**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 March 31, 2008





**o** **Transition
      Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
      of 1934**




For
      the
      transition period from ___________ to ___________




**Commission
      file number 000-23039**




**CHINA
      PRECISION STEEL, INC.**


(Exact
      name of registrant as specified in charter)




**Delaware**
            
            **14-1623047**(State
                or other jurisdiction
              of
                incorporation)
            
            (IRS
                Employer Identification No.)




**8th
      Floor, Teda Building, 87 Wing Lok Street, Sheungwan**


**Hong
      Kong, The People’s Republic of China**


(Address
      of principal executive offices)




**+852-2543-8223**


Registrant’s
      telephone number, including area code:




(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 o




Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer or a non-accelerated filer. See definition of “accelerated
      filer and large accelerated filer” in Rule 12b-2 of the Exchange
      Act.




Large
      accelerated filer o Accelerated filer o Non-accelerated filer o 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 o No x




As
      of May
      15, 2008, there were 45,896,288 shares of the Company’s common stock
      outstanding.










**China
      Precision Steel, Inc.**


**Index
      to Quarterly Report**


**on
      Form 10-Q**




**Quarter
      Ended March 31, 2008**




Item
                1.
            Financial
                StatementsCondensed
                Consolidated Balance Sheets at, March 31, 2008 (unaudited) and
                June 30, 2007 (audited)
            3Unaudited
                Condensed Consolidated Statements of Operations for the three and
                nine months ended March 31, 2008 and 2007
            4Unaudited Condensed
                Consolidated Statements of Cash Flows for the nine months ended March
                31,
                2008 and 2007
            5Condensed
                Consolidated Statements of Changes in Stockholders’ Equity for the year
                ended June 30, 2007 (audited) and the nine months ended March 31,
                2008 (unaudited)
            6Notes
                to Condensed Consolidated Financial Statements
            7Item
                2.
            Management’s
                Discussion and Analysis of Financial Condition and Results of
                Operations
            19Item
                3.
            Quantitative
                and Qualitative Disclosures About Market Risk
            31Item
                4.
            Controls
                and Procedures
            32**Part II
                - Other Information**Item
                1.
            Legal
                Proceedings
            32Item
                1A.
            Risk
                Factors
            32Item
                2.
            Unregistered
                Sales of Equity Securities and Use of Proceeds
            32Item
                3.
            Defaults
                Upon Senior Securities
            32Item
                4.
            Submission
                of Matters to a Vote of Security Holders
            32Item
                5.
            Other
                Information
            32Item
                6.
            Exhibits
            33Signatures
            
            34




2





**Part I
      - Financial Information**





**Item
      1. Financial Statements.**





**China
      Precision Steel, Inc. and Subsidiaries**


**Condensed
      Consolidated Balance Sheets**





**(Unaudited)****March
                31,**
            
            **June
                30,****Notes**
            
            **2008**
            
            **2007****Assets****Current
                assets**Cash
                and equivalents
            
            
            
            
            $
            14,295,503
            
            $
            5,504,862Accounts
                receivableTrade,
                net of allowances of $994,313 and $273,461 at March 31, 2008 and
                June 30,
                2007, respectively
            
            
            
            
            
            25,406,355
            
            
            8,242,044Bank
                acceptance notes
            
            
            
            
            
            4,197,091
            
            
            -Other
            
            
            
            
            
            4,794,735
            
            
            85,708Inventories
            
            
            5
            
            
            19,594,824
            
            
            15,723,704Deposits
            
            
            
            
            
            -
            
            
            82,758Prepaid
                expenses
            
            
            
            
            
            429,556
            
            
            -Advances
                to suppliers, net of allowance of $2,466,098 and $3,502,184 at March
                31,
                2008 and June 30, 2007, respectively
            
            
            
            
            
            38,527,179
            
            
            11,699,918**Total
                current assets**
            
            
            
            
            
            107,245,243
            
            
            41,338,994**Property
                and equipment**Land
                use rights
            
            
            
            
            
            1,869,205
            
            
            1,124,583Property
                and equipment, net
            
            
            6
            
            
            35,657,690
            
            
            29,238,227Construction-in-progress
            
            
            7
            
            
            12,344,841
            
            
            10,355,76349,871,736
            
            
            40,718,573**Goodwill**
            
            
            
            
            
            99,999
            
            
            99,999**Total
                assets**
            
            
            
            
            $
            157,216,978
            
            $
            82,157,566**Liabilities
                and Stockholders' Equity****Current
                liabilities**Accounts
                payable and accrued liabilities
            
            
            
            
            $
            11,179,506
            
            $
            4,855,932Advances
                from customers
            
            
            8
            
            
            6,896,092
            
            
            1,720,812Other
                taxes payables
            
            
            
            
            
            3,431,415
            
            
            816,554Current
                income taxes payable
            
            
            
            
            
            4,373,885
            
            
            1,892,866Deferred
                income taxes payable
            
            
            
            
            
            -
            
            
            1,064,028Amounts
                due to directors
            
            
            9
            
            
            2,807,353
            
            
            -Current
                portion of long-term debt
            
            
            
            
            
            -
            
            
            6,163,445Notes
                payable
            
            
            10
            
            
            17,400,194
            
            
            9,842,520**Total
                current liabilities**
            
            
            
            
            
            46,088,445
            
            
            26,356,157**Long-term
                debt, net of current portion shown above**
            
            
            11
            
            
            -
            
            
            6,878,714**Stockholders'
                equity:**Preferred
                stock: $0.001 per value, 8,000,000 shares authorized, no shares
                outstanding at March 31, 2008 and June 30, 2007;
            
            
            14Common
                stock: $0.001 par value, 62,000,000 shares authorized, 45,896,288
                and
                37,378,143 issued and outstanding March 31, 2008 and June 30,
                2007
            
            
            14
            
            
            45,896
            
            
            37,378Additional
                paid-in capital
            
            
            14
            
            
            73,643,064
            
            
            31,867,063Accumulated
                other comprehensive income
            
            
            
            
            
            7,745,138
            
            
            2,192,160Retained
                earnings
            
            
            
            
            
            29,694,435
            
            
            17,008,238**Total
                stockholders' equity**
            
            
            
            
            
            111,128,533
            
            
            51,104,839**Amounts
                due from directors**
            
            
            9
            
            
            -
            
            
            (2,182,144
            )**Total
                liabilities and stockholders' equity**
            
            
            
            
            $
            157,216,978
            
            $
            82,157,566





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


3





**China
      Precision Steel, Inc. and Subsidiaries**


**Condensed
      Consolidated Statements of Operations**


**For
      the Three and Nine Months Ended March 31, 2008 and 2007**


**(Unaudited)**





**Three Months Ended**
            
            **Nine Months Ended****March 31,**
            
            **March 31,**
            
            **March 31,**
            
            **March 31,****Notes**
            
            **2008**
            
            **2007**
            
            **2008**
            
            **2007****Revenues**Sales
                revenues
            
            
            
            
            $
            18,723,842
            
            $
            11,610,673
            
            $
            59,189,060
            
            $
            37,121,603Cost
                of goods sold
            
            
            
            
            
            13,399,010
            
            
            8,240,743
            
            
            42,172,998
            
            
            26,635,693**Gross
                profit**
            
            
            
            
            
            5,324,832
            
            
            3,369,930
            
            
            17,016,062
            
            
            10,485,910**Operating
                expenses**Selling
                expenses
            
            
            
            
            
            203,477
            
            
            92,315
            
            
            484,926
            
            
            196,705Administrative
                expenses
            
            
            
            
            
            699,221
            
            
            1,411,106
            
            
            2,031,816
            
            
            2,096,031Provision
                for bad debts
            
            
            
            
            
            10,150
            
            
            -
            
            
            661,930
            
            
            -Depreciation
                and amortization expense
            
            
            
            
            
            17,155
            
            
            11,062
            
            
            46,585
            
            
            32,324**Total
                operating expenses**
            
            
            
            
            
            930,003
            
            
            1,514,483
            
            
            3,225,257
            
            
            2,325,060**Income
                from continuing operations**
            
            
            
            
            
            4,394,829
            
            
            1,855,447
            
            
            13,790,805
            
            
            8,160,850**Other
                income (expense)**Other
                revenues
            
            
            
            
            
            152,894
            
            
            53,436
            
            
            945,304
            
            
            53,436Interest
                and finance costs
            
            
            
            
            
            (415,863
            )
            
            (196,787
            )
            
            (1,174,864
            )
            
            (514,869
            )**Total
                other income (expense)**
            
            
            
            
            
            (262,969
            )
            
            (143,351
            )
            
            (229,560
            )
            
            (461,433
            )**Net
                income from continuing operations before income
                tax**
            
            
            
            
            
            4,131,860
            
            
            1,712,096
            
            
            13,561,245
            
            
            7,699,417**Provision
                for (benefit from) income tax**
            
            
            12Current
            
            
            
            
            
            1,598,777
            
            
            1,196,573
            
            
            2,047,911
            
            
            2,091,886Deferred
            
            
            
            
            
            (2,089,956
            )
            
            (880,694
            )
            
            (1,172,863
            )
            
            (966,099
            )Total
                income tax expense
            
            
            
            
            
            (491,179
            )
            
            315,879
            
            
            875,048
            
            
            1,125,787**Net
                income before discontinued operations**
            
            
            
            
            
            4,623,039
            
            
            1,396,217
            
            
            12,686,197
            
            
            6,573,630**Net
                income from discontinued operations**
            
            
            16
            
            
            -
            
            
            -
            
            
            -
            
            
            831,448**Net
                income**
            
            
            
            
            $
            4,623,039
            
            $
            1,396,217
            
            $
            12,686,197
            
            $
            7,405,078**Basic
                earnings per share**
            
            
            15****From
                continuing operations
            
            
            
            
            $
            0.10
            
            $
            0.05
            
            $
            0.30
            
            $
            0.26From
                discontinued operations
            
            
            
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            0.03Total
            
            
            
            
            $
            0.10
            
            $
            0.05
            
            $
            0.30
            
            $
            0.29**Basic
                weighted average shares outstanding**
            
            
            
            
            
            45,896,288
            
            
            28,946,086
            
            
            42,088,128
            
            
            25,815,157**Diluted
                earnings per share**
            
            
            15From
                continuing operations
            
            
            
            
            $
            0.10
            
            $
            0.05
            
            $
            0.30
            
            $
            0.26From
                discontinued operations
            
            
            
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            0.03Total
            
            
            
            
            $
            0.10
            
            $
            0.05
            
            $
            0.30
            
            $
            0.29**Diluted
                weighted average shares outstanding**
            
            
            
            
            
            46,365,778
            
            
            29,387,360
            
            
            42,555,912
            
            
            25,960,101**The
                Components of comprehensive income:**Net
                income
            
            
            
            
            $
            4,623,039
            
            $
            1,396,217
            
            $
            12,686,197
            
            $
            7,405,078Foreign
                currency translation adjustment
            
            
            
            
            
            3,548,639
            
            
            335,929
            
            
            5,552,978
            
            
            990,914**Comprehensive
                income**
            
            
            
            
            $
            8,171,678
            
            $
            1,732,146
            
            $
            18,239,175
            
            $
            8,395,992





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




4




**China
        Precision Steel, Inc. and Subsidiaries**
 **Condensed
        Consolidated Statements of Cash Flows**
 **For
        the Nine Months Ended March 31, 2008 and 2007**
 **(Unaudited)**
 
 **2008**
              
              **2007****Cash
                  flows from operating activities****Net
                  Income**
              
              $
              12,686,197
              
              $
              7,405,078**Adjustments
                  to reconcile net income to net cash provided by (used in) operating
                  activities**Depreciation
              
              
              1,841,947
              
              
              1,095,981Less
                  income from discontinued operations - Oralabs, Inc
              
              
              -
              
              
              (831,448
              )Allowance
                  for bad and doubtful debts
              
              
              661,930
              
              
              519,614Warrants
                  issued for consulting
              
              
              -
              
              
              447,993**Net
                  changes in assets and liabilities:**Accounts
                  receivable, net
              
              
              (26,067,887
              )
              
              8,200,648Inventories
              
              
              (2,616,526
              )
              
              (11,548,066
              )Deposits
              
              
              89,361
              
              
              (225,887
              )Prepayments
              
              
              (429,556
              )
              
              -Advances
                  to suppliers
              
              
              (25,893,725
              )
              
              (6,197,997
              )Accounts
                  payable and accrued expenses
              
              
              5,702,234
              
              
              1,439,529Advances
                  from customers
              
              
              5,037,976
              
              
              984,523Other
                  taxes payable
              
              
              2,657,687
              
              
              108,450Current
                  income taxes
              
              
              2,329,987
              
              
              2,513,992Deferred
                  income taxes
              
              
              (1,148,927
              )
              
              (960,262
              )**Net
                  cash (used in) provided by operating activities**
              
              
              (25,149,302
              )
              
              2,952,148**Cash
                  flows from investing activities**Purchases
                  of property and equipment including construction in
                  progress
              
              
              (7,512,290
              )
              
              (10,329,164
              )**Net
                  cash (used in) investing activities**
              
              
              (7,512,290
              )
              
              (10,329,164
              )**Cash
                  flows from financing activities**Sale
                  of common stock
              
              
              44,375,282
              
              
              19,416,533Advances
                  from directors, net
              
              
              2,464,868
              
              
              (3,708,722
              )Notes
                  payable proceeds
              
              
              16,446,667
              
              
              12,280,943Repayments
                  of notes payable
              
              
              (23,757,121
              )
              
              (10,204,006
              )**Net
                  cash provided by financing activities**
              
              
              39,529,696
              
              
              17,784,748**Effect
                  of exchange rate**
              
              
              1,922,537
              
              
              990,914**Net
                  increase in cash**
              
              
              8,790,641
              
              
              11,398,646**Cash
                  and cash equivalents, beginning of period**
              
              
              5,504,862
              
              
              186,955**Cash
                  and cash equivalents, end of period**
              
              $
              14,295,503
              
              $
              11,585,601**Supplemental
                  disclosure of cash flow information**Interest
                  paid
              
              $
              1,174,864
              
              $
              572,089Taxes
                  paid
              
              $
              -
              
              $
              -Issuance
                  of 2,798,191 shares of stock for syndication fees
              
              $
              -
              
              $
              8,394,573Issuance
                  of 100,000 warrants for services
              
              $
              -
              
              $
              562,731Issuance
                  of 1,300,059 warrants for syndication fees
              
              $
              -
              
              $
              2,770,349Fixed
                  asset purchases in accounts payable
              
              $
              233,885
              
              $
              -
 
 The
        accompanying notes are an integral part of these financial
        statements.
  5


**China
      Precision Steel, Inc. and Subsidiaries**


**Condensed
      Consolidated Statements of Changes in Stockholders' Equity**


**For
      the Year Ended June 30, 2007 and the Nine Months Ended March 31,
      2008**


**(Unaudited)**





**Accumulated****Additional**
            
            **Other**
            
            
            
            **Total****Ordinary Shares**
            
            **Paid-in**
            
            **Comprehensive**
            
            **Retained**
            
            **Stockholders'****Share**
            
            **Amount**
            
            **Capital**
            
            **Income**
            
            **Earnings**
            
            **Equity**Balance
                at June 30, 2006
            
            
            24,283,725
            
            
            24,284
            
            
            1,375,716
            
            
            745,583
            
            
            9,535,577
            
            
            11,681,160Sale
                of common stock
            
            
            7,451,665
            
            
            7,451
            
            
            22,347,543
            
            
            -
            
            
            -
            
            
            22,354,994Syndication
                fees
            
            
            -
            
            
            -
            
            
            (3,028,116
            )
            
            -
            
            
            -
            
            
            (3,028,116
            )Stock
                issued for syndication fees
            
            
            2,798,191
            
            
            2,798
            
            
            (2,798
            )
            
            -
            
            
            -
            
            
            -Anti-dilution
                rights stock
            
            
            827,962
            
            
            828
            
            
            (828
            )
            
            -
            
            
            -
            
            
            -Conversion
                of debt to stock
            
            
            2,016,600
            
            
            2,017
            
            
            6,773,759
            
            
            
            
            
            
            
            
            6,775,776Warrants
                issued for consulting
            
            
            -
            
            
            -
            
            
            447,993
            
            
            -
            
            
            -
            
            
            447,993Capital
                contribution from waiver of dividend
            
            
            -
            
            
            -
            
            
            3,953,794
            
            
            
            
            
            
            
            
            3,953,794Foreign
                currency translation adjustment
            
            
            -
            
            
            -
            
            
            -
            
            
            1,446,577
            
            
            -
            
            
            1,446,577Net
                income
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            8,304,109
            
            
            8,304,109Less
                discontinued operations sold to former shareholder
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (831,448
            )
            
            (831,448
            )Balance
                at June 30, 2007
            
            
            37,378,143
            
            
            37,378
            
            
            31,867,063
            
            
            2,192,160
            
            
            17,008,238
            
            
            51,104,839Sale
                of common stock
            
            
            7,100,000
            
            
            7,100
            
            
            44,498,650
            
            
            -
            
            
            -
            
            
            44,505,750Syndication
                fees
            
            
            -
            
            
            -
            
            
            (130,468
            )
            
            -
            
            
            -
            
            
            (130,468
            )Make
                good shares
            
            
            2,000,000
            
            
            2,000
            
            
            (2,000
            )
            
            -
            
            
            -
            
            
            -Exercise
                of warrants
            
            
            189,205
            
            
            189
            
            
            (189
            )
            
            -
            
            
            -
            
            
            -Cancellation
                of stock
            
            
            (771,060
            )
            
            (771
            )
            
            (2,589,992
            )
            
            -
            
            
            -
            
            
            (2,590,763
            )Foreign
                currency translation adjustment
            
            
            -
            
            
            -
            
            
            -
            
            
            5,552,978
            
            
            -
            
            
            5,552,978Net
                income
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            12,686,197
            
            
            12,686,197Balance
                at March 31, 2008
            
            
            45,896,288
            
            $
            45,896
            
            $
            73,643,064
            
            $
            7,745,138
            
            $
            29,694,435
            
            $
            111,128,533





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


6





**China
      Precision Steel, Inc.**


Notes
      to
      the Condensed Consolidated Financial Statements





**1.   Description
      of Business**





On
      December 28, 2006, China Precision Steel, Inc. (the “Company” or “we”), under
      our former name, OraLabs Holding Corp., issued 25,363,002 shares of common
      stock
      in exchange for 100% of the registered capital of Partner Success Holdings
      Limited (“PSHL”), a British Virgin Islands Business Company pursuant to a Stock
      Exchange Agreement, dated March 31, 2006. Subsequent to the closing of that
      transaction, on December 28, 2006, the Company redeemed 3,629,350 shares of
      its
      common stock in exchange for all of the common stock of OraLabs, Inc., a
      wholly-owned operating subsidiary. The Company issued 100,000 shares of its
      common stock to OraLabs, Inc. in exchange for $450,690, and received additional
      cash payments in the aggregate amount of $108,107 in payment of an estimated
      $558,797 tax liability to be incurred by the Company in connection with the
      spin
      off of OraLabs, Inc. and the supplemental payment received. The Company then
      changed its name to China Precision Steel, Inc.




These
      transactions were treated for financial reporting purposes as a
      recapitalization, with prior OraLabs, Inc. operating activities reflected on
      the
      statements of operations as income (loss) from discontinued operations. The
      $558,797 estimated tax liability incurred in connection with the spin off of
      OraLabs, Inc. was treated as a transaction cost for financial reporting purposes
      and was treated as a reduction in additional paid in capital to the extent
      of
      the additional cash received which was also $558,797.





PSHL,
      registered on April 30, 2002 in the Territory of the British Virgin Islands,
      had
      registered capital of $50,000 as of June 30, 2007 and March 31, 2008. It has
      three wholly-owned subsidiaries, Shanghai Chengtong Precision Strip Company
      Limited (“Chengtong”), Shanghai Tuorong Precision Strip Co., Limited
      (“Tuorong”), and Blessford International Limited (“Blessford”).





In
      the
      year ended June 30, 2007, we added three indirect subsidiaries to our corporate
      structure. On April 9, 2007, we purchased Shanghai Tuorong Precision Strip,
      Limited, or Tuorong, through PSHL. The sole activity of Tuorong is the ownership
      of a land use right with respect to facilities utilized by Chengtong. On April
      10, 2007, PSHL purchased for $100,000 Blessford International Limited, a British
      Virgin Islands company. Blessford International Limited does not conduct any
      business, but it owns a single subsidiary, Shanghai Blessford Alloy Company
      Limited, that is a wholly-foreign owned enterprise chartered in China. We intend
      to hold Blessford International Limited as a shell subsidiary that may be used
      in the future to facilitate optimization of the tax structure of the Group’s
      activities.





Chengtong
      was registered on July 2, 2002 in Shanghai, in the People’s Republic of China
      (“PRC”) with a registered capital of $3,220,000 and a defined period of
      existence of 50 years from July 2, 2002 to July 1, 2052. Chengtong was
      classified as a Sino-foreign joint venture enterprise with limited liabilities.
      On August 22, 2005, the authorized registered capital was increased to
      $15,220,000 and on December 11, 2007, the authorized registered capital was
      further increased to $42,440,000. Pursuant to the document issued by the
      District Council to Xuhang Town Council on June 28, 2004, the equity transfers
      from China Chengtong Metal Group Limited and Eastreal Holdings Company Limited
      to PSHL was approved and the transformation of Chengtong from a Sino-foreign
      joint investment enterprise to a wholly foreign owned enterprise (WFOE) was
      granted.


7





As
      used
      herein, the “Group” refers to the Company, PSHL and Chengtong, Tuorong and
      Blessford on a consolidated basis.





The
      Company’s principal activities are conducted through its principal subsidiary,
      Chengtong. Chengtong is a niche precision steel processing company principally
      engaged in the manufacture and sales of cold-rolled and hot-rolled precision
      steel products and plates for down stream applications in the automobile
      industry (components and spare parts), kitchen tools and functional parts of
      electrical appliances. Raw materials, hot-rolled de-scaled (pickled) steel
      coils, will go through certain cold reduction processing procedures to give
      steel rolls and plates in different cuts and thickness for deliveries in
      accordance with customers’ specifications. Specialty precision steel offers
      specific control of thickness, shape, width, surface finish and other special
      quality features that compliment the emerging need for highly engineered end
      use
      applications. Precision steel pertains to the precision of measurements and
      tolerances of the above factors, especially thickness tolerance.





**2.    
      Basis of Preparation of Financial Statements**





The
      accompanying unaudited condensed consolidated financial statements have been
      prepared in accordance with generally accepted accounting principles for interim
      financial information and with the instructions to Form 10-Q. Accordingly,
      they
      do not include all of the information and footnotes required by generally
      accepted accounting principles for complete financial statements and related
      notes. The accompanying unaudited condensed consolidated financial statements
      and related notes should be read in conjunction with the audited consolidated
      financial statements of the Company and notes thereto for the year ended June
      30, 2007.





In
      the
      opinion of management, the accompanying unaudited condensed consolidated
      financial statements contain all adjustments (which include only normal
      recurring adjustments) necessary to present fairly the balance sheets of China
      Precision Steel, Inc. and subsidiaries as of March 31, 2008 and the results
      of
      their operations for the three and nine months ended March 31, 2008 and 2007,
      and cash flows for the nine months ended March 31, 2008 and 2007. The results
      of
      operations for the three and nine months ended March 31, 2008 and 2007 are
      not
      necessarily indicative of the results to be expected for the entire year ending
      June 30, 2008.





**3.**  **Summary
      of Significant Accounting Policies**





The
      following is a summary of significant accounting policies:





**Cash
      and Equivalents -** The **** Company
      considers all highly liquid debt instruments purchased with maturity period
      of
      three months or less to be cash equivalents. The carrying amounts reported
      in
      the accompanying consolidated balance sheet for cash and cash equivalents
      approximate their fair value.





**Accounts
      Receivable -** The
      Company provides an allowance for doubtful accounts equal to the estimated
      uncollectible amounts. It is reasonably possible that the Company’s estimate of
      the allowance will change. At March 31, 2008 and June 30, 2007, the Company
      had
      $994,313 and $273,461 of allowances for doubtful accounts,
      respectively.





**Inventory
      -** Inventory
      is stated at the lower of cost or market. Cost is determined using the weighted
      average method. Market value represents the estimated selling price in the
      ordinary course of business less the estimated costs necessary to complete
      the
      sale.





The
      cost
      of inventories comprises all costs of purchases, costs of conversion and other
      costs incurred in bringing the inventories to their present location and
      condition. The costs of conversion of inventories include fixed and variable
      production overheads, taking into account the stage of completion.





**Advances
      to Suppliers -** In
      order
      to insure a steady supply of raw materials, the Company is required from time
      to
      time to make cash advances when placing its purchase orders. Cash advances
      are
      shown net of allowances for unrecoverable advances of $2,466,098 and $3,502,184
      at, March 31, 2008 and June 30, 2007, respectively.


8




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





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





Buildings
            10
                yearsOffice
                equipment
            5
                yearsMotor
                vehicles
            5
                yearsMachineries
            10
                years





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





Property,
      plant and equipment are evaluated annually for any impairment in value. Where
      the recoverable amount of any property and equipment is determined to have
      declined below its carrying amount, the carrying amount is reduced to reflect
      the decline in value. There were no property and equipment impairments
      recognized during the years ended June 30, 2007 and 2006.





**Capitalized
      Interest -** The
      Company capitalizes interest cost on borrowings incurred during the new
      construction or upgrade of qualified assets. Capitalized interest is added
      to
      the cost of the underlying assets and is amortized over the useful lives of
      the
      assets. During the nine months ended March 31, 2008 and 2007, the Company
      capitalized $0 and $1,036,812, respectively, of interest to
      construction-in-progress.





**Construction-in-Progress** - Plant
      and production lines currently under development are accounted for as
      construction-in-progress. Construction-in-progress is recorded at acquisition
      cost, including land rights cost, development expenditure, professional fees
      and
      the interest expenses capitalized during the course of construction for the
      purpose of financing the project. Upon completion and readiness for use of
      the
      project, the cost of construction-in-progress is to be transferred to fixed
      assets.





**Contingent
      Liabilities and Contingent Assets**  **-** A
      contingent liability is a possible obligation that arises from past events
      and
      whose existence will only be confirmed by the occurrence or non-occurrence
      of
      one or more uncertain future events not wholly within the control of the
      Company. It can also be a present obligation arising from past events that
      is
      not recognized because it is not probable that outflow of economic resources
      will be required or the amount of obligation cannot be measured
      reliably.





A
      contingent liability is not recognized but is disclosed in the notes to the
      financial statements. When a change in the probability of an outflow occurs
      so
      that outflow is probable, the contingency is then recognized as a
      provision.





A
      contingent asset is a possible asset that arises from past events and whose
      existence will be confirmed only by the occurrence or non-occurrence of one
      or
      more uncertain events not wholly within the control of the Company.





Contingent
      assets are not recognized but are disclosed in the notes to the financial
      statements when an inflow of economic benefits is probable. When inflow is
      virtually certain, an asset is recognized.





**Advances
      from customers**  **-** Revenue
      from the sale of goods or services is recognized at the time that goods are
      delivered or services are rendered. Receipts in advance for goods to be
      delivered or services to be rendered in a subsequent period are carried forward
      as deferred revenue.





**Revenue
      Recognition -** Revenue
      from the sale of goods and services is recognized on the transfer of risks
      and
      rewards of ownership, which generally coincides with the time when the goods
      are
      delivered to customers and the title has passed and services have been rendered
      and invoiced. Revenue is reported net of all VAT taxes. Other income is
      recognized when it is earned.


9




**Foreign
      Currencies** - The
      Company’s principal country of operations is in the PRC. The financial position
      and results of operations of the Company are determined using the local currency
      (“Renminbi” or “Yuan”) as the functional currency. Transactions not conducted in
      Renminbi are translated into Renminbi at the exchange rates prevailing at the
      times of such transactions. The results of operations denominated in foreign
      currencies are translated at the average rate of exchange during the reporting
      period. Assets and liabilities denominated in foreign currencies at the balance
      sheet date are translated at the market rate of exchange ruling at that date.
      The registered equity capital denominated in the functional currency is
      translated at the historical rate of exchange at the time of capital
      contribution. All translation adjustments resulting from the translation of
      the
      financial statements into the reporting currency (“US Dollars”) are dealt with
      as an exchange fluctuation reserve in shareholders’ equity.





**Taxation
      -** Taxation
      on overseas profits has been calculated on the estimated assessable profits
      for
      the year at the rates of taxation prevailing in the country in which the Company
      operates.





Provision
      for the PRC enterprise income tax is calculated at the prevailing rate based
      on
      the estimated assessable profits less available tax relief for losses brought
      forward **.** The
      Company does not accrue taxes on unremitted earnings from foreign operations
      as
      it is the Company’s intention to invest these earnings in the foreign operations
      indefinitely **.**





*Enterprise
      income tax*





Under
      the
      Provisional Regulations of the People’s Republic of China Concerning Income Tax
      on Enterprises promulgated by the State Council which came into effect on
      January 1, 1994, income tax is payable by enterprises at a rate of 33% of their
      taxable income. Preferential tax treatment may, however, be granted pursuant
      to
      any law or regulations from time to time promulgated by the State Council.
      Specialty state companies’ enterprise income tax rate was reduced to 27%. The
      Group is currently enjoying a 50% reduction in the statutory rates due to the
      classification of Chengtong as a “Wholly Foreign Owned Enterprise”. This reduced
      rate applies to the fiscal years ended June 30, 2007, 2008, and 2009. Subsequent
      to June 30, 2009, Chengtong will be subject to enterprise income taxes at the
      prevailing statutory rates. The Enterprise Income Tax Law was passed on March
      16, 2007, and becomes effective on January 1, 2008. The new law introduces
      fundamental changes to the Chinese tax system for both domestic and
      foreign-owned entities. A new unified general income tax of 25% will be
      applicable to enterprises in China. Entities subject to a “tax holiday” prior to
      January 1, 2008, are expected to be able to retain the benefits of the reduced
      rates for the remaining term.





Deferred
      tax assets and liabilities are recognized for the future tax consequences
      attributable to differences between the financial statement carrying amounts
      of
      existing assets and liabilities and their respective tax bases. Deferred tax
      assets, including tax loss and credit carry forwards, 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 income in the period that includes the enactment date.
      Deferred income tax expense represents the change during the period in the
      deferred tax assets and deferred tax liabilities. The components of the deferred
      tax assets and liabilities are individually classified as current and
      non-current based on their characteristics. Deferred tax assets are reduced
      by a
      valuation allowance when, in the opinion of management, it is more likely than
      not that some portion or all of the deferred tax assets will not be
      realized.





In
      2006,
      the Financial Accounting Standards Board (FASB) issued FIN 48, which clarifies
      the application of SFAS 109 by defining a criterion that an individual income
      tax position must meet for any part of the benefit of that position to be
      recognized in an enterprise’s financial statements and provides guidance on
      measurement, derecognition, classification, accounting for interest and
      penalties, accounting in interim periods, disclosure and transition. In
      accordance with the transition provisions, the Company adopted FIN 48 effective
      January 1, 2007.





The
      Company recognizes that virtually all tax positions in the PRC are not free
      of
      some degree of uncertainty due to tax law and policy changes by the State.
      However, the Company cannot reasonably quantify political risk factors and
      thus
      must depend on guidance issued by current state officials.





Based
      on
      all known facts and circumstances and current tax law, the Company believes
      that
      the total amount of unrecognized tax benefits as of March 31, 2008, is not
      material to its results of operations, financial condition or cash flows. The
      Company also believes that the total amount of unrecognized tax benefits as
      of
      March 31, 2008, if recognized, would not have a material effect on its effective
      tax rate. The Company further believes that there are no tax positions for
      which
      it is reasonably possible, based on current Chinese tax law and policy, that
      the
      unrecognized tax benefits will significantly increase or decrease over the
      next
      12 months producing, individually or in the aggregate, a material effect on
      the
      Company’s results of operations, financial condition or cash
      flows.


10





*Value
      added tax*





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





Value
      added tax payable in the PRC is charged on an aggregated basis at a rate of
      13%
      or 17% (depending on the type of goods involved) on the full price collected
      for
      the goods sold or, in the case of taxable services provided, at a rate of 17%
      on
      the charges for the taxable services provided, but excluding, in respect of
      both
      goods and services, any amount paid in respect of value added tax included
      in
      the price or charges, and less any deductible value added tax already paid
      by
      the taxpayer on purchases of goods and services in the same financial
      year.





**Retirement
      Benefit Costs** -
      According to the PRC regulations on pension, Chengtong contributes to a defined
      contribution retirement scheme organized by municipal government in the province
      in which Chengtong was registered and all qualified employees are eligible
      to
      participate in the scheme. Contributions to the scheme are calculated at 23.5%
      of the employees’ salaries above a fixed threshold amount and the employees
      contribute 2% to 8%, while Chengtong contributes the balance contribution of
      21.5%% to 15.5%. The Group has no other material obligation for the payment
      of
      retirement benefits beyond the annual contributions under this
      scheme.





For
      the
      three and nine months ended March 31, 2008, the Company’s pension cost charged
      to the statements of operations under the plan amounted to $83,273 and $215,931,
      respectively, all of which have been paid to the State Pension Fund (2007:
      $36,532 and $110,695, respectively).





**Fair
      Value of Financial Instruments -** The
      carrying amounts of certain financial instruments, including cash, accounts
      receivable, other receivables, accounts payable, accrued expenses, and other
      payables approximate their fair values as at March 31, 2008 and June 30, 2007
      because of the relatively short-term maturity of these instruments.





**Use
      of Estimates**  **-** The
      preparation of financial statements in accordance with generally accepted
      accounting principles require management to make estimates and assumptions
      that
      affect reported amounts of assets and liabilities and disclosure of contingent
      assets and liabilities at the date of the financial statements and reported
      amounts of revenues and expenses during the reporting period. Actual results
      could differ from those estimates.





**Reclassifications
      -** Certain
      reclassifications have been made to the prior years’ financial statements to
      conform to the current year presentation. These reclassifications had no effect
      on previously reported results of operations or retained earnings.





**Recent
      Accounting Pronouncements** -





The
      Financial Accounting Standards Board recently issued the following standards
      which the Company reviewed to determine the potential impact on our financial
      statements upon adoption.





In
      June
      2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty
      in
      Income Taxes—An Interpretation of FASB Statement No. 109 (“FIN 48”).
      FIN 48 provides guidance for recognizing and measuring uncertain tax positions,
      as defined in SFAS 109, Accounting for Income Taxes. FIN 48 prescribes a
      threshold condition that a tax position must meet for any of the benefit of
      the
      uncertain tax position to be recognized in the financial statements. Guidance
      is
      also provided regarding de-recognition, classification and disclosure of these
      uncertain tax positions. FIN 48 is effective for fiscal years beginning after
      December 15, 2006. The adoption of FIN 48 did not have a material impact on
      our financial position, results of operations or cash flows.





In
      September 2006, the FASB issued Statement No. 157, “Fair Value
      Measurements” (“SFAS No. 157”). SFAS No. 157 addresses how
      companies should measure fair value when they are required to use a fair value
      measure for recognition or disclosure purposes under generally accepted
      accounting principles. SFAS No. 157 defines fair value, establishes a
      framework for measuring fair value and expands the required disclosures about
      fair value measurements. SFAS No. 157 is effective for fiscal years
      beginning after November 15, 2007, with earlier adoption permitted.
      Management is assessing the impact of the adoption of
      SFAS No. 157.


11




In
      September 2006, the FASB issued Statement No. 158, “Employers’ Accounting
      for Defined Benefit Pension and Other Postretirement Plans”
(“SFAS No. 158”), an amendment of FASB Statements No. 87, 88, 106
      and 132(R). SFAS No. 158 requires (a) recognition of the funded
      status (measured as the difference between the fair value of the plan assets
      and
      the benefit obligation) of a benefit plan as an asset or liability in the
      employer’s statement of financial position, (b) measurement of the funded
      status as of the employer’s fiscal year-end with limited exceptions, and
      (c) recognition of changes in the funded status in the year in which the
      changes occur through comprehensive income. The requirement to recognize the
      funded status of a benefit plan and the disclosure requirements are effective
      as
      of the end of the fiscal year ending after December 15, 2006. The
      requirement to measure the plan assets and benefit obligations as of the date
      of
      the employer’s fiscal year-end statement of financial position is effective for
      fiscal years ending after December 15, 2008. SFAS No. 158 has no
      current applicability to the Company’s financial statements.





In
      September 2006, the Securities and Exchange Commission issued Staff Accounting
      Bulletin No. 108 (“SAB No. 108”). SAB No. 108
      addresses how the effects of prior year uncorrected misstatements should be
      considered when quantifying misstatements in current year financial statements.
      SAB No. 108 requires companies to quantify misstatements using a
      balance sheet and income statement approach and to evaluate whether either
      approach results in quantifying an error that is material in light of relevant
      quantitative and qualitative factors. When the effect of initial adoption is
      material, companies will record the effect as a cumulative effect adjustment
      to
      beginning of year retained earnings and disclose the nature and amount of each
      individual error being corrected in the cumulative adjustment. Complying with
      the requirements of SAB No. 108 had no impact on the Company’s financial
      statements.





In
      February 2007, the FASB issued Statement No. 159, “The Fair Value Option
      for Financial Assets and Financial Liabilities” (“SFAS No. 159”), an
      amendment of FASB Statement No. 115. SFAS No. 159 addresses how
      companies should measure many financial instruments and certain other items
      at
      fair value. The objective is to mitigate volatility in reported earnings caused
      by measuring related assets and liabilities differently without having to apply
      complex hedge accounting provisions. SFAS No. 159 is effective for
      fiscal years beginning after November 15, 2007, with earlier adoption
      permitted. Management is assessing the impact of the adoption of
      SFAS No. 159.





In
      December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business
      Combinations” (“SFAS 141(R)”). SFAS 141(R) will change the accounting for
      business combinations. Under SFAS No. 141(R), an acquiring entity will be
      required to recognize all the assets acquired and liabilities assumed in a
      transaction at the acquisition-date fair value with limited exceptions. SFAS
      No. 141(R) will change the accounting treatment and disclosure for certain
      specific items in a business combination. SFAS No. 141(R) applies
      prospectively to 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, 2008. SFAS 141(R) will impact the Company in the event of any
      future acquisition.




In
      December 2007, the FASB issued SFAS No. 160, “Non-controlling Interests in
      Consolidated Financial Statements—an amendment of Accounting Research Bulletin
      No. 51” (“SFAS 160”). SFAS 160 establishes new accounting and reporting
      standards for the noncontrolling interest in a subsidiary and for the
      deconsolidation of a subsidiary. SFAS No. 160 is effective for fiscal years
      beginning on or after December 15, 2008. The Company does not believe that
      SFAS 160 will have a material impact on its consolidated financial
      statements.




In
      March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative
      Instruments and Hedging Activities—an amendment of FASB Statement No. 133
      (FAS 161). FAS 161 changes the disclosure requirements for derivative
      instruments and hedging activities. Entities are required to provide enhanced
      disclosures about (a) how and why an entity uses derivative instruments,
      (b) how derivative instruments and related hedged items are accounted for
      under Statement 133 and its related interpretations, and (c) how derivative
      instruments and related hedged items affect an entity’s financial position,
      financial performance, and cash flows. The guidance in FAS 161 is effective
      for
      financial statements issued for fiscal years and interim periods beginning
      after
      November 15, 2008, with early application encouraged. This Statement
      encourages, but does not require, comparative disclosures for earlier periods
      at
      initial adoption. The Company is currently assessing the impact of FAS
      161.


12




**4.  Concentrations
      of Business and Credit Risk**





The
      Company provides credit in the normal course of business. The Company performs
      ongoing credit evaluations of its customers and clients and maintains allowances
      for doubtful accounts based on factors surrounding the credit risk of specific
      customers and clients, historical trends, and other information. Trade accounts
      receivable totaled $25,406,355 and $8,242,044 as of March 31, 2008 and June
      30,
      2007, respectively.





The
      Company’s list of customers whose purchases exceeded 10% of total sales during
      the nine months ended March 31, 2008 and 2007 is as follows:





**Customers**
            
            **March 31,**
              **2008**
            
            **% to**
              **sales**
            
            **March 31,**
              **2007**
            
            **% to**
              **sales**Shanghai
                Changshuo Stainless Steel Company, Ltd
            
            $
            14,174,957
            
            
            24
            
            $
            —
            
            
            —Shanghai
                Bayou Trade Co., Ltd.
            
            
            10,854,529
            
            
            18
            
            
            —
            
            
            —Shanghai
                Shengdejia Metal Products Limited
            
            
            8,232,801
            
            
            14
            
            
            —
            
            
            —Sinosteel
                Company Limited
            
            
            —
            
            
            —
            
            
            4,805,195
            
            
            13





**5.**  **Inventories**





As
      of
      March 31, 2008 and June 30, 2007 inventory consisted of the
      following:





**March 31,**
              **2008**
            
            **June 30,**
              **2007**Raw
                materials
            
            $
            9,668,424
            
            $
            13,026,530Work
                in progress
            
            
            3,631,070
            
            
            -Finished
                goods
            
            
            6,295,330
            
            
            2,697,174$
            19,594,824
            
            $
            15,723,704





**6.**  **Property,
      Plant and Equipment**





Property,
      plant and equipment, stated at cost less accumulated depreciation, consisted
      of
      the following:





**March 31,**
              **2008**
            
            **June 30,**
              **2007**Plant
                and machinery
            
            $
            19,840,572
            
            $
            21,087,245Buildings
            
            
            21,093,420
            
            
            11,361,207Motor
                vehicles
            
            
            359,482
            
            
            283,534Office
                equipment
            
            
            78,519
            
            
            85,56041,371,993
            
            
            32,817,546Less:
                Accumulated depreciation
            
            
            (5,714,303
            )
            
            (3,579,319
            )$
            35,657,690
            
            $
            29,238,227





Depreciation
      expense related to manufacturing is included as a component of cost of goods
      sold. During the three and nine months ended March 31, 2008, depreciation
      totaling $770,556
      and $1,430,250,
      respectively, was included as a component of cost of goods sold (2007: $467,514
      and $1,063,658, respectively).





**7.  Construction-In-Progress**





As
      of
      March 31, 2008 and June 30, 2007, construction-in-progress consisted of the
      following:





**March 31,**
              **2008**
            
            **June 30,**
              **2007**Construction
                costs of plant and machinery
            
            $
            12,344,841
            
            $
            10,355,763





Construction-in-progress
      represents construction and installations of the new plant and machinery and
      administration and factory buildings.


13




**8.**  **Advances
      from Customers**





Advances
      from customers represent advance cash receipts from new customers and for which
      goods have not been delivered or services rendered as of the balance sheets
      dates. Advances from customers for goods to be delivered or services to be
      rendered in the subsequent period are carried forward as deferred revenue.
      As of
      March 31, 2008 and June 30, 2007, there were advances from customers of
      $6,896,092 and $1,720,812, respectively.





**9.**  **Transactions
      with Related Parties**





Amounts
      due to (from) directors as of March 31, 2008 and June 30, 2007 are as
      follows:





**Name**
            
            **March
                31,**
              **2008**
            
            **June 30, 2007**Wo
                Hing Li
            
            $
            2,852,704
            
            $
            (2,590,763
            )Hai
                Sheng Chen
            
            
            (45,351
            )
            
            408,619$
            2,807,353
            
            $
            (2,182,144
            )





Amounts
      due are unsecured, non-interest bearing and have no fixed repayment
      terms.





Wo
      Hing
      Li, a director and the President of the Company, executed an agreement with
      the
      Company and certain other parties, dated as of February 13, 2007, as amended
      (the “Debt Conversion Agreement”), such that, upon the occurrence of the
      transfer to Chengtong of Tuorong, he contributed $3,953,794 as additional paid
      in capital to the Company and agreed to convert current debt outstanding and
      payable to him of $6,775,776 into shares of the Company’s common stock at a
      price of $3.36 per share. This transaction was completed on May 19, 2007. When
      Chengtong acquired Tuorong, Tuorong had a preexisting receivable from Wo Hing
      Li, and the Group offset remaining amounts owed to Wo Hing Li against this
      receivable.





In
      conjunction with the Company’s final audit of the Tuorong acquisition, certain
      post-closing adjustments were required. In light of such adjustments and
      consistent with the purposes and intentions of the Debt Reduction Agreement,
      dated February 13, 2007, as amended February 20, 2007, it was determined that
      771,060 shares of the Company’s Common Stock issued to directors pursuant to
      such Agreement would be required to be cancelled in order to eliminate the
      $2,590,763 reflected on the June 30, 2007 audited financial statements as
      amounts due from directors. Such cancellation was effected on November 8,
      2007.





**10.  Short-Term
      Loans**





Short-term
      loans consisted of the following:





**March 31,**
              **2008**
            
            **June 30,**
              **2007**Bank
                loan dated September 22, 2005, due December 31, 2007 with a interest
                rate
                of 15% over the standard market rate set by the People’s Bank of China for
                Renminbi loans, secured by land, buildings and machinery
            
            $
            —
            
            $
            9,842,520Bank
                loan dated August 1, 2007, due in one year with a interest rate of
                the
                Singapore Interbank Offered Rate (SIBOR) plus 3% (5.72% at March
                31,
                2008)
            
            
            5,300,000
            
            
            —Bank
                loan dated August 1, 2007, due in one year with a interest rate of
                13%
                over the standard market rate set by the People’s Bank of China for
                Renminbi loans, secured by land, buildings, plant and machinery (8.44%
                at
                March 31, 2008)
            
            
            3,030,029
            
            
            —Bank
                loan dated July 26, 2007, due in one year with a interest rate of
                15% over
                the standard market rate set by the People’s Bank of China for Renminbi
                loans, secured by land, buildings, plant and machinery (8.59% at
                March 31,
                2008)
            
            
            9,070,165
            
            
            —$
            17,400,194
            
            $
            9,842,520


14


The
      weighted average interest rate on short-term loans at March 31, 2008 was
      7.69%.





**11.  Long-Term
      Debts - Secured**





**March
                31,**
              **2008**
            
            **June 30,**
              **2007**Long-term
                debts:Bank
                loan dated October 14, 2004, due July 31, 2007, at an interest rate
                of 3%
                over the 10% of the standard market rate set by the People’s Bank of China
                for Renminbi loans, secured by land, buildings and
                machinery
            
            $
            —
            
            $
            6,163,445Bank
                loan dated September 22, 2005, due August 31, 2009, at an interest
                rate of
                15% the standard market rate set by the People’s Bank of China for
                Renminbi loans, secured by land, buildings and machinery
            
            
            —
            
            
            6,878,714Total
                long-term debt
            
            
            —
            
            
            13,042,159Less:
                Current portion of long-term debts
            
            
            —
            
            
            6,163,445Long-term
                debts
            
            $
            —
            
            $
            6,878,714





**12.  Income
      Tax**





For
      enterprise income tax reporting purposes, the Company reports income and
      expenses on a tax basis and is required to compute a 10% salvage value when
      computing depreciation expense. For financial reporting purposes, the Company
      reports income and expenses on the accrual basis and does not take into account
      a 10% salvage value when computing depreciation expense.





The
      tax
      holiday resulted in tax savings as follows:





**Three months ended**
              **March 31,**
            
            **Nine months ended**
              **March 31,****2008**
            
            **2007**
            
            **2008**
            
            **2007**Tax
                savings
            
            $
            1,715,718
            
            $
            315,879
            
            $
            3,158,499
            
            $
            1,023,932Benefit
                per shareBasic
            
            $
            0.04
            
            $
            0.01
            
            $
            0.10
            
            $
            0.04Diluted
            
            $
            0.04
            
            $
            0.01
            
            $
            0.10
            
            $
            0.04


15





Significant
      components of the Group’s deferred tax assets and liabilities as of March 31,
      2008 and June 30, 2007 are as follows:





**Deferred tax
                assets and liabilities:**
            
            **March 31,**
              **2008**
            
            **June 30,**
              **2007**Book
                depreciation in excess of tax depreciation
            
            $
            77,143
            
            $
            39,918Timing
                  differences resulting from reporting for tax
                  purposes
            
            
            443,561
            
            
            (1,103,946
            )Net
                deferred income tax asset (liability)
            
            
            520,704
            
            $
            (1,064,028
            )Valuation
                allowance
            
            
            (520,704
            )
            
            --
            
            $
            (1,064,028
            )





A
      reconciliation of the provision for income taxes with amounts determined by
      the
      U.S. federal income tax rate to income before income taxes is as
      follows.




**Three months ended**
              **March 31,**
            
            **Nine months ended**
              **March 31,****2008**
            
            **2007**
            
            **2008**
            
            **2007**Computed tax
                at the federal statutory rate of 34%
            
            $
            1,404,833
            
            $
            582,113
            
            $
            4,610,823
            
            $
            2,617,802Less
                adjustment to EIT statutory rate of 27%
            
            
            (289,231
            )
            
            (119,847
            )
            
            (949,287
            )
            
            (538,959
            )Tax
                effect of US losses not deductible in PRC
            
            
            108,937
            
            
            172,733
            
            
            372,011
            
            
            172,733Deferred
                taxes
            
            
            -
            
            
            (3,241
            )
            
            -
            
            
            (101,857
            )Benefit
                of tax holiday
            
            
            (1,715,718
            )
            
            (315,879
            )
            
            (3,158,499
            )
            
            (1,023,932
            )Income
                tax expense per books
            
            $
            (491,179
            )
            $
            315,879
            
            $
            875,048
            
            $
            1,125,787





Income
      tax expense (benefit) consists of:





**Three months ended**
              **March 31,**
            
            **Nine months ended**
              **March 31,****2008**
            
            **2007**
            
            **2008**
            
            **2007**Income
                tax expense (benefit) for the current year PRC
            
            $
            1,598,777
            
            $
            1,196,573
            
            $
            2,047,911
            
            $
            2,091,886Deferred
                income tax expense (benefit) - PRC
            
            
            (2,089,956
            )
            
            (880,694
            )
            
            (1,172,863
            )
            
            (966,099
            )Income
                tax expense per books
            
            $
            (491,179
            )
            $
            315,879
            
            $
            875,048
            
            $
            1,125,787





**13.  Blessford
      International Limited**





On
      April
      10, 2007, the Company purchased for $100,000 Blessford International Limited,
      a
      British Virgin Islands company. Blessford International Limited does not conduct
      any business, but it owns a single subsidiary, Shanghai Blessford Alloy Company
      Limited, that is a wholly-foreign owned enterprise chartered in China. The
      purchase price was allocated $1 to cash and $99,999 to goodwill.





**14.  Equity**




In
      connection with a Stock Purchase Agreement, dated February 16, 2007 (the “Stock
      Purchase Agreement”), on February 22, 2007, the Company issued warrants to
      the placement agents to purchase an aggregate of 1,300,059 shares of Common
      Stock as partial compensation for services rendered in connection with the
      Private Placement valued at $2,770,349. The value of the warrants was considered
      syndication fees and was recorded to additional paid-in
      capital.





On
      February 22, 2007, the Company issued warrants to purchase up to 100,000 shares
      of Common Stock to the Company’s investor relations consultants valued at
      $447,993. The value of these was considered syndication fees in association
      with
      the Private Placement and was recorded to additional paid-in capital.





On
      November 6, 2007, in connection with a Subscription Agreement, dated November
      1,
      2007 (the “Subscription Agreement”), the Company issued to certain institutional
      accredited investors warrants to purchase 1,420,000 shares of Common Stock
      valued at $5,374,748. In connection with the transaction, Roth Capital Partners,
      LLC, as placement agent, received warrants to purchase 225,600 shares of Common
      Stock valued at $887,504.


16


Information
      with respect to stock warrants outstanding are as follows:





**Exercise**
              **Price**
            
            **Outstanding**
              **June 30, 2007**
            
            **Granted**
            
            **Expired or**
              **Exercised**
            
            **Outstanding**
              **March 31,**
              **2008**
            
            **Expiration Date**$
            3.00
            
            
            1,300,059
            
            
            -0-
            
            
            (275,000
            )
            
            1,025,059
            
            
            02/22/2011$
            3.60
            
            
            100,000
            
            
            -0-
            
            
            -0-
            
            
            100,000
            
            
            02/22/2010$
            8.45
            
            
            -0-
            
            
            1,420,000
            
            
            -0-
            
            
            1,420,000
            
            
            11/06/2010$
            7.38
            
            
            -0-
            
            
            225,600
            
            
            -0-
            
            
            225,600
            
            
            11/06/2010





Pursuant
      to Section 5.1 of the Stock Purchase Agreement, the Company agreed to reserve
      for issuance to investors in the private placement an aggregate of 2,000,000
      shares of Common Stock if the Company’s net income for the fiscal year ended
      June 30, 2007 was less than US$10.4 million, as set forth in the Company’s
      audited financial statements as filed with the SEC in the Company’s Annual
      Report on Form 10-K for the fiscal year ended June 30, 2007. As the Company’s
      net income as set forth in its audited financial statements for the year ended
      June 30, 2007 was less than US$10.4 million, the Company was required to issue
      the 2,000,000 shares of Common Stock to such investors. Such issuance was
      effected on October 15, 2007. No additional consideration was received by the
      Company in connection with this issuance of shares of Common Stock.





In
      conjunction with the Company’s final audit of the Tuorong acquisition, certain
      post-closing adjustments were required. In light of such adjustments and
      consistent with the purposes and intentions of the Debt Reduction Agreement,
      dated February 13, 2007, as amended February 20, 2007, it was determined that
      771,060 shares of the Company’s Common Stock issued to directors pursuant to
      such Agreement would be required to be cancelled in order to eliminate the
      $2,590,763 reflected on the June 30, 2007 audited financial statements as
      amounts due from directors. Such cancellation was effected on November 8,
      2007.





Pursuant
      to the Subscription Agreement, on November 6, 2007, the Company agreed to issue
      and sell in a registered direct offering (the “Offering”) an aggregate of
      7,100,000 shares of its common stock (“Common Stock”) at a price of $6.75 per
      share (the “Purchase Price”) and an aggregate of 1,420,000 warrants to purchase
      shares of its Common Stock (“Warrants” and, together with the Common Stock, the
“Securities”). The Warrants have an exercise price of $8.45 per share. The
      Warrants may not be exercised prior to May 6, 2008. The Securities (including
      the shares issuable upon exercise of the Warrants) are registered under the
      Securities Act of 1933, as amended (the “Act”), pursuant to the Company’s
      existing effective shelf Registration Statement on Form S-3. In connection
      with
      the offer and sale of the Securities, the Company filed on November 1, 2007,
      a
      Registration Statement on Form S-3 pursuant to Rule 462(b) promulgated under
      the
      Act to register an additional $10 million of its securities relating to its
      shelf Registration Statement.





The
      Company closed the Offering on November 6, 2007 (the “Closing Date”). The net
      proceeds of the offering were approximately $44 million, after deducting
      underwriting commissions and discounts and other fees and expenses relating
      to
      the offering. The warrants were valued at $5.3 million and were recorded to
      additional paid-in capital. The Company intends to use the net proceeds for
      repayment of certain existing bank debt in the amount of approximately $22
      million, capital expenditures related to the annealing furnace and construction
      of the third reverse rolling mill and related capital expenditures in the amount
      of approximately $18 million, and the balance for general corporate purposes.
      Long-term bank loans of $13,042,159 were paid during the three months ended
      March 31, 2008.





On
      the
      Closing Date, pursuant to a Placement Agency Agreement entered into between
      the
      Company and Roth Capital Partners LLC on October 31, 2007, Roth Capital received
      an amount in cash equal to 7.0% of the gross proceeds of the Offering and
      warrants to purchase an amount of Common Stock equal to 3.0% of the total number
      of shares of Common Stock sold in the Offering (the “Placement Warrants”), or
      225,600 shares of Common Stock valued at $887,504 and were recorded as
      syndication fees offsetting additional paid-in capital. Such Placement Warrants
      have an exercise price per share of 120% of the closing price per share of
      the
      Company’s Common Stock on the Closing Date, or $7.38, and are not exercisable
      prior to May 6, 2008. Thereafter, the Placement Warrants are exercisable at
      any
      time until the third anniversary of the date of issue.


17




**15.  Earnings
      Per Share**





SFAS
      128
      requires a reconciliation of the numerator and denominator of the basic and
      diluted earnings per share (EPS) computations.





For
      the
      nine months ended March 31, 2008, dilutive shares include outstanding warrants
      to purchase 1,025,059 shares of common stock at an exercise price of $3.00
      and
      100,000 shares at an exercise price of $3.60. Warrants to purchase 1,420,000
      shares at an exercise price of $8.45; and 225,600 shares at an exercise price
      of
      $7.38 were not included as their effect would have been anti-dilutive. For
      the
      nine months ended March 31, 2007, dilutive shares include outstanding warrants
      to purchase 1,300,059 shares of common stock at an exercise price of $3.00
      and
      100,000 shares at an exercise price of $3.60.





The
      following reconciles the components of the EPS computation:





**Income**
            
            **Shares**
            
            **Per Share****(Numerator)**
            
            **(Denominator)**
            
            **Amount**For
                the three months ended March 31, 2008:Net
                income
            
            $
            4,623,039Less
                Net income from discontinued operations
            
            $
            —Basic
                EPS income available to common shareholders
            
            $
            4,623,039
            
            
            45,896,288
            
            $
            0.10Effect
                of dilutive securities:Warrants
            
            
            
            
            
            469,490Diluted
                EPS income available to common shareholders
            
            $
            4,623,039
            
            
            46,365,778
            
            $
            0.10For
                the three months ended March 31, 2007:Net
                income
            
            $
            1,396,217Less
                net income from discontinued operations
            
            $
            -Basic
                EPS income available to common shareholders
            
            $
            1,396,217
            
            
            28,946,086
            
            $
            0.05Effect
                of dilutive securities:Warrants
            
            
            
            
            
            441,274Diluted
                EPS income available to common shareholders
            
            $
            1,396,217
            
            
            29,387,360
            
            $
            0.05








**Income**
            
            **Shares**
            
            **Per Share****(Numerator)**
            
            **(Denominator)**
            
            **Amount**For
                the nine months ended March 31, 2008:Net
                income
            
            $
            12,686,197Less
                Net income from discontinued operations
            
            $
            -Basic
                EPS income available to common shareholders
            
            $
            12,686,197
            
            
            42,088,128
            
            $
            0.30Effect
                of dilutive securities:Warrants
            
            
            
            
            
            467,784Diluted
                EPS income available to common shareholders
            
            $
            12,686,197
            
            
            42,555,912
            
            $
            0.30For
                the nine months ended March 31, 2007:Net
                income
            
            $
            7,405,078Less
                net income from discontinued operations
            
            $
            990,914Basic
                EPS income available to common shareholders
            
            $
            8,395,992
            
            
            25,815,157
            
            $
            0.26Effect
                of dilutive securities:Warrants
            
            
            
            
            
            144,944Diluted
                EPS income available to common shareholders
            
            $
            8,395,992
            
            
            25,960,101
            
            $
            0.29




18




**16.  Discontinued
        Operations**


The
      operations of OraLabs Inc prior to December 28, 2006 are shown in the financial
      statements as income from discontinued operations as these operations were
      transferred to a former shareholder in exchange for the redemption of his common
      stock. The consolidated financial statements have been reclassified to conform
      to discontinued operations presentation for all historical periods
      presented.





Summarized
      selected financial information for discontinued operations for the three and
      nine months ended March 31, 2008, and 2007 is as follows:





**Three months ended:**
            
            **Nine months ended****March 31,**
            
            **March 31,**
            
            **March 31**
            
            **March
                31****2008**
            
            **2007**
            
            **2008**
            
            **2007**Revenues
            
            $
            -0-
            
            $
            -0-
            
            $
            -0-
            
            $
            9,404,000Income
                before tax
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            1,023,000Income
                taxes
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            192,000Income
                from discontinued operations
            
            $
            -0-
            
            $
            -0-
            
            $
            -0-
            
            $
            831,000




As
      of
      March 31, 2008, there were no assets or liabilities associated with OraLabs,
      Inc.





**17.  Commitments**





As
      of,
      March 31, 2008, the Company had $4,113,480 in commitments for capital
      expenditures for contractual commitments of the construction projects related
      to
      expansion of Chengtong’s production facilities.





**18.**  **Other
      events**





On
      November 12, 20007, at the Annual Meeting of the Company’s shareholders, the
      Company’s shareholders approved the reincorporation of the Company in the state
      of Delaware. The reincorporation was effected on November 16, 2007 through
      a
      merger with and into the Company’s wholly-owned subsidiary.




**19.**  **VAT
        adjustment**
 
 An
        adjustment to increase sales for the first and second quarter by $3,238,801
        to
        reflect the correction of the offset of VAT taxes from net sales has been
        reflected in these financials statements.




**ITEM
      2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATION**




*This
      Quarterly Report on Form 10-Q contains statements that constitute “forward
      looking statements” within the meaning of Section 21E of the Securities
      Exchange Act of 1934, as amended, and Section 27A of the Securities Act of
      1933, as amended. The words “may,” “will,” “expect,” “anticipate,” “continue,”
“estimate,” “project,” “intend,” and similar expressions are intended to
      identify forward-looking statements. These statements appear in a number of
      places in this document and include statements regarding the intent, belief
      or
      expectation of the Company, its directors or its officers with respect to
      events, conditions, and financial trends that may affect the Company’s future
      plans of operations, business strategy, operating results, and financial
      position. Persons reviewing this Quarterly Report on Form 10-Q are
      cautioned that any forward-looking statements are not guarantees of future
      performance and are subject to risks and uncertainties and that actual results
      may differ materially from those included within the forward-looking statements
      as a result of various factors. More information on these risks and
      uncertainties, many of which are beyond the Company’s control, is set forth
      under Part II, Item 1A, “Risk Factors,” in the Company’s Form 10-K filed on
      October 26, 2007.*




*While
      these forward-looking statements, and any assumptions upon which they are based,
      are made in good faith and reflect the Company’s current judgment regarding the
      direction of its business, actual results will almost always vary, sometimes
      materially, from any estimates, predictions, projections, assumptions or other
      future performance suggested herein. The Company undertakes no responsibility
      or
      obligation to update publicly these forward-looking statements, but may do
      so in
      the future in written or oral statements. Investors should take note of any
      future statements made by or on behalf the Company.*




The
      following discussion should be read in conjunction with our unaudited
      consolidated financial statements and the related notes that appear in
      Part I, Item 1, “Financial Statements,” of this Quarterly Report. Our
      unaudited consolidated financial
      statements are stated in United States Dollars and are prepared in accordance
      with United States Generally Accepted Accounting Principles. The following
      discussion and analysis covers the Company’s consolidated financial condition at
      March 31, 2008 (unaudited) and June 30, 2007, the end of its prior
      fiscal year, and its unaudited consolidated results of operation for the three
      and nine month periods ended March 31, 2008 and 2007.


19




**Introduction**




Management’s
      discussion and analysis of financial condition and results of operations is
      intended to help provide an understanding of China Precision Steel, Inc.
      and our subsidiaries’ (together, the “Group”) financial condition, changes in
      financial condition and results of operations. This discussion is organized
      as
      follows.




·
            **Overview
                of the Company’s Business**-
                This section provides a general description of the Group’s business, as
                well as recent developments that have either occurred during the
                nine
                months ended March 31, 2008 and are important in understanding the
                results
                of operations and financial condition or disclose known
                trends.




·
            **Results
                of Operations**-
                This section provides an analysis of our results of operations for
                the
                three and nine months ended March 31, 2008 and 2007. This discussion
                includes a brief description of significant transactions and events
                that
                have an impact on the comparability of the results being
                analyzed.




·
            **Liquidity
                and Capital Resources**-
                This section provides an analysis of the Group’s cash flows for the nine
                months ended March 31, 2008 and 2007. Included in this section is a
                discussion of the Group’s outstanding debt and the financial capacity
                available to fund the Group’s future commitments and
                obligations.




***OVERVIEW
      OF THE COMPANY’S BUSINESS***




We
      are a
      niche and high value-added steel processing company principally engaged in
      the
      manufacture and sale of high precision cold-rolled steel products, in the
      provision of heat treatment and in the cutting of medium and high-carbon
      hot-rolled steel strips. We use commodity steel to create a specialty premium
      steel intended to yield above-average industry gross margins. Specialty
      precision steel pertains to the precision of measurements and tolerances of
      thickness, shape, width, surface finish and other special quality features
      of
      highly-engineered end-use applications.




We
      produce and sell precision ultra-thin and high strength cold-rolled steel
      products ranging from 7.5 mm to 0.03 mm. We also provide heat treatment and
      cutting of medium and high-carbon hot-rolled steel strips not exceeding 7.5
      mm
      fineness. Our process puts hot-rolled de-scaled (pickled) steel coils through
      a
      cold-rolling mill, utilizing our patented systems and high technology reduction
      processing procedures, to make steel coils and sheets in customized thicknesses
      according to customer specifications. Currently, our specialty precision
      products are mainly used in the manufacture of automobile parts and components,
      plane friction discs, appliances, food packaging materials, saw blades, textile
      needles, microelectronics, and packing containers.




We
      conduct our operations principally in China through our wholly-owned operating
      subsidiary, Shanghai Chengtong Precision Strip Co., Limited, or Chengtong,
      which, in turn, is a wholly owned subsidiary of our direct subsidiary, Partner
      Success Holdings Limited, or PSHL. Most of our sales are made domestically
      in
      China; however, during fiscal 2007, we began exporting our cold-rolled
      steel products to Indonesia and the Philippines and, to a lesser extent, Nigeria
      and Thailand. We intend to expand into additional overseas markets in the
      future, subject to suitable market conditions and favorable regulatory
      controls.




Over
      the
      course of the past two years, we have begun to alter our product mix to meet
      market demands in our primary market, China, as well as to expand into overseas
      markets. We continue to focus on the production of higher margin products,
      although we have increased production of certain of our lower margin products
      due to market demand. These changes in our strategy have created increased
      capital requirements as we have sought to construct additional rolling mills
      to
      accommodate our planned growth. In addition, our workforce has increased and,
      in
      particular, we have faced a growing need for experienced executive and technical
      staff.




Our
      market is highly competitive, although we have focused on a niche market that
      we
      consider allows us to compete effectively as we continue to grow our business.
      We face significant competition for raw materials, especially crude steel,
      and
      our financial results may be impacted by changes in the market prices for these
      materials. Given our size, we do not have the ability to influence the prices
      at
      which we must purchase raw materials. However, the nature of our products enable
      us to pass on all or part of the price fluctuations in raw materials to our
      customers.


20




In
      the
      year ended June 30, 2007, we added three indirect subsidiaries to our
      corporate structure. On April 9, 2007, we purchased Shanghai Tuorong
      Precision Strip, Limited, or Tuorong, through PSHL. The sole activity of Tuorong
      is the ownership of a land use right with respect to facilities leased to
      Chengtong. On April 10, 2007, PSHL purchased for nominal consideration
      Blessford International Limited, a British Virgin Islands company. Blessford
      International Limited does not conduct any business, but it owns a single
      subsidiary, Shanghai Blessford Alloy Company Limited, that is a wholly-foreign
      owned enterprise chartered in China. We intend to hold Blessford International
      Limited as a shell subsidiary that may be used in the future to facilitate
      optimization of the structure of the Group’s activities.




***RESULTS
      OF OPERATIONS***




***Three
      Months Ended March 31, 2008 Compared to Three Months Ended March 31,
      2007***




Net
      income before tax increased by $2,419,764, or 141%, period-on-period to
      $4,131,860 for the three months ended March 31, 2008 from $1,712,096 for
      the three months ended March 31, 2007 and gross profit increased by
      $1,954,902, or 58%, period-on-period.




**Gross
      Profit**




Gross
      profits in absolute terms increased by $1,954,902, or 58%, period-on-period
      to
      $5,324,832 for the three months ended March 31, 2008 from $3,369,930 for
      the three months ended March 31, 2007, while gross profit margin slightly
      decreased to 28.4% for the three months ended March 31, 2008 from 29.0% for
      the three months ended March 31, 2007. The decrease in gross profit margin
      principally resulted from a change in sales mix over the three months ended
      March 31, 2008, during which no high end cold-rolled steel was
      produced.




***Sales
      Revenues.*** Sales
      volume increased by 8,163 metric tons, or 50.7%, period-on-period to 24,273
      metric tons for the three months ended March 31, 2008 from 16,110 tons for
      the three months ended March 31, 2007.  As a result, sales revenues
      increased by $7,113,169, or 61.3%, period-on-period to $18,723,842 for the
      three
      months ended March 31, 2008 from $11,610,673 for the three months ended
      March 31, 2007. We believe that the increases in sales and sales revenues
      are a direct result of increase in volume produced and shipped, especially
      the
      production and exporting of additional low carbon hard-rolled steel coils,
      as
      well as the subcontracting work during the quarter that was not done in the
      quarter ended March 31, 2007.




Average
      cost of production per ton increased to $552 for the three months ended
      March 31, 2008 compared to an average cost of production per ton of $512
      for the three months ended March 31, 2007, representing an increase of $40
      per ton, or 7.8%, period-on-period. The 1400 mm cold-roll mill which became
      operational at the beginning of October 2006 is now operating at
      approximately 50% of design capacity and will likely take another two years
      to
      reach its maximum production speed and capacity.




**Sales
      by Product Line.** A
      break-down of our sales by product line for the three months ended
      March 31, 2008 and 2007 is as follows:





**Three Months Ended March 31,****2008**
            
            **2007**
            
            **Period-on-period****Product category******
            
            **Quantity**
              **(tons)**
            
            **$  Amount**
            
            **% of sales**
            
            **Quantity**
              **(tons)**
            
            **$****Amount**
            
            **% of**
              **sales**
            
            **Qty.**
              **Variance******Low
                carbon cold-rolled
            
            
            7,196
            
            
            5,362,597
            
            
            28.7
            
            
            8,739
            
            
            5,233,213
            
            
            45.0
            
            
            (1,543
            )Low
                carbon hard rolled
            
            
            5,178
            
            
            3,562,724
            
            
            19.0
            
            
            378
            
            
            262,340
            
            
            2.3
            
            
            4,800High-carbon
                cold-rolled
            
            
            3,270
            
            
            4,011,039
            
            
            21.4
            
            
            2,309
            
            
            3,583,283
            
            
            30.9
            
            
            961High-carbon
                hot-rolled
            
            
            1,592
            
            
            1,447,782
            
            
            7.7
            
            
            4,511
            
            
            2,334,225
            
            
            20.1
            
            
            (2,919
            )Sales
                of scrap metal
            
            
            —
            
            
            296,863
            
            
            1.6
            
            
            —
            
            
            —
            
            
            —
            
            
            —Subcontracting
                income
            
            
            7,037
            
            
            4,042,838
            
            
            21.6
            
            
            —
            
            
            —
            
            
            —
            
            
            7,037High
                end cold- rolled
            
            
            —
            
            
            —
            
            
            —
            
            
            173
            
            
            197,612
            
            
            1.7173
            
            
            (173
            )Total
            
            
            24,273
            
            
            18,723,842
            
            
            100.0
            
            
            16,110
            
            
            11,610,673
            
            
            100




21




There
      were various changes in the break-down of sales among our product lines over
      the
      three months ended March 31, 2008 as we have been ramping up the capacity
      of the additional mill since October 2006 and are in the process of developing
      new products and new markets. High-carbon hot-rolled steel products only
      accounted for 7.7% of the current sales mix at an average selling price of
      $909
      per ton for the three months ended March 31, 2008 compared to 20.1% of the
      sales mix at an average selling price per ton of $517 for the three months
      ended
      March 31, 2007. The low-carbon cold-rolled steel products accounted for
      28.7% of the current sales mix at an average selling price of $745 per ton
      for
      the three months ended March 31, 2008 compared to 45.0% of the sales
      mix at an average selling price per ton of $599 for the three months ended
      March 31, 2007 as a result of production of higher precision products in
      this category. Low carbon hard-rolled steel, which is also our exported
      precision steel products, was 2.3% of sales during the three months ended
      March 31, 2007, accounted for $3,562,724, or 19.0%, of the current sales
      mix at an average selling price of $688 per ton for the three months ended
      March 31, 2008.




We
      strive
      to find an appropriate sales mix that provides us with the stability and cash
      flows, along with the higher margin provided by high precision and individually
      customized cold-rolled steel products. Management continues to take appropriate
      action to develop new products and optimize our product mix without adversely
      affecting overall sales volume and margins. Management believes that there
      are
      high barriers to entry in the Chinese domestic precision cold-rolled steel
      industry because of the level of technology expertise required for operation
      and
      that our unique capabilities and know-how give us a competitive advantage to
      grow sales of higher margin products as we continuously carry out R&D and
      strive to launch new products that could potentially lead to new segments,
      customers and markets.




**Three Months Ended**
              **March 31,****Average selling prices**
            
            **2008**
            
            **2007**
            
            **Variance**********
            
            $
            
            $ ****
            
            $
            
            % ****Low-carbon
                cold-rolled
            
            
            745
            
            
            599
            
            
            146
            
            
            24.4Low-carbon
                hard rolled
            
            
            688
            
            
            694
            
            
            (6
            )
            
            (0.9
            )High-carbon
                cold-rolled
            
            
            1,227
            
            
            1,552
            
            
            (325
            )
            
            (20.9
            )High-carbon
                hot-rolled
            
            
            909
            
            
            517
            
            
            392
            
            
            75.8Subcontracting
                income
            
            
            575
            
            
            —
            
            
            575
            
            
            100High-end
                cold-rolled
            
            
            —
            
            
            1,142
            
            
            (1,142
            )
            
            (100
            ))




The
      average unit selling price per ton generated increased to $771 per ton for
      the
      three months ended March 31, 2008 compared to the corresponding period in
      2007 of $721, representing an increase of $50, or 6.9%, period-on-period. This
      increase was due to changes in our sales mix during the quarter to focus on
      high
      quality high margin products and subcontracting work. Sales of high-carbon
      cold-rolled steel products have increased by 961 metric tons, or 41.6%,
      period-on-period to 3,270 metric tons for the three months ended March 31,
      2008 compared to 2,309 metric tons for the three months ended March 31,
      2007. While the volume of high-carbon cold-rolled steel increased, the average
      sales price declined $325, or 20.9%, to $1,227 in the three months ended
      March 31, 2008 as compared to an average selling of $1,552 in the three
      months ended March 31, 2007. This product accounted for $4,011,039, or
      21.4%, of the total sales mix for the three months ended March 31, 2008
      compared to $3,583,283, or 30.9%, of the sales mix for the three months ended
      March 31, 2007.




**Sales
      Breakdown by Major Customer.**




********
            
            **Three Months Ended March 31****Customers******
            
            **2008 ($ )**
            
            **% to sales**
            
            **2007 ($ )**
            
            **% to sales**Shanghai
                Baosteel Stainless Steel Processing and Distribution Co., Ltd.
            
            
            3,906,047
            
            
            21
            
            
            *
            
            
            *Shanghai
                Bayou Trading Co., Ltd
            
            
            1,628,451
            
            
            9
            
            
            *
            
            
            *Shanghai
                Shengdejia Metal Products Co., Ltd.
            
            
            1,223,316
            
            
            6
            
            
            *
            
            
            *Shanghai
                Changshuo Stainless Steel Processing Co. Ltd.
            
            
            706,998
            
            
            4
            
            
            *
            
            
            *Unimax
                & Far Corporation
            
            
            526,322
            
            
            3
            
            
            *
            
            
            *Sinosteel
                Company Limited
            
            
            *
            
            
            *
            
            
            1,585,399
            
            
            14Hangzhou
                Relian Company Limited
            
            
            *
            
            
            *
            
            
            1,373,785
            
            
            12Nuoying
                International (HK) Co. Limited
            
            
            *
            
            
            *
            
            
            1,411,803
            
            
            12Hubei
                Dafan Vehicle Enterprise Co. Limited
            
            
            *
            
            
            *
            
            
            475,908
            
            
            4Shanghai
                Bayou Industrial Limited
            
            
            *
            
            
            *
            
            
            319,957
            
            
            37,991,134
            
            
            43
            
            
            5,166,852
            
            
            45Others
            
            
            10,732,709
            
            
            57
            
            
            6,443,821
            
            
            55**Total**
            
            
            18,723,842
            
            
            100
            
            
            11,610,673
            
            
            100







**
      Not
      major customers for the relevant periods*




22





Sales
      revenues generated from the top five major customers as a percentage of total
      sales decreased to 43% for the three months ended March 31, 2008 as
      compared to 45% for the three months ended March 31, 2007. The top five
      major customers were different period-on-period. The change in customer mix
      reflects our shift in product focus during the course of the
      period.




**Cost
      of Sales** .




********
            
            **Three Months Ended March 31,**********
            
            **2008**
            
            **2007**
            
            **Variance**********
            
            $
            
            $
            
            $
            
            %**Cost
                of sales**-
                Raw materials
            
            
            10,685,196
            
            
            6,781,677
            
            
            3,903,519
            
            
            57.6-
                Direct labor
            
            
            134,404
            
            
            128,675
            
            
            5,729
            
            
            4.5-
                Factory overhead
            
            
            2,579,410
            
            
            1,330,391
            
            
            1,249,019
            
            
            93.913,399,010
            
            
            8,240,743
            
            
            5,158,267
            
            
            62.6**Cost
                per units sold**Total
                units sold
            
            
            24,273
            
            
            16,110
            
            
            8,163
            
            
            50.7Average
                cost per unit sold
            
            
            552
            
            
            512
            
            
            40
            
            
            7.8




Cost
      of
      sales increased by $5,158,267, or 62.6%, period-on-period to $13,399,010 for
      the
      three months ended March 31, 2008 from $8,240,743 for the three months
      ended March 31, 2007. Cost of sales represented 71.6% of sales revenues for
      the three months ended March 31, 2008 compared to 71.0% for the three
      months ended March 31, 2007. Average cost per ton sold increased by $40, or
      7.8%, period-on-period to $552 per ton for the three months ended March 31,
      2008 from $512 per ton for the three months ended March 31, 2007.
      Meanwhile, the average selling price per ton increased by $50 per ton, or 6.9%,
      period-on-period to $771 per ton for the three months ended March 31, 2008
      from $721 per ton for the three months ended March 31, 2007.




Management
      believes that the increase in cost of sales is represented by the combined
      effect of:




·
            significant
                increase in sales of 5,178 metric tons of low-carbon hard-rolled
                steel
                (compared to 378 metric tons for the three months ended March 31,
                2007) was generated at an average selling price of $688 per ton for
                the
                three months ended March 31,
                2008.





·
            sales
                of 3,270 metric tons of high-carbon cold-rolled steel (compared to
                2,309
                metric tons for the three months ended March 31, 2007) generated at
                an average selling price of $1227 per ton (compared to $1,552 per
                ton for
                the three months ended March 31, 2007) for the three months ended
                March 31, 2008;





·
            sales
                of low-carbon cold-rolled steel at a lower 7,196 metric tons (compared
                to
                8,739 metric tons for the three months ended March 31, 2007) was
                generated at an average selling price of $745 per ton (compared to
                $599
                for the three months ended March 31, 2007) for the three months ended
                March 31, 2008;





The
      cost
      of raw materials consumed increased by $3,903,519, or 57.6%, period-on-period
      to
      $10,685,196 for the three months ended March 31, 2008 from $6,781,677 for
      the three months ended March 31, 2007. This increase was mainly
      attributable to increases in sales volume by 8,163 metric tons, or 50.7%,
      period-on-period to 24,273 metric tons for the three months ended March 31,
      2008 from 16,110 metric tons for the three months ended March 31, 2007
      resulting in higher input of raw materials utilized in production. Average
      unit
      cost of raw materials per unit produced increased by $40 per ton, or 7.8%,
      period-on-period to $552 per ton for the three months ended March 31, 2008
      from $512 per ton for the three months ended March 31, 2007.




23




Manufacturing
      overhead costs increased by $1,249,019, or 93.9%, period-on-period to $2,579,410
      for the three months ended March 31, 2008 from $1,330,391 for the three
      months ended March 31, 2007. The increase was mainly attributable to the
      combined effect of an increase in utilities by $304,656, or 216%,
      period-on-period to $445,437 for the three months ended March 31, 2008 from
      $140,781 for the three months ended March 31, 2007, an increase in
      consumables by $406,632, or 162%, period-on-period to $656,994 for the three
      months ended March 31, 2008 from $250,362 for the three months ended
      March 31, 2007.




**Expenses**




***Selling
      Expenses*** .
      Selling
      expenses increased by $111,162, or 120%, period-on-period, to $203,477 for
      the
      three months ended March 31, 2008 compared to the corresponding period in
      2007 of $92,315. The increase was mainly attributable to increases in
      transportation, which rose by 109% period-on-period, due to our increased
      delivery charges of precision steel resulting from a broader customer base,
      especially exports where our standard contract terms are F.O.B. and we incur
      transportation costs to the port of shipment, plus loading costs, as well as
      an
      increase in the frequency of deliveries.


***Administrative
        Expenses*** **.** Administrative
        expenses decreased by $711,885, or 50.4%, period-on-period, to $699,221 for
        the
        three months ended March 31, 2008 compared to the comparable period in
        2007. This decrease was chiefly associated with lower SEC compliance costs
        and
        professional fees as there was no financing activity during the quarter and
        we
        become more familiar with the rules and regulations as a listed company.
        There
        were increases in salaries and wages which were principally due to increases
        in
        the monthly salaries of the management staff as well as increase in average
        number of Chengtong staff.
  ***Finance
        Costs*** .
        Net
        finance cost increased 111% period-on-period as a result of the increase
        in
        total interest expense to 415,863 for 2008 compared to $196,787 for
        2007.
  ***Nine
        Months Ended March 31, 2008 Compared To Nine Months Ended March 31,
        2007***
  Net
        income before tax increased by $5,861,828, or 76.1%, period-on-period to
        $13,561,245 for the nine months ended March 31, 2008 from $7,699,417 for
        the nine months ended March 31, 2007 and gross profit increased by
        $6,530,152, or 62.3%, period-on-period.
  **Gross
        Profit**
  Gross
        profits in absolute terms increased by $6,530,152, or 62.3%, period-on-period
        to
        $17,016,062 for the nine months ended March 31, 2008 from $10,485,910 for
        the nine months ended March 31, 2007, while gross profit margin increased
        to 28.7% for the nine months ended March 31, 2008 from 28.2% for the nine
        months
        ended March 31, 2007. The increase in gross profits is mainly attributable
        to
        increase in sales during the nine months ended March 31, 2008. The increase
        in
        gross profit margin principally resulted from a change in sales mix over
        the
        nine months ended March 31, 2008, which produced increased sales of higher
        margin steel products.
  ***Sales
        Revenues.*** Sales
        volume increased by 32,048 metric tons, or 70.3%, period-on-period to 77,651
        metric tons for the nine months ended March 31, 2008 from 45,603 tons for
        the
        nine months ended March 31, 2007.  As a result, sales revenues increased by
        $22,067,457, or 59.4%, period-on-period to $59,189,060 for the nine months
        ended
        March 31, 2008 from $37,121,603 for the nine months ended March 31, 2007.
        We
        believe that the increases in sales and sales revenues are a direct result
        of
        increases in our capacity and the continuous building of our brand both inside
        and outside China among users of precision steel products.


24




Average
      cost of production per ton decreased to $543 for the nine months ended March
      31,
      2008 compared to an average cost of production per ton of $584 for the nine
      months ended March 31, 2007, representing an decrease of $41 per ton, or 7.0%,
      period-on-period. The 1400 mm cold-roll mill which became operational in
      October 2006 is now operating at approximately 50% of design capacity.
      Greater production capacity and more flexibility in our sales mix has resulted
      in a decrease in the average cost of production during the nine months ended
      March 31, 2008.




**Sales
      by Product Line** . A
      break-down of our sales by product line for the nine months ended March 31,
      2008
      and 2007 is as follows:




********
            
            **2008**
            
            **2007**
            
            **Period-on-period****Product category******
            
            **Quantity**
              **(tons)**
            
            **$****Amount**
            
            **% of sales**
            
            **Quantity**
              **(tons)**
            
            **$****Amount**
            
            **% of**
              **sales**
            
            **Qty.**
              **Variance**Low
                carbon cold-rolled
            
            
            24,958
            
            
            19,561,692
            
            
            33.0
            
            
            26,558
            
            
            16,046,675
            
            
            43.2
            
            
            (1,600
            )Low
                carbon hard rolled
            
            
            12,462
            
            
            8,235,950
            
            
            13.9
            
            
            2,344
            
            
            436,242
            
            
            1.2
            
            
            10,118High-carbon
                cold-rolled
            
            
            15,726
            
            
            21,523,894
            
            
            36.4
            
            
            4,116
            
            
            8,164,065
            
            
            22.0
            
            
            11,610High-carbon
                hot-rolled
            
            
            6,846
            
            
            3,620,677
            
            
            6.1
            
            
            12,026
            
            
            7,226,249
            
            
            19.5
            
            
            (5,180
            )Low
                carbon acid wash
            
            
            -
            
            
            -
            
            
            -
            
            
            14
            
            
            5,686
            
            
            0.0
            
            
            (14
            ))High
                end cold-rolled
            
            
            -
            
            
            -
            
            
            -
            
            
            545
            
            
            5,242,686
            
            
            14.1
            
            
            (545
            )Sales
                of Scrap Metal
            
            
            -
            
            
            781,238
            
            
            1.3
            
            
            -
            
            
            -
            
            
            -
            
            
            -Subcontracting
                income
            
            
            17,659
            
            
            5,465,609
            
            
            9.3
            
            
            -
            
            
            -
            
            
            -
            
            
            17,659Total
            
            
            77,651
            
            
            59,189,060
            
            
            100.0
            
            
            45,603
            
            
            37,121,603
            
            
            100.0




There
        were various changes in the break-down of sales among our product lines over
        the
        nine months ended March 31, 2008 as we have been ramping up the capacity
        of the
        additional mill since October 2006 and are in the process of developing new
        products and new markets. High-carbon hot-rolled steel products only accounted
        for 6.1% of the current sales mix at an average selling price of $529 per
        ton
        for the nine months ended March 31, 2008 compared to 19.5% of the sales mix
        at
        an average selling price per ton of $601 for the nine months ended March
        31,
        2007. The lower priced low-carbon cold-rolled steel products accounted for
        33.0%
        of the current sales mix at an average selling price of $784 per ton for
        the
        nine months ended March 31, 2008 compared to 43.2% of the sales mix at an
        average selling price per ton of $604 for the nine months ended March 31,
        2007.
        Low carbon hard-rolled steel, accounted for 13.9%, of the current sales mix
        at
        an average selling price of $661 per ton for the nine months ended March
        31,
        2008 compared to 1.2% of the sales mix at an average selling price per ton
        of
        $186 for the nine months ended March 31, 2007.




We
      strive
      to find an appropriate sales mix that provides us with the stability and cash
      flows, along with the higher margin provided by high precision and individually
      customized cold-rolled steel products. Management continues to take appropriate
      action to develop new products and optimize our product mix without adversely
      affecting overall sales volume and margins. Management believes that there
      are
      high barriers to entry in the Chinese domestic precision cold-rolled steel
      industry because of the level of technology expertise required for operation
      and
      that our unique capabilities and know-how give us a competitive advantage to
      grow sales of higher margin products as we continuously carry out R&D and
      strive to launch new products that could potentially lead to new segments,
      customers and markets.




**Nine months Ended**
              **December 31,****Average selling prices**
            
            **2008**
            
            **2007**
            
            **Variance**$
            
            $
            
            $
            
            %Low-carbon
                cold-rolled
            
            
            784
            
            
            604
            
            
            180
            
            
            8.3
            %Low-carbon
                hard rolled
            
            
            661
            
            
            186
            
            
            475
            
            
            255.4
            %High-carbon
                cold-rolled
            
            
            1,369
            
            
            1,983
            
            
            (614
            )
            
            (31.0
            %)High-carbon
                hot-rolled
            
            
            529
            
            
            601
            
            
            (72
            )
            
            (12.0
            %)Low
                -carbon acid wash
            
            
            —
            
            
            406
            
            
            (406
            )
            
            (100.0
            %)High
                end cold-rolled
            
            
            —
            
            
            9,620
            
            
            (9,620
            )
            
            (100.0
            %)Subcontracting
                income
            
            
            310
            
            
            —
            
            
            310
            
            
            100.0
            %




The
      average unit selling price per ton generated decreased to $762 per ton for
      the
      nine months ended March 31, 2008 compared to the corresponding period in 2007
      of
      $814, representing a decrease of $52, or 6.4%, period-on-period. This
      decrease was due to changes in the sales mix for the nine months ended March
      31,
      2008 as compared to 2007. Sales of high-carbon cold-rolled steel products have
      increased by 11,610 metric tons, or 282%, period-on-period to 15,726 metric
      tons
      for the nine months ended March 31, 2008 compared to 4,116 metric tons for
      the
      nine months ended March 31, 2007. While the volume of high-carbon cold-rolled
      steel increased, the average sales price declined $614, or 31%, to $1,369 in
      the
      nine months ended March 31, 2008 as compared to an average selling of $1,983
      in
      the nine months ended March 31, 2007. This product accounted for $21,523,894,
      or
      36.4%, of the total sales mix for the nine months ended March 31, 2008 compared
      to $8,164,065, or 22%, of the sales mix for the nine months ended March 31,
      2007.




25




**Sales
      Breakdown by Major Customer.**




**Nine months Ended December 31****Customers**
            
            **2008 ($ )**
            
            **% to sales**
            
            **2007 ($ )**
            
            **% to sales**Shanghai
                Changshuo Steel Company Ltd
            
            
            14,174,957
            
            
            24
            
            
            *
            
            
            *Shanghai
                Bayou Trade Co. Ltd.
            
            
            10,854,529
            
            
            18
            
            
            *
            
            
            *Shanghai
                Shengdejia Metal Products Co., Ltd
            
            
            8,232,801
            
            
            14
            
            
            *
            
            
            *Shanghai
                Baosteel Stainless Steel Processing and Distribution Co., Ltd
            
            
            4,113,827
            
            
            7
            
            
            *
            
            
            *Shanghai
                Wozi Jintian Saw Blade Co., Ltd
            
            
            1,429,622
            
            
            2
            
            
            *
            
            
            *Sinosteel
                Company Limited
            
            
            --*
            
            
            *
            
            
            4,805,195
            
            
            13Hangzhou
                Relian Company Limited
            
            
            *
            
            
            *
            
            
            3,308,317
            
            
            9Nuoying
                International (HK) Co. Limited
            
            
            *
            
            
            *
            
            
            3,120,068
            
            
            8Weitu
                Technology(Shanghai) Co., Ltd
            
            
            *
            
            
            *
            
            
            953,509
            
            
            3Hubei
                Dafan Vehicle Enterprise Co. Limited
            
            
            *
            
            
            *
            
            
            947,010
            
            
            238,805,736
            
            
            65
            
            
            13,134,099
            
            
            35Others
            
            
            20,383,324
            
            
            35
            
            
            23,987,504
            
            
            65**Total**
            
            
            59,189,060
            
            
            100
            
            
            37,121,603
            
            
            100







**
      Not
      major customers for the relevant periods*




Sales
      revenues generated from the top five major customers as a percentage of total
      sales increased to 65% for the nine months ended March 31, 2008 as compared
      to
      35% for the nine months ended March 31, 2007. The top five major customers
      were
      different period-on-period. The change in customer mix reflects our shift in
      product focus during the course of the period.




**Cost
      of Sales** .




****
            
            **Nine months Ended December 31,******
            
            **2008**
            
            **2007**
            
            **Variance******
            
            $
            
            $
            
            $
            
            %**Cost
                of sales**-
                Raw materials
            
            
            35,954,929
            
            
            23,116,946
            
            
            12,837,983
            
            
            55.5-
                Direct labor
            
            
            484,872
            
            
            465,067
            
            
            19,805
            
            
            4.3-
                Factory overhead
            
            
            5,733,197
            
            
            3,053,680
            
            
            2,679,517
            
            
            87.742,172,998
            
            
            26,653,693
            
            
            15,537,305
            
            
            58.3**Cost
                per units sold**Total
                units sold
            
            
            77,651
            
            
            45,603
            
            
            32,048
            
            
            70.3Average
                cost per unit sold
            
            
            543
            
            
            584
            
            
            (41
            )
            
            (7.0
            )




Cost
      of
      sales increased by $15,537,305 or 58.3%, period-on-period to $42,172,998 for
      the
      nine months ended March 31, 2008 from $26,653,693 for the nine months ended
      March 31, 2007. Cost of sales represented 71.3% of sales revenues for the nine
      months ended March 31, 2008 compared to 71.8% for the nine months ended March
      31, 2007. Average cost per ton sold decreased by $41, or 7.0%, period-on-period
      to $543 per ton for the nine months ended March 31, 2008 from $584 per ton
      for
      the nine months ended March 31, 2007. Meanwhile, the average selling price
      per
      ton decreased by $52 per ton, or 6.4%, period-on-period to $762 per ton for
      the
      nine months ended March 31, 2008 from $814 per ton for the nine months ended
      March 31, 2007.




26




The
      raw
      materials cost component relative to sales revenues increased to 60.7% for
      the
      nine months ended March 31, 2008 compared to 62.3% for the nine months ended
      March 31, 2007. This was attributable to changes in the production mix of
      products with different gross margins in the nine months ended March 31, 2008
      as
      compared to the nine months ended March 31, 2007.  This mix of lower margin
      products, primarily produced in the first quarter, was related to a decision
      by
      management to reduce levels of raw materials inventory to a more healthy
      level.




Management
      believes that the increase in cost of sales is represented by the combined
      effect of:




·
            sales
                of 15,726 metric tons of high-carbon cold-rolled steel (compared
                to 4,116
                metric tons for the nine months ended March 31, 2007) generated at
                an
                average selling price of $1,369 per ton (compared to $1,983 per ton
                for
                the nine months ended March 31, 2007) for the nine months ended March
                31,
                2008; and




·
            sales
                of 12,462 metric tons of low-carbon hard-rolled steel (compared to
                2,344
                metric tons at an average selling price of $186 for the nine months
                ended
                March 31, 2007) generated at an average selling price of $661 per ton
                for the nine months ended March 31,
                2008.




The
      cost
      of raw materials consumed increased by $12,837,983, or 55.5%, period-on-period
      to $39,954,929 for the nine months ended March 31, 2008 from $23,116,946 for
      the
      nine months ended March 31, 2007. This increase was mainly attributable to
      increases in sales volume by 32,048 metric tons, or 70.3%, period-on-period
      to
      77,651 metric tons for the nine months ended March 31, 2008 from 45,603 metric
      tons for the nine months ended March 31, 2007 resulting in higher input of
      raw
      materials utilized in production. Average unit cost of raw materials per unit
      produced decreased by $44 per ton, or 8.7%, period-on-period to $463 per ton
      for
      the nine months ended March 31, 2008 from $507 per ton for the nine months
      ended
      March 31, 2007.




Manufacturing
      overhead costs increased by $2,679,517, or 87.7%, period-on-period to $5,733,197
      for the nine months ended March 31, 2008 from $3,053,680 for the nine months
      ended March 31, 2007. The increase was mainly attributable to the combined
      effect of an increase in utilities by $863,157, or 337%, period-on-period to
      $1,119,244 for the nine months ended March 31, 2008 from $256,087 for the nine
      months ended March 31, 2007, and an increase in consumables by $1,160,277,
      or
      308%, period-on-period to $1,537,044 for the nine months ended March 31, 2008
      from $376,767 for the nine months ended March 31, 2007.




**Expenses**




***Selling
      Expenses*** .
      Selling
      expenses increased by $288,221, or 147%, period-on-period, to $484,926 for
      the
      nine months ended March 31, 2008 compared to the corresponding period in 2007
      of
      $196,705. The increase was mainly attributable to increases in transportation,
      which rose by 251% period-on-period, due to our increased delivery charges
      of
      precision steel resulting from a broader customer base, especially exports
      where
      our standard contract terms are F.O.B.  and we incur transportation costs
      to the port of shipment, plus loading costs, as well as an increase in the
      frequency of deliveries.




***Administrative
      Expenses*** . **** Administrative
      expenses decreased by $64,215, or 3.1%, period-on-period, to $2,031,816 for
      the
      nine months ended March 31, 2008 compared to $2,096,031 in the comparable period
      in 2007. This decrease was chiefly due to reduction in the expenses relating
      to
      the Company’s SEC and NASDAQ compliance obligations.




***Finance
      Costs*** .
      Net
      finance cost increased 128% period-on-period as a result of increases in total
      interest expense by $659,995 to $1,174,864 in 2008 compared to $514,869 for
      2007.




***LIQUIDITY
      AND CAPITAL RESOURCES***




Our
      business is capital intensive and requires substantial expenditures for, among
      other things, the purchase and maintenance of equipment used in our operations.
      Our short-term and long-term liquidity needs arise primarily from capital
      expenditures, working capital requirements and principal and interest payments
      related to our outstanding indebtedness. We have met these liquidity
      requirements with cash provided by operations, equity financing, and bank
      debt.




27





Net
      cash
      flows used in operating activities for the nine months ended March 31, 2008
      was
      $25,149,302 as compared with $2,952,148 provided by operating activities for
      the
      nine months ended March 31, 2007, for a net increase of $28,101,450.  This
      increase was due primarily to an increase in bank acceptance notes not
      previously held at June 30, 2007 and increases in advances to suppliers
      during the nine months ended March 31, 2008.




Net
      cash
      flows used in investing activities for the nine months ended March 31, 2008
      was
      $7,512,290 as compared with $10,329,164 for the nine months ended March 31,
      2007.  The decrease in investing activity was due to reduced construction
      during the nine months ended March 31, 2008 as compared to the same period
      in
      2007.




Net
      cash
      flows provided by financing activities for the nine months ended March 31,
      2008,
      was $39,529,696 as compared with $17,784,748 provided by financing activities
      for the nine months ended March 31, 2007. The nine months ended March 31,
      2007 **** reflect
      borrowings which were incurred for expansion of the operations and to finance
      the construction-in-progress on new facilities. Repayments on advances from
      directors in 2007 partially offset the bank borrowings. During the nine months
      ended March 31, 2008, the Company received $44 million in net proceeds from
      the
      sale of its equity securities, which will be used for repayment of certain
      bank
      debt, capital expenditures relating to the new facilities and working capital.
      Also during the nine months ended March 31, 2008, a director cancelled stock
      in
      the amount of $2 million which was applied against amounts owed by the director
      at June 30, 20007.




**Current
      assets** .
      Current
      assets increased significantly by $65,906,249, or 159.4%, period-on-period
      to
      $107,245,243 as of March 31, 2008 from $41,338,994 as of June 30, 2007,
      principally as a result of increases in cash and equivalents by $8,790,641,
      or
      160%, period-on-period, accounts receivable by $17,164,311, or 208%,
      period-on-period, bank acceptance notes of $4,197,091, or 100%, period on
      period, inventories by $3,871,120, period on period.


**Current
        liabilities** .
        Current
        liabilities increased by $19,832,288, or 75.2%, period-on-period to $46,088,445
        as of March 31, 2008 from $26,356,157 as of June 30, 2007. The increase was
        due to increases in advances from customers, tax payables, provision for
        taxation and amounts due to directors and was mitigated by decreases in current
        portion of long-term debt.
  As
        of
        March 31, 2008, we had $17,400,194 in short term bank debt. We expect to
        refinance such debt at its maturity, but we cannot assure you that we will
        be
        able to do so on terms favorable to the Company or at all.
  **Capital
        Expenditures** . ** During
        the nine months ended March 31, 2008, we invested $7,512,290 in property,
        production plants and equipment. We believe these capital investments increase
        our capacity, expand our product line, and reduce risks related to occupancy
        costs, thereby creating new opportunities to grow sales and control
        expenses.




During
      the current year, we expect to make additional investments in a new continuous
      annealing line and a new 1700mm cold roll mill at our facilities in Shanghai.
      We
      estimate that these investments could total up to $20 million. We intend to
      fund
      these investments through a combination of funds from operations, working
      capital, bank debt and the recent $47.9 million financing which was completed
      in
      November 2007. The actual combination of sources of funds will be dependant
      upon market conditions at the time of implementation.




***OFF-BALANCE
      SHEET ARRANGEMENTS***




For
      the
      three and nine months ended March 31, 2008, we did not have any off-balance
      sheet arrangements.




***CONTRACTUAL
      OBLIGATIONS***




********
            
            **At March 31, 2008**
              **Payments Due By Period****(in thousands)******
            
            **Total**
            
            **Fiscal Year**
              **2008**
            
            **Fiscal**
              **Years**
              **2009-2010**
            
            **Fiscal**
              **Years**
              **2011-2012**
            
            **Fiscal Year**
              **2013 and**
              **Beyond**Contractual obligations:Debt
                Obligations
            
            $
            17,734,713
            
            $
            17,734,713
            
            $
            -
            
            $
            -
            
            $
            -Construction
                Commitments
            
            
            4,235,722
            
            
            4,235,722
            
            
            -
            
            
            -
            
            
            -$
            21,970,435
            
            $
            21,970,435
            
            $
            -
            
            $
            -
            
            $
            -




28


**Bank
      Debt**




Bank
      and
      other loans decreased by $5,484,485, or 24% period-on-period to $17,400,194
      as
      of March 31, 2008 from $22,884,679 as of June 30, 2007. The decrease was
      attributable to the payoff of one of the outstanding loans.




***Short-term
      bank loans***




Short-term
      bank loans increased by $7,557,674 or 76.8%, period on period to $17,400,194
      as
      of March 31, 2008 compared to $9,842,520 as of June 30, 2007.




***Long-term
      bank loans***




Long-term
      bank loans of $13,042,159 were paid during the nine months ended March 31,
      2008.




**Land
      Use Rights**




In
      October 2004, Tuorong agreed to purchase a land use right from the Shanghai
      Labor and Economic Development Council with respect to a 20-acre parcel for
      a
      lease period of 50 years at a cost of $472,441. Additionally in November 2005,
      Chengtong agreed to purchase a land use right from the Shanghai Xuhang
      Industrial Development Co., Ltd. with respect to a 27.04-acre parcel for a
      lease
      period of 50 years at a cost of $497,795. In November 2006, Chengtong entered
      into an agreement with the Shanghai Labor and Economic Development Council
      which
      supersedes the aforementioned Tuorong agreement to purchase a total of
      21.34-acre parcel for a lease period of 50 years at an aggregate amount of
      $672,126. In December 2006, Tuorong entered into a Compensation Agreement with
      the Shanghai Jiading Housing, Land and Resource Management Bureau to pay an
      aggregate amount of $637,294 in connection to the two aforementioned
      parcels.




**Inflation**




We
      believe that inflation has not had a material effect on our results of
      operations. We generally manufacture our products to match orders from our
      customers. Due to the specialized nature of our products, we are able to
      purchase raw materials based upon customer orders. This operating model allows
      us to effectively pass along fluctuations in the price of raw materials to
      our
      customers. For commonly used raw materials, we purchase larger quantities when
      we believe prices are likely to increase in the short term in order to minimize
      the impact of any such price increase.




***CRITICAL
      ACCOUNTING POLICIES AND ESTIMATES***




The
      preparation of financial statements in conformity with accounting principles
      generally accepted in the United States requires our management to make
      assumptions, estimates and judgments that affect the amounts reported in the
      financial statements, including the notes thereto, and related disclosures
      of
      commitments and contingencies, if any. We consider our critical accounting
      policies to be those that require the more significant judgments and estimates
      in the preparation of financial statements, including the
      following:




·
            *Functional
                Currency and Translating Financial Statements*—
                The consolidated financial statements have been prepared in accordance
                with accounting principles generally accepted in the United States
                of
                America. Our functional currency is Chinese Renminbi; however, the
                accompanying consolidated financial statements have been expressed
                in USD.
                The consolidated balance sheets have been translated into USD at
                the
                exchange rates prevailing at each balance sheet date. The consolidated
                statements of operations and cash flows have been translated using
                the
                weighted-average exchange rates prevailing during the periods of
                each
                statement.




·
            *Advances
                to Suppliers and from Customers*-
                As is common practice in China, Chengtong will often make advance
                payments
                to its suppliers for materials, or receive advance payments from
                its
                customers. In some cases, the same party may be both a supplier to,
                and
                customer of, Chengtong. In such cases, Chengtong may make an advance
                to a
                third party as supplier and receive an advance from the same party
                as a
                customer. Chengtong’s practice is to offset such amounts against each
                other. We have established an allowance for doubtful accounts as
                a reserve
                against advances made to suppliers to the extent that the related
                goods
                are not received within ninety (90) days of the contract delivery
                date.


29




·
            *Other
                Policies*-
                Other accounting policies used by the Company are set forth in the
                notes
                accompanying our financial
                statements.




***RECENT
      ACCOUNTING PRONOUNCEMENTS***




In
      September 2006, the FASB issued Statement No. 157, “Fair Value
      Measurements” (“SFAS No. 157”). SFAS No. 157 addresses how companies
      should measure fair value when they are required to use a fair value measure
      for
      recognition or disclosure purposes under generally accepted accounting
      principles. SFAS No. 157 defines fair value, establishes a framework for
      measuring fair value and expands the required disclosures about fair value
      measurements. SFAS No. 157 is effective for fiscal years beginning after
      November 15, 2007, with earlier adoption permitted. Management is assessing
      the impact of the adoption of SFAS No. 157.




In
      September 2006, the FASB issued Statement No. 158, “Employers’
Accounting for Defined Benefit Pension and Other Postretirement Plans” (“SFAS
      No. 158”), an amendment of FASB Statements No. 87, 88, 106 and 132(R).
      SFAS No. 158 requires (a) recognition of the funded status (measured
      as the difference between the fair value of the plan assets and the benefit
      obligation) of a benefit plan as an asset or liability in the employer’s
      statement of financial position, (b) measurement of the funded status as of
      the employer’s fiscal year-end with limited exceptions, and (c) recognition
      of changes in the funded status in the year in which the changes occur through
      comprehensive income. The requirement to recognize the funded status of a
      benefit plan and the disclosure requirements are effective as of the end of
      the
      fiscal year ending after December 15, 2006. The requirement to measure the
      plan assets and benefit obligations as of the date of the employer’s fiscal
      year-end statement of financial position is effective for fiscal years ending
      after December 15, 2008. SFAS No. 158 has no current applicability to
      the Company’s financial statements.




In
      September 2006, the Securities and Exchange Commission issued Staff
      Accounting Bulletin No. 108 (“SAB No. 108”). SAB No. 108
      addresses how the effects of prior year uncorrected misstatements should be
      considered when quantifying misstatements in current year financial statements.
      SAB No. 108 requires companies to quantify misstatements using a balance
      sheet and income statement approach and to evaluate whether either approach
      results in quantifying an error that is material in light of relevant
      quantitative and qualitative factors. When the effect of initial adoption is
      material, companies will record the effect as a cumulative effect adjustment
      to
      beginning of year retained earnings and disclose the nature and amount of each
      individual error being corrected in the cumulative adjustment. Complying with
      the requirements of SAB No. 108 had no impact on the Company’s financial
      statements.




In
      February 2007, the FASB issued Statement No. 159, “The Fair Value
      Option for Financial Assets and Financial Liabilities” (“SFAS No. 159”), an
      amendment of FASB Statement No. 115. SFAS No. 159 addresses how
      companies should measure many financial instruments and certain other items
      at
      fair value. The objective is to mitigate volatility in reported earnings caused
      by measuring related assets and liabilities differently without having to apply
      complex hedge accounting provisions. SFAS No. 159 is effective for fiscal
      years beginning after November 15, 2007, with earlier adoption permitted.
      Management is assessing the impact of the adoption of SFAS
      No. 159.




In
      December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business
      Combinations” (“SFAS 141(R)”). SFAS 141(R) will change the accounting for
      business combinations. Under SFAS No. 141(R), an acquiring entity will be
      required to recognize all the assets acquired and liabilities assumed in a
      transaction at the acquisition-date fair value with limited exceptions. SFAS
      No. 141(R) will change the accounting treatment and disclosure for
      certain specific items in a business combination. SFAS
      No. 141(R) applies prospectively to 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, 2008. SFAS 141(R) will
      impact the Company in the event of any future acquisition.




In
      December 2007, the FASB issued SFAS No. 160, “Non-controlling
      Interests in Consolidated Financial Statements—an amendment of Accounting
      Research Bulletin No. 51” (“SFAS 160”). SFAS 160 establishes new accounting
      and reporting standards for the noncontrolling interest in a subsidiary and
      for
      the deconsolidation of a subsidiary. SFAS No. 160 is effective for fiscal
      years beginning on or after December 15, 2008. The Company does not believe
      that SFAS 160 will have a material impact on its consolidated financial
      statements.




In
      March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative
      Instruments and Hedging Activities—an amendment of FASB Statement No. 133
      (FAS 161). FAS 161 changes the disclosure requirements for derivative
      instruments and hedging activities. Entities are required to provide enhanced
      disclosures about (a) how and why an entity
      uses derivative instruments, (b) how derivative instruments and related
      hedged items are accounted for under Statement 133 and its related
      interpretations, and (c) how derivative instruments and related hedged
      items affect an entity’s financial position, financial performance, and cash
      flows. The guidance in FAS 161 is effective for financial statements issued
      for
      fiscal years and interim periods beginning after November 15, 2008, with
      early application encouraged. This Statement encourages, but does not require,
      comparative disclosures for earlier periods at initial adoption. The Company
      is
      currently assessing the impact of FAS 161.




30





**ITEM
      3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
      RISK**




We
      have
      exposure to several types of market risk: changes in foreign currency exchange
      rates, interest rates and commodity prices. We neither hold nor issue financial
      instruments for trading purposes nor do we make use of derivative instruments
      to
      hedge the risks discussed below.




The
      following sections provide quantitative information on our exposure to market
      risks. Our use of sensitivity analyses are inherently limited in estimating
      actual losses in fair value that can occur from changes in market
      conditions.




**Foreign
      Currency Exchange Rates**




The
      Group
      collects revenues from operations principally in the Chinese Renminbi. Except
      for limited exports to Thailand and the Philippines, all of our local sales
      revenues are collected in and substantially all of its expenses are paid in
      the
      Chinese Renminbi. We face foreign currency rate translation risk when
      Chengtong’s results are translated to U.S. Dollars, as well as foreign currency
      rate transaction risk with respect to sales outside of China and with respect
      to
      financial instruments denominated in foreign currencies. Our results of
      operations denominated in foreign currency are translated at the average rate
      of
      exchange during the reporting period. Assets and liabilities denominated in
      foreign currencies at the balance sheet date are translated at the market rate
      of exchange ruling at that date. The registered equity capital denominated
      in
      the functional currency is translated at the historical rate of exchange at
      the
      time of capital contribution.




The
      Chinese Renminbi had remained stable against the U.S. Dollar at approximately
      8.28 Yuan to 1.00 U.S. Dollar for several years and it was not until
      July 21, 2005 that the Chinese currency regime was altered, with a 2.1%
      revaluation versus the United States Dollar. This move initially valued the
      Renminbi at 8.11 per United States Dollar. In addition, the Renminbi is no
      longer linked to the U.S. currency but rather to a basket of currencies with
      a
      0.3% margin of fluctuation. However, there remains international pressure on
      the
      Chinese government to adopt an even more flexible currency policy and as of
      March 31, 2008 the exchange rate was 7.012 Yuan to 1.00 U.S. Dollar. The
      exchange rate of Renminbi is subject to changes in China’s government policies
      which are, to a large extent, dependent on the economic and political
      development both internationally and locally and the demand and supply of
      Renminbi in the domestic market. There can be no assurance that such exchange
      rate will continue to remain stable in the future amongst the volatility of
      currencies, globalization and the unstable economies in recent years. Since
      (i) our income and profit are mainly denominated in Renminbi, and
      (ii) the payment of dividends will be in U.S. dollars, if any, any exchange
      fluctuation of the Renminbi against other foreign currencies would adversely
      affect the value of the shares and dividends payable to shareholders, in foreign
      currency terms.




At
      March
      31, 2008, the Group’s outstanding financial instruments with foreign currency
      exchange rate risk exposure had an aggregate fair value of $20 million
      (including the Group’s non-U.S. dollar denominated debt). The potential increase
      in the fair values of these instruments resulting from a 10% adverse change
      in
      quoted foreign currency exchange rates would be approximately $2 million at
      March 31, 2008.




**Interest
      Rates**




The
      Group
      is subject to interest rate risk on its non-derivative financial instruments.
      The Group does not hedge its interest rate risk. At March 31, 2008, the Group’s
      total bank debt outstanding was $17,400,194, all of which was interest-bearing.
      Substantially all of the bank debt was floating-rate debt with interest rates
      which vary with changes in the standard rate set by the People’s Bank of China.
      A change in the interest rate or yield of fixed rate debt will only impact
      the
      fair value of such debt, while a change in the interest rate of floating rate,
      or variable rate, debt will impact interest expense as well as the amount of
      cash required to service such debt. To the extent interest rates increase,
      we
      will be liable for higher interest payments to our lenders. For the current
      financial year, annual interest on loans is anticipated
      to be approximately $1.6 million. The impact of a 1% increase in interest rates
      will increase interest expense by approximately $174,000. As our short-term
      borrowings mature, we will be required to either repay or refinance these
      borrowings. An increase in short-term interest rates at the time that we seek
      to
      refinance short-term borrowings may increase the cost of borrowings, which
      may
      adversely affect our earnings and cash available for distribution to its
      shareholders.




31




At
      March
      31, 2008, the aggregate fair value of the Group’s financial instruments with
      exposure to interest rate risk was approximately $17 million. The potential
      change in fair value for these financial instruments from an adverse 10% change
      in quoted interest rates across all maturities, often referred to as a parallel
      shift in the yield curve, would be approximately $0.2 million at March 31,
      2008.




**Commodity
      Prices**




The
      steel
      coils and other raw materials used by Chengtong, require large amounts of raw
      materials - iron ore or other iron containing material, steel scrap, coke and
      coal - as well as large amounts of energy to produce. Additionally, Chengtong
      also uses large amounts of energy in its operations. Over the last several
      years, prices for raw materials and energy, in particular natural gas and oil,
      have increased significantly. In many cases these price increases have been
      at a
      greater percentage than price increases for the sale of steel
      products.




The
      Group
      has no open derivative commodity instruments as of March 31, 2008 and does
      not
      currently hedge its exposure to price fluctuations in the raw materials and
      energy required for the manufacture of its products.





**ITEM
      4.**  **CONTROLS
      AND PROCEDURES.**


**Evaluation
        of Disclosure Controls and Procedures.** We
        maintain a system of disclosure controls and procedures. The term “disclosure
        controls and procedures,” as defined by regulations of the SEC, means controls
        and other procedures that are designed to ensure that information required
        to be
        disclosed in the reports that we file or submit to the SEC under the Exchange
        Act, is recorded, processed, summarized and reported, within the time periods
        specified in the SEC’s rules and forms. Disclosure controls and procedures
        include, without limitation, controls and procedures designed to ensure that
        information required to be disclosed by us in the reports that we file or
        submit
        to the SEC under the Exchange Act is accumulated and communicated to management,
        including our principal executive officer and our principal financial officer,
        or persons performing similar functions, as appropriate to allow timely
        decisions to be made regarding required disclosure. Each of Wo Hing Li, our
        President and Chief Executive Officer, and Leada Tak Tai Li, our Chief Financial
        Officer, have evaluated the design and operating effectiveness of our disclosure
        controls and procedures as of March 31, 2008. Based upon their evaluation,
        these
        executive officers have concluded that our disclosure controls and procedures
        are effective as of March 31, 2008.
 
 **Changes
        in Internal Control over Financial Reporting.** There
        has been no change to our internal control over financial reporting during
        the
        quarter ended March 31, 2008 that has materially affected, or is reasonably
        likely to materially affect, our internal control over financial reporting.




**PART II
      - OTHER INFORMATION**




**ITEM
      1A. RISK FACTORS.**





There
      have been no material changes to the risk factors previously disclosed in the
      Company’s Form 10-K filed on October 26, 2007.





**ITEM
      1.**  **LEGAL
      PROCEEDINGS.**




As
      of the
      date of this Quarterly Report, there is no pending litigation against the
      Company nor was there any litigation initiated by the Company.





**ITEM
      2.**  **UNREGISTERED
      SALES OF EQUITY SECURITIES AND USE OF PROCEEDS**




None. ****





**ITEM
      3.**  **DEFAULTS
      UPON SENIOR SECURITIES**




None.




**ITEM
      4.**  **SUBMISSION
      OF MATTERS TO A VOTE OF SECURITY HOLDERS**




None.





**ITEM
      5.**  **OTHER
      INFORMATION**




(a)  None.




(b)  
      None.




32




**ITEM
      6.**  **EXHIBITS**




(a)  
      Exhibits required to be filed are listed below. Certain of the following
      exhibits are hereby incorporated by reference pursuant to Rule 12(b)-32, as
      promulgated under the Securities and Exchange Act of 1934, as amended, from
      the
      reports noted below:




**Exhibit No.**
            
            **Exhibit:**31(i).1
            
            Certification
                of President pursuant to Rule 13a-14(a)/15d-14(a) of the
                Securities Exchange Act*31(i).2
            
            Certification
                of Chief Financial Officer pursuant to
                Rule 13a-14(a)/15d-14(a) of the Securities Exchange
                Act*32
            
            Certification
                of President and Chief Financial Officer Pursuant to 18 U.S.C.
                Section 1350, as adopted pursuant to Section 906 of the
                Sarbanes-Oxley Act of 2002*




33




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
                PRECISION STEEL, INC.**Date: May 15,
                2008
            By:
            /s/
                Wo Hing LiWo
                Hing LiPresident




34




EXHIBIT
      INDEX




**Exhibit No.**
            
            **Exhibits**31(i).1
            
            Certification
                of President pursuant to Rule 13a-14(a)/15d-14(a) of the
                Securities Exchange Act31(i).2
            
            Certification
                of Chief Financial Officer pursuant to
                Rule 13a-14(a)/15d-14(a) of the Securities Exchange
                Act32
            
            Certification
                of President and Chief Financial Officer Pursuant to 18 U.S.C.
                Section 1350, as adopted pursuant to Section 906 of the
                Sarbanes-Oxley Act of 2002




35