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.

We are on a calendar year; as such the three month period ending March 31, is referred to as our "first quarter". 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 the Company's Annual Report on Form 10-K filed with the SEC on March 31, 2011.

Our Business and Recent Developments

We import, sell and distribute to the metal refinery industry in the People's Republic of China (the "PRC") 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, South America, Oman, Turkey, Nigeria, Indonesia, and the Philippines and distribute them in the PRC. We also recycle scrap metal to steel mills for their use in the production of recycled steel.

Domestic steel production in the PRC continued to grow in first quarter of 2011. We believe the low-income housing construction in plan and urbanization measure implemented by PRC government will support the continuing growth of demand for steel. In addition, as a result of the destruction and devastation casued by the March 2011 earthquake in Japan, Chinese steel mills have raised their export growth expectations. Conversely, the PRC government has implemented measures to curb inflation, which are limiting the amount of liquidity available to Chinese companies and may limit or slow future growth in the PRC steel industry. In particular, the Chinese government recently announced that it will require Chinese banks to hold 21% of their deposits in reserve, which is among the highest in the world. Commentators believe that this reserve requirement will constrain lending to small and medium sized business in China, such as our business, and will also lead to higher interests rates for companies that are able to obtain credit. Moreover, the PRC steel industry is expected to experience increased resource, energy and environmental constraints, which may lead to greater instability of steel mill operations. Finally, iron ore prices fluctuated during the first quarter and were at higher levels compared to last year.

We continue to refine our business model in response to 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 can limit certain trading opportunities, we believe that it will enhance our competitive position as the market for ore prices recover. As discussed later in this section, we generated significant growth in revenue and profits in our trading business during the first quarter of 2011as a result of our efforts in these areas.

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 year ended December 31, 2010. This 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. During the first quarter of 2011, production of our recycling facility operated significantly below capacity, which we attribute to seasonal factors and to certain other factors described below. Traditionally the first quarter of each year sees the lowest production for Chinese scrap metal recyclers due to the Chinese New Year holiday, which can last for as long as three or four weeks, when facilities are shut down and stricter restrictions are enforced on the transportation of scrap metals materials. In addition, we believe that our recycling business customers and other steel mills stockpiled raw materials in advance of the Chinese New Year holiday season, which resulted in lower demand and purchases in the first quarter of 2011. Consequently, for the first quarter of 2011, our scrap metal business sold approximately 14,435 MT of scrap metals, generating approximately $6.3 million of revenue and $0.4 million of gross profit. However, the gross profit margin of 6.4% for our recycling business in the first quarter of 2011 improved significantly compared to our 1.5% gross margin for 2010.

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 invested a total of approximately $35.5 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. In the third quarter of 2010, we installed an additional nine cutting machines in the Facility, giving us 12 such machines at the end of 2010. In January 2011, we purchased an additional six cutting machines. With these purchases, we believe that the Facility provides us with a production capacity to recycle approximately one million MT of scrap metal per year.

During the first quarter of 2011, our net revenues increased by nearly 5 times (479%) over the same period in 2010 due to continued growth in domestic steel production in the PRC and a significant increase in our supply capacity of metal ores in our trading business resulting from our development of new vendors and sourcing options. Our gross profit margin decreased slightly during the current period to 6.4% compared to 6.5% during the same period in 2010. Our trading business and recycling business gross profit margins were each 6.4%. Our trading business has historically experienced fluctuations in gross profit as a result of fluctuations in the market prices of ore and metals that we sell. In this regard, gross profit margins ranged from 7% for the first quarter of 2010, to 1% for the second quarter of 2010, to 4% for the third quarter of 2010, and to 3% for the fourth quarter of 2010.

As noted above, our recycling business generated a gross profit margin of 6.4% for the first quarter of 2011, which represents a significant increase from the 1.5% gross profit margin in this business for 2010. We believe this increase in gross profit margin for the first quarter of 2011 is primarily due relief from the result of power restrictions implemented by the Chinese government and to better managing the inefficiencies associated with the Facility.

Our net income increased $0.5 million during the first quarter of 2011 due to a significant increase in sales with a slightly reduced gross margin on our trading business. Our total assets at March 31, 2011 increased $20 million, or 21%, compared to December 31, 2010, which was mainly due to an $11.4 million increase in accounts receivable resulting from the sale of 150,000 MT iron ore against L/C (generating an accounts receivable of $22.4 million) and an $8.6 million increase in inventory for our recycling production, offset by a $2.7 million decrease in pledged deposits and a $0.9 million decrease in marketable securities. In April 2011, we collected $22.0 million of the $22.4 million accounts receivable described above.

We have long term borrowings of $3.8 million (net of current maturities), with current maturities of such borrowings of $4.6 million related to our investment in the Facility. Loans payable increased $3.6 million, Banker's acceptance notes payable increased by $6.1 million and accounts payable increased by $9.5 million, while inventories increased $8.6 million, accounts receivable increased $11.4 million and advances on purchases and prepayment and other current assets increased $0.9 million at March 31, 2011 from December 31, 2010.

Our Outlook

We believe the low-income housing construction, on-going urbanization and increasing domestic consumption in the PRC will continue to support the growth of the steel industry, evidencing a higher demand for our products with an associated revenue growth. We also expect our recycling business to benefit substantially from the measures and policies to be implemented gradually by the Chinese government according to its 12th Five Year Plan (2011-2015). Under this plan, China intends to restructure its iron and steel industry to be more energy efficient and have increased environmental protection by adopting and developing the most advanced technology in the world.

Metal Ore Trading. The metal ore markets experienced a fluctuation in pricing in the first quarter of 2011. We expect the price of iron ore may stabilize at its current level, which is above historical prices. Our trading business achieved a 479% increase in net revenues during the first quarter of 2011 compared to the same period in 2010. This large increase is primarily due to our development of new vendor relationships and an increase in our supply capacity of our metal ore trading business. In the first quarter of 2011, we established new business relationships with large suppliers and completed the first large order with a new supplier of the Company. Although we do not believe the substantial growth generated by our metal ore trading business in the first quarter of 2011 is sustainable, we believe the increase in our supply capacity will benefit us in the long term and strengthen our market position in the industry in the PRC. Net revenues generated in our trading business in the first quarter of 2010 and 2009 accounted for 17% and 6% of its total annual net revenues of 2010 and 2009, respectively.

Scrap Metal Recycling. The gross profit margin for our recycling business increased significantly to 6.4% for the first quarter in 2011 compared to 1.5% for 2010, although the net revenue generating in first quarter was lower-than-expected due to the seasonal and other factors described above. We believe that our recycling operations will generate greater revenue growth in the remaining quarters of 2011 as we gain more operational experience and create efficiencies at the Facility. Moreover, with the increase in our sales force, we have commenced a concerted effort to increase our brand name in the market, establishing our reputation on the recycling business. We also believe that our recycling business will benefit from the efforts and measures to be taken by Chinese government to restructure the Chinese steel industry described above. Under the 5 year plan, the Chinese steel industry will develop and adopt advanced technologies that will increase its demand for, and use of, scrap metals. In addition to these expected technological upgrades, this government led restructuring focusing on the steel industry will also result in geographical shifts, with more capacity of steel production concentrated in the east coast of the PRC where our Facility is located. As a direct result of such a shift, we believe this geographical advantage will enhance our competitive position in the marketplace.

Due to efforts to improve our performance and operate more efficiently, we believe we are now in the position to capitalize on trading opportunities as the low-income housing construction, urbanization and domestic consumption in the PRC continue to develop and we gradually increase production of processed scrap metal at our Facility. However, as demand increases for metal ore and scrap metal, we may also experience difficulty securing new and reliable sources of the inventory we process and sell.

RESULTS OF OPERATIONS

The table below summarizes the consolidated operating results for the three
months ended March 31, 2011 and 2010. The percentages represent each line item
as an approximate percentage of net revenues unless otherwise noted.

                                     For the Three Months Ended March 31,
                               2011                          2010                         $ Change        % Change
Net revenues               $ 49,684,652         100.0 %   $ 8,576,570         100.0 %   $ 41,108,082          479.3 %
Cost of goods sold           46,515,883          93.6 %     8,017,651          93.5 %     38,498,232          480.2 %
Gross profit                  3,168,769           6.4 %       558,919           6.5 %      2,609,850          466.9 %

Total operating expenses      1,766,448           3.6 %       913,577          10.7 %        852,871           93.4 %
Operating income (loss)       1,402,321           2.8 %      (354,658 )        -4.1 %      1,756,979          495.4 %

Net Revenues

Net revenues of $49.7 million in the first quarter of 2011 increased $41.1 million compared to the same period in 2010, primarily due to an increase of $22.4 million, $11 million and a $6.3 million from the sales of iron ore, pellet ore and scrap metals, respectively.

Cost of Goods Sold

Cost of goods sold includes the cost of the products we purchase from our vendors and shipping and handling costs on shipments from such vendors. Cost of goods sold in the first quarter of 2011 was $46.5 million, representing a gross profit margin of 6.4%, compared to a gross profit margin of 6.5% in the same period in 2010. The gross profit margin of 6.4% in the first quarter of 2011 represents a compound margin for our trading and recycling businesses, each of which generated a gross profit margin of 6.4% for the period. We had no revenue from recycling business in the same period in 2010, and so the gross profit margin of 6.5% in such period was for our metal ore trading business alone.

Total Operating Expenses

Operating expenses of $1.77 million in the first quarter of 2011 increased by $0.86 million, or 93.4%, compared to the same period in 2010, due to an increase of $0.45 million in general and administrative expenses and an increase of $0.47 million in operating cost of Armet idle manufacturing facility. Such increase was partially offset by a decrease of $71,181 in selling expenses.

General and administrative expenses include salaries, professional fees including legal and accounting fees, and office expenses. Our general and administrative costs increased by $0.46 million, or 80%, in the first quarter of 2011 as compared to the same period in 2010 primarily due to an increase of $0.19 million in general and administrative expense for our recycling operations (which were not operational during the same period of 2010) and $0.15 million in general and administrative expense for our 2010 newly-established subsidiary Armco Shanghai. General and administrative expenses as a percentage of net revenues decreased to 2% for the first quarter of 2011 as compared to at 7% for the same period in 2010, which we believe is due to operating our businesses more efficiently.

Operating costs at our Facility include $0.47 million of costs that were mainly depreciation expenses of idle manufacturing facilities due to under utilization of the production facility in the first quarter of 2011. There was no comparable period in 2010 as our Facility was under construction during such period.

Selling expenses include commissions, salaries, and travel for our sales agents. Selling expenses as a percentage of net revenues were 1% in the first quarter of 2011 as compared to 4% in the first quarter of 2010. Selling expenses decreased by $71,181 mainly due to decreases in port charges and lower warehousing expenses as a result of faster sales of inventory in the first quarter of 2011 as compared to the same period of 2010.

Total Other (Income) Expense

Total other expense of $0.7 million in the first quarter of 2011 increased $1.2 million from the comparable period in 2010, during which we had total other income of $0.5 million. The increase in total other expense was primarily due to the absence of a one -time $1 million gain from a vendor price adjustment in the first quarter of 2010, an increase of $0.5 million in interest expense, an increase of $0.25 million in other expenses, and an increase of $89,666 in loan guarantee costs. These increases were partially offset by an increase of $0.18 million in foreign currency transaction gain and an decrease of $0.37 million in change in the fair value of a derivative liability. The one-time $1 million gain from a vendor price adjustment in the first quarter of 2010 was related to a vendor price adjustment for goods purchased and resold during 2009. Interest expense increased $0.5 million as a result of increased short term borrowings of $20 million incurred in connection with increases in net revenues.

Income Tax Expense

Income tax expense of $0.18 million in the first quarter of 2011 increased by $28,830, compared to the same period in 2010, primarily due to an increase in net income tax accrual for income taxes on the operations of our Hong Kong subsidiary during 2010 (using an effective tax rate of 16.5%).

Net Income (Loss)

Net income of $0.56 million in the first quarter of 2011 increased $0.51 million compared to the same period in 2010, primarily due to a significant increase in net revenue of $41 million with a slightly decreased gross margin and the other factors described above.

LIQUIDITY AND CAPITAL RESOURCES

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

At March 31, 2011 and December 31, 2010, we had cash and cash equivalents of $5.7 million and $3.1 million, respectively. At March 31, 2011, our working capital was $12.2 million as compared to $12.2 million at December 31, 2010.

As of March 31, 2011, we had invested a total of approximately $35.5 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 our management. 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 and debt financing. We collect cash from our customers based on our sales to them and their respective payment terms.

On April 20, 2010 we sold to nine accredited and institutional investors 1,538,464 shares of our common stock for $6.50 per share and five year warrants to purchase an additional 1,538,464 shares of our common stock at an exercise price of $7.50 per share resulting in net proceeds to us of $9.1 million. We also received an additional $13.2 million in proceeds during the first nine months of 2010 through the exercises of outstanding warrants and common stock options. Included in these exercises was the exercise by Mr. Kexuan Yao, our Chairman and CEO, of one million warrants with an exercise price of $5 per share. As consideration for the exercise of these warrants, Mr. Yao paid us $4,500,000 in cash and forgave a $500,000 debt owed to him by us.

We believe our working capital is sufficient for our operations for at least the next 12 months. We have a RMB 70 million (the equivalent to $10.6 million at March 31, 2011) line of credit facility ("Line of Credit") with the Bank of China that we entered into on September 4, 2009. The proceeds from the Line of Credit are designated for property, plant and equipment expenditures related to the Facility and are secured by these assets in addition to our land use rights. The Line of Credit expires on September 3, 2012. Interest is paid quarterly. As of March 31, 2011, the balance outstanding under our Line of Credit was $8.3 million. The remaining principal payments of RMB 30 million (the equivalent to U.S. $4.5 million) and RMB 25 million (the equivalent to U.S. $3.8 million) are due on August 25, 2011 and 2012, respectively.

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 $95 million, as more fully described below. Approximately $53 million was available under these facilities at March 31, 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 March 31, 2011, the balance outstanding under this facility was $700,000.

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 March 31, 2011, the balance outstanding under this facility was $26,724,000.

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 March 31, 2011, the balance outstanding under this facility was $1,023,000.

On May 18, 2010, Henan Armco obtained a RMB 40,000,000 (approximately $6,100,000) 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 March 31, 2011, the balance outstanding under this facility was $2,589,448.