200,112			-		-			(250,641	)		-			-
Mark to market		-			-					(321,752	)		-			321,752
Derivative warrant at March 31, 2010		200,112			1,031,715		1,231,827			(572,393	)		-			321,752
Exercise of warrants in April 20, 2010		(13,806	)		-		(13,806	)		21,229			(21,229	)		-
Derivative warrants remaining		186,306			-		186,306			(551,164	)		-			-
Mark to market		-			-					427,875			-			(427,875	)
Derivative warrant at June 30, 2010		186,306			1,031,715		1,218,021			(123,289	)		-			(106,123	)
Mark to market		-			-					(13,211	)		-			13,211
Derivative warrant at September 30, 2010		186,306			1,031,715		1,218,021			(136,500	)		-			(92,912	)
Mark to market		-			-					(1643	)		-			1643
Derivative warrant at December 31, 2010		186,306			1,031,715		1,218,021			(138,143	)		-			(91,269	)
Mark to market		-			-					51,223			-			(51,223	)
Derivative warrant at March 31, 2011		186,306			1,031,715		1,218,021			(86,920	)		-			(51,223	)
Mark to market										76,897						(76,897	)
Derivative warrant at June 30, 2011		186,306			1,031,715		1,218,021			(10,023	)					(128,120	)

(ii) Warrants issued in April 2010

Description of warrants

In connection with the sale of 1,538,464 shares of its common stock at $6.50 per share or $10,000,016 in gross proceeds to nine (9) accredited and institutional investors on April 20, 2010, the Company issued five (5) year common stock purchase warrants to purchase an additional 1,538,464 shares of its common stock at $7.50 per share (“2010 Warrants”) exercisable commencing 181 days following the date of issuance.  At the closing of the private offering, the Company paid Rodman & Renshaw, LLC, a FINRA member firm that served as placement agent for the Company in the offering, (i) a fee of $500,000 as compensation for their services and (ii) five-year common stock purchase warrants to purchase 76,923 shares of the Company’s common stock at $7.50 per share exercisable commencing 181 days following the date of issuance, as well as a $15,000 non-accountable expense allowance to one of the nine (9) investors in the offering.

Warrants valuation and related assumptions

The 2010 warrants were valued with the following assumptions:

- The underlying NYSEAmex stock price $6.95 was used as the fair value of the common stock as of 4/20/10;

- The Company’s stock price would fluctuate with its projected volatility. The projected volatility curve for each valuation period was based on the historical volatility of 14 comparable companies in the metal/industrial metals industries: At April 20, 2010 one (1) through five (5) years were 76%, 134%, 155%, 167% and 182%, respectively.

- The Holder would exercise the warrants at maturity if the stock price was above the exercise price.

- Dilutive reset events projected to occur are based on no future projected capital needs;

- The Holder would exercise the warrants as they become exercisable at target prices of $11.25 for the 2010 Offering, and lowering such target as the warrants approaches maturity.

- 1,615,387 warrants have been issued on 4/20/10.

The fair value of the 2010 warrants, estimated on the date of issuance, was $2,483,938.

Derivative analysis

The warrants issued as part of the April 20, 2010 private placement were analyzed to determine the appropriate treatment under ASC 815-40. The warrants meet the provisions of EITF 07-5 (ASC 815-40) to be considered indexed to the Company’s own stock. In addition, the warrants meet all the criteria in EITF 00-19 (ASC 815-40) to be accounted for as equity.

Warrants outstanding

As of June 30, 2011 warrants to purchase 1,615,387 shares of its common stock remain outstanding.

(iii) Warrant activities

The table below summarizes the Company’s derivative warrant activities through June 30, 2011:

	Number of Warrant Shares			Exercise Price Range Per Share		Weighted Average Exercise Price		Fair Value at Date of Issuance		Aggregate Intrinsic Value
Balance, December 31, 2009		2,723,913		$	5.00	$	5.00	$	-	$	-
Granted		1,615,387			7.50		-		2,483,938		-
Canceled for cashless exercise		(89,523	)		- -		-		-		-
Exercised (Cashless)		(78,217	)		-		-		-		-
Exercised		(1,338,152	)		5.00		5.00		-		-
Expired		-			-		-		-		-
Balance, December 31, 2010		2,833,408		$	6.43	$	4.14	$	-	$	-
Granted		-			-		-		-		-
Canceled for cashless exercise		(-	)		- -		-		-		-
Exercised (Cashless)		(-	)		-		-		-		-
Exercised		(-	)		-		-		-		-
Expired		-			-		-		-		-
Balance, June 30, 2011		2,833,408		$	6.43	$	4.14	$	-	$	-
Earned and exercisable, June 30, 2011		2,833,408		$	6.43	$	4.14	$	-	$	-
Unvested, June 30, 2011		-		$	-	$	-	$	-	$	-

The following table summarizes information concerning outstanding and exercisable warrants as of June 30, 2011:

	Warrants Outstanding				Warrants Exercisable
Range of Exercise Prices	Number Outstanding	Average Remaining Contractual Life  (in years)		Weighted Average Exercise Price	Number Exercisable	Average Remaining Contractual Life (in years)		Weighted Average Exercise Price
$5.00	1,218,021	2.34	$	5.00	1,218,021	2.34	$	5.00
$7.50	1,615,387	4.06	$	7.50	1,615,387	4.06	$	7.50
$5.00 - $7.50	2,833,408	3.32	$	6.43	2,833,408	3.32	$	6.43

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Consolidated Statement of Stockholders' Equity (USD $)	Total	Exercise OfWarrants [Member]	Waiver OfAnti Dilution Provision OfWarrants [Member]	April20 [Member]	June30 [Member]	China Direct [Member]	Bespoke [Member]	Chaoyang Steel [Member]	HCI First Quarter [Member]	HCI Second Quarter [Member]	March31 Cashless [Member]	June30 [Member]	Common Stock [Member]	Common Stock [Member] April20 [Member]	Common Stock [Member] June30 [Member]	Common Stock [Member] China Direct [Member]	Common Stock [Member] Bespoke [Member]	Common Stock [Member] Chaoyang Steel [Member]	Common Stock [Member] HCI First Quarter [Member]	Common Stock [Member] HCI Second Quarter [Member]	Common Stock [Member] March31 Cashless [Member]	Common Stock [Member] March31 [Member]	Common Stock [Member] June30 [Member]	Additional Paid-in Capital [Member]	Additional Paid-in Capital [Member] Exercise OfWarrants [Member]	Additional Paid-in Capital [Member] Waiver OfAnti Dilution Provision OfWarrants [Member]	Additional Paid-in Capital [Member] April20 [Member]	Additional Paid-in Capital [Member] June30 [Member]	Additional Paid-in Capital [Member] China Direct [Member]	Additional Paid-in Capital [Member] Bespoke [Member]	Additional Paid-in Capital [Member] Chaoyang Steel [Member]	Additional Paid-in Capital [Member] HCI First Quarter [Member]	Additional Paid-in Capital [Member] HCI Second Quarter [Member]	Additional Paid-in Capital [Member] March31 Cashless [Member]	Additional Paid-in Capital [Member] March31 [Member]	Additional Paid-in Capital [Member] June30 [Member]	Retained Earnings [Member]	Accumulated Net Unrealized Investment Gain (Loss) [Member]	Foreign Currency Translation Gain Loss [Member]
Balance at Dec. 31, 2009	$ 17,125,372												$ 10,310											$ 1,880,466													$ 14,936,915		$ 297,681
Balance (in Shares) at Dec. 31, 2009													10,310,699
Issuance of common stock upon warrant exercise				9,112,974	7,000,000						6,621,730	69,030		1,538	1,400						1,325	78	14				9,111,436	6,998,600						6,620,405	(78)	69,016
Issuance of common stock upon warrant exercise (in Shares)														1,538,464	1,400,000						1,324,346	78,217	13,806
Issuance of common stock for consulting services						392,800	78,525	244,997								80	23	67											392,720	78,502	244,930
Issuance of common stock for consulting services (in Shares)																80,000	22,500	66,666
Issuance of restricted stock to Director pursuant to 2009 Stock Incentive Plan for future services valued at $3.28 per share granted on September 16, 2010	19,500												6											19,494
Issuance of restricted stock to Director pursuant to 2009 Stock Incentive Plan for future services valued at $3.28 per share granted on September 16, 2010 (in Shares)													6,250
Issuance of restricted stock to Director	(19,500)																							(19,500)
Amortization of deferred compensation	244,043																							244,043
Issuance of stock options to an employee pursuant to 2009 Stock Incentive Plan for services on October 6, 2010	138,000																							138,000
Net Income	(2,225,876)																																				(2,225,876)
Change in unrealized loss on marketable securities	(506,278)																																					(506,278)
Foreign currency translation gain	1,345,886																																						1,345,886
Total comprehensive income (loss)	(1,386,268)
Extinguishment of derivative liability associated with the exercise of warrants to purchase common stock for the three-month period ending March 31, 2010	1,875,106																							1,875,106
Reclassification of derivative liability		1,292,227	21,229																						1,292,227	21,229
Balance at Dec. 31, 2010	42,829,765												14,841											28,966,596													12,711,039	(506,278)	1,643,567
Balance (in Shares) at Dec. 31, 2010	14,840,948												14,840,948
Issuance of common stock for consulting services	134,999							89,666	29,051	14,688								33	11	11											89,633	29,040	14,677
Issuance of common stock for consulting services (in Shares)																		33,333	10,800	10,800
Issuance of common shares to an employee for future services	27,400												10											27,390
Issuance of common shares to an employee for future services (in Shares)													10,000
Issuance of common stock to an employee pursuant to 2009 Stock Incentive Plan for services valued at $3.38 per share granted on October 6, 2010	187,180												55											187,125
Issuance of common stock to an employee pursuant to 2009 Stock Incentive Plan for services valued at $3.38 per share granted on October 6, 2010 (in Shares)													55,378
Issuance of restricted stock to Director	(27,400)																							(27,400)
Amortization of deferred compensation	132,784																							132,784
Net Income	(735,053)																																				(735,053)
Change in unrealized loss on marketable securities	(2,109,512)																																					(1,603,234)
Foreign currency translation gain	886,612																																						886,612
Total comprehensive income (loss)	(1,957,953)
Balance at Jun. 30, 2011	$ 41,876,793												$ 14,995											$ 29,465,145													$ 11,975,986	$ (2,109,512)	$ 2,530,179
Balance (in Shares) at Jun. 30, 2011	14,994,592												14,994,592

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Note 15 - Stockholders' Equity

6 Months Ended

Jun. 30, 2011

Stockholders' Equity Note Disclosure [Text Block]

NOTE 15 – STOCKHOLDERS’ EQUITY

Sale of common stock

On April 20, 2010, the Company entered into a Securities Purchase Agreement with nine (9) accredited and institutional investors for the sale of 1,538,464 shares of its common stock at an offering price of $6.50 per share resulting in gross proceeds to the Company of $10,000,016.  At closing the Company issued the investors five (5) year common stock purchase warrants to purchase an additional 1,538,464 shares of its common stock at an exercise price of $7.50 per share.  The warrants are exercisable commencing 181 days after the date of issuance.  The private offering, which was made under an exemption from the registration requirements of the Securities Act of 1933 in reliance on exemptions provided by Section 4(2) of that act and Rule 506 of Regulation D.  At closing, the Company paid Rodman & Renshaw, LLC, a FINRA member firm that served as placement agent for the Company in the offering, (i) a fee of $500,000 as compensation for its services and (ii) issued the firm five (5) year common stock purchase warrants exercisable for 76,923 shares of the Company’s common stock at an exercise price of $7.50 per share which are exercisable commencing 181 days after the date of issuance, as well as a $15,000 non-accountable expense allowance to one (1) of the investors in the offering.  The Company intends to use the net proceeds from this offering for its working capital.

Issuance of common stock for services

On May 7, 2009, the Company issued 7,000 shares of its common stock to Hayden Communications as consideration for canceling an agreement to provide IR services.  These shares were valued at $1.50 per share for total consideration of $10,500 (the estimated fair value on the date of grant).

On February 5, 2010, the Company issued 80,000 shares of its common stock to China Direct Investments, Inc. as consideration for management and accounting consulting services for the period beginning January 1, 2010 through December 31, 2010.  There is no performance commitment at the date of the agreement therefore the company will use the date(s) at which performance is complete as the measurement date(s).  The services are earned and forfeitable on a ratable basis throughout each quarter during the year.  The 20,000 shares each earned for each quarter in 2010 were valued at $9.39, $2.90, $3.47 and $3.88 per share, or $187,800, $58,000, $69,400 and $77,600 in aggregate, which was recorded as consulting fees for the relevant quarter. In aggregate, $392,800 was recorded as consulting fee for the year ended December 31, 2010.

On April 30 and July 9, 2010, the Company issued 12,500 shares and 10,000 shares, or 22,500 shares in aggregate to Bespoke Growth Partners, Inc. as consulting fees for investor relations services rendered, valued at $3.49 per share for $78,525.

On June 11, 2010 the Company entered into a Guaranty Cooperation Agreement with Henan Chaoyang Steel Co., Ltd. (“Henan Chaoyang”), a Chinese limited liability company that was 85% owned by the Company’s then member of the Board of Director, Mr. Heping Ma.  Under the terms of the guaranty, Henan Chaoyang agreed to provide loan guarantees to Armet existing and pending bank lines of credit of up to 300 million RMB in aggregate (approximately $45,400,000) for five (5) years expiring June 30, 2016.  On September 16, 2010 Mr. Ma resigned from the Company’s Board of Directors.  As consideration for the guaranty, the Company issued a designee of Henan Chaoyang 500,000 shares of its common stock, which are earned and forfeitable on a ratable basis during the term of the agreement.

33,333 shares each earned for quarters ended September 30, 2010 and December 31, 2010 were valued at $3.47 and $3.88 per share, or $115,666 and $129,332 in aggregate, which was recorded as loan guarantee expense and included in the consolidated statements of operations and comprehensive income (loss) for the relevant periods. In aggregate, $244,998 was recorded as loan guarantee expense for the year ended December 31, 2010.

33,333 common shares each earned for quarter ended March 31, 2011 and June 30, 2011 were valued at $2.61 and $1.36 per share, or $86,996 and $45,333 in aggregate, which was recorded as loan guarantee expense and included in the consolidated statements of operations and comprehensive income (loss) for the relevant periods.

On November 19, 2010, the Company entered into an investor relations consulting agreement with HCI International Inc. expiring December 31, 2011.  Either party may terminate the agreement any time during the term of the contract.  Pursuant to the agreement the Company is required to pay the investor relation firm 3,600 shares of the Company’s restricted stock per month payable at the first of each month for the 12 month service period, or 43,200 shares in aggregate for 2011 investor relations services.  10,800 shares per quarter were valued at $1.36 per share, or $14,688 in aggregate and $2.69 per share, or $29,051 in aggregate and recorded as investor relations expense for the quarterly period ended March 31, 2011 and June 30, 2011, respectively.

Stock options

On June 27, 2008, the Company entered into a share purchase agreement (the “Share Purchase Agreement”) and consummated a share purchase (the “Share Purchase”) with Armco HK and Feng Gao, who owned 100% of the outstanding shares of Armco HK.  Under the Share Purchase Agreement, the Company purchased from Ms. Gao, the sole shareholder of Armco HK, 100% of the issued and outstanding shares of Armco HK capital stock for $6,890,000 by delivery of the Company’s purchase money promissory note (the “Share Purchase”).  In addition, the Company issued to Ms. Gao a stock option entitling Ms. Gao to purchase 5,300,000 shares of our common stock, par value $.001 per share (the “Common Stock”) at $1.30 per share expiring on December 31, 2008 and 2,000,000 shares at $5.00 per share expiring on June 27, 2010, vested immediately (the “Gao Option”).  On August 12, 2008, Ms. Gao exercised her option to purchase and the Company issued 5,300,000 Shares in exchange for the $6,890,000 note owed to Ms. Gao.  Accordingly, the 5,300,000 Shares issued to Ms. Gao represented approximately 69.7% of the issued and outstanding Shares of the Company giving effect to the cancellation of 7,694,000 Shares owned by Mr. Cox.

The fair value of the stock options issued in June 2008 under Share Purchase Agreement using the Black-Scholes Option Pricing Model was $0 at the date of grant.  For the interim periods ended March 31, 2010 and 2009, the Company did not grant any stock options.

On April 12, 2010, Mr. Kexuan Yao purchased the stock option to purchase 2,000,000 shares of the Company’s common stock at $5.00 per share on June 27, 2008 originally granted to and owned by Ms. Feng Gao pursuant to a share purchase agreement to consummate the reverse merger capital transaction with Armco HK.  In addition, on April 12, 2010 and June 25, 2010, Mr. Yao exercised part of the option and purchased 1,000,000 and 400,000 shares of the Company’s common stock at $5.00 per share resulting in net proceeds of $4,500,000, forgiveness of debt of $500,000 and $2,000,000 to the Company, respectively. The balance of the stock option to purchase the remaining 600,000 common shares expired at June 27, 2010.

Stock incentive plan

On October 26, 2009, the Board of Directors of the Company adopted the 2009 Stock Incentive Plan, whereby the Board of Directors authorized 1,200,000 shares of the Company’s common stock to be reserved for issuance (the “2009 Stock Incentive Plan”). The purpose of the 2009 Stock Incentive Plan is to advance the interests of the Company’s company by providing an incentive to attract, retain and motivate highly qualified and competent persons who are important to us and upon whose efforts and judgment the success of the company is largely dependent. Grants to be made under the Plan will be limited to the Company’s employees, including employees of the Company’s subsidiaries, the Company’s directors and consultants to the Company. The recipient of any grant under the Plan, and the amount and terms of a specific grant, will be determined by the board of directors.  Should any option granted or stock awarded under the Plan expire or become un-exercisable for any reason without having been exercised in full or fail to vest, the shares subject to the portion of the option not so exercised or lapsed will become available for subsequent stock or option grants.

On May 19, 2011, the Company’s Board of Directors adopted and approved the Amended and Restated 2009 Stock Incentive Plan, subject to stockholder approval at the Annual Meeting.  At the 2011 Annual Meeting of Stockholders (the “Annual Meeting”) of the Company held on July 9, 2011, the Company’s stockholders approved an amendment and restatement of the Company’s 2009 Stock Incentive Plan (the “Amended and Restated 2009 Stock Incentive Plan”).  The primary purpose for the Amended and Restated 2009 Stock Incentive Plan was to increase the number of shares of the Company’s common stock available for issuance thereunder by 1,000,000 shares to 2.200,000 shares of the Company’s common stock.

On October 26, 2009, the Company awarded 200,000 shares of its restricted common stock, par value $.001 per share, pursuant to the 2009 Stock Incentive Plan, to Mr. Kexuan Yao, the Company’s Chief Executive Officer.  The shares awarded to Mr. Yao will vest 66,667 shares on December 15, 2010, 66,667 shares on December 15, 2011 and 66,666 shares on December 15, 2012.  These shares were valued at $3.28 per share or $656,000 on the date of grant and were amortized over the vesting period.  In aggregate, $54,667 was recorded as stock based compensation for the interim period ended March 31, 2011 each.

On October 26, 2009, the Company agreed to pay Mr. William Thomson the sum of $20,000 and awarded 6,250 shares of the Company’s restricted common stock to Mr. William Thomson in conjunction with his appointment to the Company's board of directors.  The shares awarded to Mr. Thompson will vest 25% on March 31, 2010, 25% on June 30, 2010, 25% on September 30, 2010 and 25% on December 31, 2010.  The restricted stock vests only if Mr. Thomson is still a director of the Company on the vesting date (with limited exceptions), and the shares are eligible for the payment of dividends, if the Board of Directors was to declare dividends on the Company’s common stock.  These shares were valued at $3.28 per share or $20,500 on the date of grant and were amortized over the vesting period.  In aggregate, all of the $20,500 was earned and recorded as stock based compensation for the year ended December 31, 2010. The Company and Mr. William Thomson are in the process of entry into the new director service agreement for 2011.

On September 16, 2010, the Company agreed to pay Mr. Jinping Chan the sum of $20,000 and awarded 6,250 shares of the Company’s restricted common stock to Mr. Chan in conjunction with his appointment to the Company's board of directors.  The shares awarded to Mr. Chan will vest 50% on March 10, 2011 and 50% on September 10, 2011.  The restricted stock vests only if Mr. Chan is still a director of the Company on the vesting date (with limited exceptions), and the shares are eligible for the payment of dividends, if the Board of Directors was to declare dividends on the Company’s common stock. These shares were valued at $3.12 per share or $19,500 on the date of grant and were amortized over the vesting period.  In aggregate, $4,875 was recorded as stock based compensation for the three months ended March 31, 2011.

On October 5, 2010, the Company awarded a stock option to purchase 40,000 shares of the Company’s common stock exercisable at $5.00 per share to an employee in conjunction with his employment agreement as the Company's Director of Administration, vested upon grant.  The fair value of option granted, estimated on the date of grant, was $138,000, using the Black-Scholes option-pricing model with the following weighted-average assumptions:

Expected option life (year)	5.00
Expected volatility	187%
Risk-free interest rate	1.21%
Dividend yield	0.00%

The Company recorded the entire amount of $138,000 as stock based compensation expense on the date of grant.

On January 25, 2011, the Company issued 55,378 shares of its common shares to certain of its employees for their 2010 services of approximately $187,100 in lieu of cash, which was recorded as compensation expenses in 2010 and credited the same to the accrued expenses at December 31, 2010.

On March 29, 2011, the Company awarded 10,000 shares of the Company’s common stock to an employee for his 2011 employment service vesting on July 1, 2011. These shares were valued at $2.74 per share or $27,400 on the date of grant and are being amortized over the service period of one year in 2011. $6,850 was recorded as stock based compensation expense for the six months ended June 30, 2011.

The table below summarizes the Company’s Amended and Restated 2009 Stock Incentive Plan activities as of June 30, 2011:

	Number of Shares or Options		Fair Value at Date of Grant
Balance, December 31, 2009		206,250	$	676,500
Granted – shares		6,250		19,500
Canceled – shares		-		-
Granted – options		40,000		138,000
Canceled – options		-		-
Balance, December 31, 2010		252,500		834,000
Granted – shares		65,378		214,580
Canceled – shares		-		-
Granted – options		-		-
Canceled – options		-		-
Balance, June 30, 2011		317,878	$	1,048,580
Vested, June 30, 2011		211,319		605,365
Unvested, June 30, 2011		106,559	$	403,215

As of June 30, 2011, there were 1,882,122 shares of common stock remaining available for issuance under the Amended and Restated 2009 Stock Inceptive Plan.

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Note 17 - Commitments and Contingencies

6 Months Ended

Jun. 30, 2011

Commitments and Contingencies Disclosure [Text Block]

NOTE 17 – COMMITMENTS AND CONTINGENCIES

Uncommitted trade credit facilities

The Company entered into uncommitted trade credit facilities with certain financial institutions.  Substantially all of the uncommitted trade credit facilities were guaranteed by Mr. Yao, the Company’s chairman, Chief Executive Officer and principal stockholder.  The uncommitted trade credit facilities at June 30, 2011 were as follows:

	Date of Expiration	Total Facilities		Facilities Used		Facilities Available
Armco HK
DBS (Hong Kong) Limited (i)	August 26, 2011	$	20,000,000	$	0.00	$	20,000,000
ING Bank, N.V. Hong Kong Branch (ii)	August 12, 2011		20,000,000		26,740,000		-
RZB (Beijing) Branch (iii)	October 31, 2011		15,000,000		765,000		14,235,000
Henan Armco
Guangdong Development Bank Zhengzhou Branch (iv)	June 17, 2012		10,830,046		2,936,768		7,893,278
China CITIC Bank Zhengzhou Branch (v)	March 15, 2012		7,735,747		0.00		7,735,747
China Minsheng Bank Zhengzhou Branch (vi)	October 13, 2011		3,094,299		2,128,364		965,935
Armet
Bank of China Lianyungang Branch (vii)	September 3, 2012		10,830,046		8,509,322		2,320,724
Bank of China Lianyungang Branch (viii)	October 29, 2011		3,094,299		773,575		2,320,724
Bank of Communications Lianyungang Branch (ix)	June 30, 2013		11,139,476		5,105,593		6,033,883
		$	101,723,913	$	51,710,602	$	61,505,291

(i) On August 6, 2010, Armco HK entered into a Banking Facilities Agreement with DBS Bank (Hong Kong) Limited of $20,000,000 for issuance of commercial letters of credit in connection with the Company’s purchase of metal ore.  The Company pays interest at LIBOR or DBS Bank’s cost of funds plus 2.50% per annum on issued letters of credit in addition to an export bill collection commission equal to 1/8% of the first $50,000 and 1/16% of the balance and an opening commission of 1/4% on the first $50,000 and 1/16% of the balance for each issuance.  Amounts advanced under this facility are repaid from the proceeds of the sale of metal ore.  The lender may terminate the facility at anytime at its sole discretion. The facility is secured by the charge on cash deposit of the borrower, the borrower’s restricted pledged deposit in the minimum amount of 3% of the letter of credit amount, the Company’s letter of comfort and the guarantee of Mr. Kexuan Yao. 

(ii) On August 12, 2010, Armco HK obtained a $20,000,000 line of credit from ING Bank Hong Kong Branch for issuance of letters of credit to finance the purchase of metal ore along with a sub-limit facility for freight advance of $3,000,000.  The letters of credit require the Company to pledge cash equal to 5% of the letter of credit, subject to increase by the lender in the event of price fluctuations and market demand while the letter of credit remains open.  The Company pays interest at the lender’s cost of funds plus 250 basis points per annum on issued letters of credit in addition to an export bill collection commission equal to 1/4% of the first $50,000 and 1/16% of the balance for each issuance.  Amounts advanced under this line of credit are repaid from the proceeds of the sale of metal ore.  The lender may terminate the facility at anytime at its sole discretion. The facility is secured by the Company’s restricted cash deposit in the minimum amount of 5% of the letter of credit amount, the Company’s guarantee, the guarantee of Mr. Kexuan Yao and a security interest in the contract for the purchase of the ore for which the letter of credit has been issued and the contract for the sale of the ore. ING verbally approved the increase of trade credit facilities to $26,740,000 to facilitate one purchase on a temporary basis.

(iii) On July 23, 2010, Armco HK entered into Amendment No. 1 to the March 25, 2010 uncommitted Trade Finance Facility with RZB Austria Finance (Hong Kong) Limited.  The amendment provides for the issuance of $15,000,000 of commercial letters of credit in connection with the purchase of metal ore, an increase of $5,000,000 over the amounts provided for in the March 25, 2010 facility.  The Company pays interest at 200 basis points per annum plus the lender’s cost of funds per annum on issued letters of credit in addition to fees upon issuance of the letter of credit of 1/16% for issuance commissions, negotiation commissions, commission-in-lieu and collection commissions.  Amounts advanced under this facility are repaid from the proceeds of the sale of metal ore.  The lender may, however, terminate the facility at anytime or at its sole discretion upon the occurrence of any event which causes a material market disruption in respect of unusual movement in the level of funding costs to the lender or the unusual loss of liquidity in the funding market. The lender has the sole discretion to decide whether or not such event has occurred.  The facility is secured by restricted cash deposits held by the lender, the personal guarantee of Mr. Kexuan Yao, the Company’s guarantee, and a security interest in the contract for the purchase of the ore for which the letter of credit has been issued and the contract for the sale of the ore.

(iv) On June 18, 2011, Henan Armco obtained a RMB 70,000,000 (approximately $10,800,000) line of credit from Guangdong Development Bank Zhengzhou Branch for issuance of letters of credit to finance the purchase of metal ore.  The Company pays interest at 120% of the applicable base rate for lending published by the People’s Bank of China (“PBC”) at the time the loan is made on issued letters of credit.  The facility is secured by the guarantee provided by Mr. Kexuan Yao and Armet jointly and the pledge of movable assets provided by the borrower. Amounts advanced under this line of credit are repaid from the proceeds of the sale of metal ore. The term of the facility is one year.

(v) On April 27, 2011, Henan Armco obtained a RMB 50,000,000 (approximately $7,700,000) line of credit from China CITIC Bank, Zhengzhou Branch, for issuance of letters of credit to finance the purchase of metal ore and scrap metal expiring one (1) year from the date of issuance. The letters of credit require the Company to pledge cash deposits equal to 20% of the letter of credit for letters of credit at sight, or 30% for term letters of credit.  Term letters of credit are limited to no more than 90 days. The interest rates are variable depending on the lender’s cost of funds at the time when the letter of credit is issued. The facility is guaranteed by Armet and Mr. Kexuan Yao, the Company’s Chairman and Chief Executive Officer.

(vi) On October 13, 2010, Henan Armco obtained a RMB 20,000,000 (approximately $3,000,000) line of credit from China Minsheng Bank, Zhengzhou Branch, for issuance of letters of credit to finance the purchase of metal ore and scrap metal expiring one (1) year from the date of issuance. The facility is guaranteed by Armet and Mr. Kexuan Yao, the Company’s Chairman and Chief Executive Officer.

(vii) On September 4, 2009, Armet entered into a line of credit facility (“Line of Credit”) in the amount of RMB 70,000,000 (approximately $10.7 million) from Bank of China, Lianyungang Branch expiring September 3, 2012, which can be drawn in the form of long-term debt or a bank acceptance payable.  The facility is to finance the construction of Armet’s metal recycling facility. Armet pays interest at 105% of the applicable base rate for lending published by the People’s Bank of China (“PBOC”) at the time the loan is drawn down, as adjusted annually. The line of credit facility is collateralized by Armet’s building, equipment and land use right and the guarantees provided by Mr. Kexuan Yao, Mr. Yi Chu, Henan Armco and Henan Chaoyang, respectively.

(viii) On October 29, 2010, Armet entered into a line of facility in the amount of RMB20,000,000 (approximately $3.0 million) from Bank of China, Lianyungang Branch for the purchase of raw materials. The term of the facility is 12 months with interest at 5.838% per annum. The facility is secured by the guarantees provided by Mr. Kexuan Yao, Mr. Yi Chu, Henan Armco and Henan Chaoyang, respectively.

(ix) On July 1, 2011, Armet obtained a RMB 72,000,000 (approximately $11.1 million) line of credit from Bank of Communications, Lianyungang Branch expiring two years from the date of issuance, for issuance of letters of credit in connection with the purchase of scrap metal. The letters of credit require Armet to pledge cash deposit equal to 20% of the letter of credit for letters of credit at sight, or 30% for other domestic letters of credit and for extended domestic letters of credit, the collateral of inventory equal to 166% of the letter of credit. The facility is secured by Armet inventories and guarantee provided by Mr. Kexuan Yao, the Company’s Chairman and Chief Executive Officer.

Loan guarantee

On June 11, 2010 the Company entered into a Guaranty Cooperation Agreement with Henan Chaoyang to provide additional liquidity to meet anticipated capital requirements of the recently launched Armet scrap metal recycling facility and the expansion of its metal ore trading business in the coming years.  Under the terms of this guaranty, Henan Chaoyang agreed to provide up to RMB 300 million (approximately $46,400,000) loan guarantees to the Company’s subsidiary, Armet, for five (5) years for the following approved bank loans and credit lines and pending application of bank loans and line of credits:

● Bank of China Lianyungang Branch’s project loan in the amount of RMB 90 million (approximately $13.4 million) which was guaranteed in 2009,

● Bank of Communications Lianyungang Branch loan in the amount of RMB 50 million (approximately $7.5 million) which was approved on June 10, 2010 and is in the process of closing,

● Bank of Jiangsu loan in the amount of RMB 30 million (approximately $4.5 million) which is pending lender approval, and

● Bank of China’s additional loan for working capital of RMB 130 million (approximately $19.4 million) which is pending lender approval.

Under the terms of the Guaranty Cooperation Agreement, the Company has the right to apply to other banks for credit lines at the same or lesser amounts if the pending applications are not approved, but the Company needs the consent of Henan Chaoyang to apply to other banks for credit lines.

As consideration for the guaranty, the Company issued to Xianjun Ma, a designee of Henan Chaoyang, 500,000 shares of its common stock.  The shares are earned ratably over the term of the agreement, and the unearned shares are forfeitable in the event of nonperformance by the guarantor.

Mr. Heping Ma, a former member of the Company’s Board of Directors, is the founder, Chairman and owns 85% equity interest of Henan Chaoyang.  On September 16, 2010, Mr. Ma resigned from the Company’s Board of Directors.  This transaction was approved by the members of Board of Directors of the Company who were independent in the matter in accordance with the Company’s Related Persons Transaction Policy.

Legal proceedings

The Company and certain of its officers and directors were named as parties to a lawsuit filed on September 16, 2010 in the U.S. District Court, District of Nevada (Case No.: 2:10-cv-01581-JCM-RJJ). The complaint, brought by Crawford Shaw, an alleged shareholder of the Company, sought unspecified money damages, against the Company and certain officers and directors of the Company relating primarily to an alleged omission regarding Mr. Kexuan Yao’s pledge of his personal stock.

On October 12, 2010, the Company filed a motion to dismiss the complaint filed by Mr. Shaw on grounds that, among other things, the Complaint failed to state a claim for relief. On January 24, 2011, United States District Judge Mahan granted the Company’s motion to dismiss the complaint against the Company without prejudice. On March 8, 2011, the Court dismissed the law suit against the Company’s officers and directors without prejudice on grounds that the plaintiff failed to serve the complaint.

Operating leases

(i) Operating lease for San Mateo office

On December 17, 2010, China Armco entered into a non-cancelable operating lease for office space that will expire on December 31, 2013.  Future minimum payments required under this non-cancelable operating lease were as follows:

Year ending December 31:
2011	$	21,867
2012		44,916
2013		46,098
	$	112,881

(ii) Operating lease for Armco Shanghai office

On July 16, 2010, Armco Shanghai entered into a non-cancelable operating lease for office space that will expire on July 15, 2012.  Future minimum payments required under this non-cancelable operating lease were as follows:

Year ending December 31:
2011	$	45,984
2012		48,698
	$	94,682

(iii) Operating lease of property, plant and equipment and facilities

On June 24, 2011, Armet entered into a non-cancelable operating lease agreement with an independent third party for property, plant, equipment and facilities that will expire one year from date of signing.  Armet is required to pay RMB 30 (equivalent to $4.64) per metric ton of scrap metal processed at this facility over the term of the lease.  The fee will be paid annually and necessary adjustment will be made at the end of term.

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Consolidated Statements of Cash Flows (USD $)	6 Months Ended		12 Months Ended
	Jun. 30, 2011	Jun. 30, 2010	Dec. 31, 2010
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$ (735,053)	$ (194,408)	$ (2,225,876)
Depreciation expense	1,322,537	60,757
Amortization expense	24,287	23,056
Change in fair value of derivative liability	(128,120)	(610,127)
Gain on foreign exchange rate change on investment	(92,869)
Stock based compensation	311,523	337,407
Bank acceptance notes receivable	(154,715)
Accounts receivable	18,900,255	16,419,615
Inventories	(2,995,412)	(3,315,143)
Advance on purchases	(4,870,851)	(1,941,706)
Prepaid value added taxes		(1,342,876)
Prepayments and other current assets	2,809,624	2,715,506
Accounts payable	(1,386,949)	3,124,133
Customer deposits	7,121,994	(1,183,590)
Taxes payable	(956,651)	(1,537,208)
Accrued expenses and other current liabilities	(5,263,344)	(422,314)
NET CASH PROVIDED BY OPERATING ACTIVITIES	13,906,256	12,133,102
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from release of pledged deposits	27,057,004	3,146,131
Payment made towards pledged deposits	(26,247,324)	(3,945,268)
Purchase of marketable securities		(3,656,981)
Purchases of property and equipment	(1,263,008)	(10,641,249)
NET CASH USED IN INVESTING ACTIVITIES	(453,328)	(15,097,367)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from loans payable	45,707,764	9,532,567
Repayment of loans payable	(61,873,516)	(26,574,054)
Banker's acceptance notes payable	1,918,465
Repayment of capital lease obligation	(388,186)
Proceeds from long-term debt		1,468,731
Repayment of long-term debt		(2,203,096)
Advances from (to) Chairman and CEO	(72,760)	339,829
Proceeds from exercise of warrants		6,690,760
Proceeds from exercise of options		7,000,000
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES	(14,708,233)	5,367,710
EFFECT OF EXCHANGE RATE CHANGES ON CASH	(17,356)	17,899
NET CHANGE IN CASH	(1,272,661)	2,421,344
Cash at beginning of period	3,097,917	743,810	743,810
Cash at end of period	1,825,255	3,165,154	3,097,917
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:
Interest paid	963,428	361,777
Income taxes paid	$ 1,205,932	$ 404,897

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Note 9 - Loans Payable

6 Months Ended

Jun. 30, 2011

Loans Payable [Text Block]

NOTE 9 – LOANS PAYABLE

Loans payable at June 30, 2011 and December 31, 2010 consisted of the following:

	June 30, 2011		December 31, 2010
Armco HK
Loan payable to RZB Austria Finance (Hong Kong) Limited, collateralized by certain of the Company’s inventory, guaranteed by the Company’s Chairman and Chief Executive Officer, with interest at the bank’s cost of funds plus 200 basis points, per annum, payable monthly, with principal due and paid on January 26, 2011.		-		2,145,246
Loan payable to ING Bank, Hong Kong Branch, in the form of letters of credits, secured by (i) pledged deposits equal to 5% of the letters of credits, (ii) guarantee from China Armco Metals, Inc., (iii) guarantee by the Company’s Chairman and Chief Executive Officer, and (iv) assignment of specific receivables, with interest at the bank’s cost of funds plus 250 basis points, per annum, payable monthly with principal due and paid on January 3, 2011.		-		11,198,830
Unsecured loan payable to Fremery Holdings, Ltd., with interest at 15% per annum, with principal and interest due March 26, 2011 and paid in full by March 23, 2011.		-		1,500,000
Armet
Loan payable to Bank of Communications, Lianyungang Branch, under trade credit facilities, collateralized by Armet inventories and guaranteed by the Company’s Chairman and Chief Executive Officer, with interest at 110% of the bank’s benchmark rate, per annum (5.3631%), payable monthly, with principal due through August 15, 2011.		5,105,593		9,074,685
Loan payable to Bank of China, Lianyungang Branch, under trade credit facilities, guaranteed by the Company’s Chairman and Chief Executive Officer, with interest at 5.838%, per annum, payable monthly, with principal due October 28, 2011.		773,575		756,224
Henan Armco
Loan payable to Guangdong Development Bank Zhengzhou Branch, with interest at 4.5%, per annum, payable monthly, with principal due and paid March 21, 2011		-		90,835
Loan payable to Guangdong Development Bank Zhengzhou Branch, with interest at 5.8%, per annum, payable monthly, with principal due and paid July 27, 2011		1,799,373		-
Loan payable to Minsheng Bank, Zhengzhou Branch,, with interest at 3.92% per annum, with principal and interest due and paid July 26, 2011		1,149,174		-
	$	8,827,715	$	24,765,820

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Note 13 - Long-Term Debt

6 Months Ended

Jun. 30, 2011

Long-term Debt [Text Block]

NOTE 13 – LONG-TERM DEBT

Long-term debt at June 30, 2011 and December 31, 2010 consisted of the following:

	June 30, 2011			December 31, 2010
Armet
Long-term debt due to Bank of China, Lianyungang Branch, collateralized by all of Armet’s building and land use right, with interest at 5.40% per annum payable monthly, with principal of RMB30,000,000 ($4,641,443), and RMB25,000,000 ($3,867,873) due August 25, 2011 and August 25, 2012, respectively.	$	8,509,321		$	8,318,461
Less current maturities		(4,641,448	)		(4,537,342	)
LONG-TERM DEBT, net of current maturities	$	3,867,873		$	3,781,119

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Consolidated Balance Sheets (USD $)	Jun. 30, 2011	Dec. 31, 2010
CURRENT ASSETS:
Cash	$ 1,825,255	$ 3,097,917
Pledged deposits	12,114,281	12,643,671
Marketable securities	1,380,015	2,890,380
Bank acceptance notes receivable	154,715
Accounts receivable	337,302	19,115,019
Inventories	13,669,273	10,439,831
Advance on purchases	11,530,060	6,509,846
Prepaid corporate income taxes-Armet	459,950
Prepayments and other current assets	1,558,343	4,729,935
Total Current Assets	43,029,194	59,426,599
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment	36,673,750	34,633,639
Accumulated depreciation	(2,099,639)	(761,515)
PROPERTY, PLANT AND EQUIPMENT, net	34,574,111	33,872,124
LAND USE RIGHT
Land use right	2,391,940	2,338,289
Accumulated amortization	(181,784)	(153,965)
LAND USE RIGHT, net	2,210,156	2,184,324
Total Assets	79,813,461	95,483,047
CURRENT LIABILITIES:
Loans payable	8,827,715	24,765,820
Banker's acceptance notes payable	6,188,598	4,174,355
Current maturities of capital lease obligation	730,334	727,756
Current maturities of long-term debt	4,641,448	4,537,342
Accounts payable	2,114,391	3,435,528
Advances received from Chairman and CEO	726,634	799,394
Customer deposits	8,498,165	1,345,304
Corporate income tax payable-HK	134,381	1,091,038
Accrued expenses and other current liabilities	994,901	6,316,568
Total Current Liabilities	32,856,567	47,193,105
CAPITAL LEASE OBLIGATION, net of current maturities	1,202,205	1,540,915
LONG-TERM DEBT, net of current maturities	3,867,873	3,781,119
DERIVATIVE LIABILITY	10,023	138,143
Total Liabilities	37,936,668	52,653,282
STOCKHOLDERS' EQUITY:
Common stock, $0.001 par value, 74,000,000 shares authorized, 14,994,592 and 14,840,948 shares issued and outstanding, respectively	14,995	14,841
Additional paid-in capital	29,465,145	28,966,596
Retained earnings	11,975,986	12,711,039
Accumulated other comprehensive income (loss):
Change in unrealized loss on marketable securities	(2,109,512)	(506,278)
Foreign currency translation gain	2,530,179	1,643,567
Total Stockholders' Equity	41,876,793	42,829,765
Total Liabilities and Stockholders' Equity	$ 79,813,461	$ 95,483,047